What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-05-09 · 185 added, 114 removed, 269 unchanged (53% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis of Global Water Resources, Inc.’s (the “Company”, “GWRI”, “we”, or “us”) financial condition and results of operations (“MD&A”) relate to the three months ended March 31, 2024 and should be read together with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this report.

The following management’s discussion and analysis of Global Water Resources, Inc.’s (the “Company”, “GWRI”, “we”, or “us”) financial condition and results of operations (“MD&A”) relate to the three and six months ended June 30, 2024 and should be read together with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this report.

Cautionary Statement Regarding Forward-Looking Statements

5 unchanged sentences

future financial performance;

regulatory and Arizona Corporation Commission (“ACC”) proceedings, decisions, and approvals, such as the anticipated benefits resulting from rate decisions, including any collective revenue increases due to new water and wastewater rates, our beliefs and expectations pertaining to ACC actions relating to our Southwest Plant, as well as the outcome and timing of our rate case and other applications with the ACC, including our applications for the approval of an accounting order and the approval of an annual bill credit, in each case, relating to the Southwest Plant;

our plans relating to future filings of our rate cases with the ACC;

35 unchanged sentences

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

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

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

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

Business Outlook

During the second half of 2023, we experienced an increase in the rate of connection growth, which has continued into the first three months of 2024.

We continue to experience an increasing rate of organic growth, exclusive of acquisition related growth, evidenced by our year over year increase in active connections of 4.9% as compared to 1.9% for the same period in 2023.

According to the most recent U.S.

1 unchanged sentence

and had an estimated population of 5.1 million, an increase of 4.6% over the 4.8 million people reported in the 2020 Census.

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

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

The Employment and Population Statistics Department of the State of Arizona predicts that the Phoenix metropolitan area will have a population of 5.8 million people by 2030 and 6.5 million by 2040.

Arizona’s job growth increased by 2.2% during the first three months of 2024 as compared to the same period for the prior year, ranking the state in the top ten nationally as of March 31, 2024.

While we saw an overall weakness in the market for single-family housing during the first half of 2023, according to the W.P.

Carey School of Business Greater Phoenix Blue Chip Real Estate Consensus Panel the outlook is improving.

They anticipate permitting to increase in 2024 due to the improvement that started in the second half of 2023 combined with the expectations of modestly declining mortgage rates in 2024.

Further, single family permits in the City of Maricopa increased 131% for the three months ended March 31, 2024 as compared to the same period in the prior year.

Arizona’s job growth increased by 2.2% during the first six months of 2024 as compared to the same period for the prior year, ranking the state in the top ten nationally as of June 30, 2024.

According to the W.P.

Carey School of Business Greater Phoenix Blue Chip Real Estate Consensus Panel (the “Greater Phoenix Blue Chip Panel”), interest rate shock negatively impacted permit activity in the Phoenix metropolitan area, particularly between July 2022 and June 2023.

Further, the Greater Phoenix Blue Chip Panel concluded that the recovery from that interest rate shock resulted in permit activity increasing by more than 44% in the first five months of 2024.

The Greater Phoenix Blue Chip Panel anticipates single family permit growth by more than 27% for 2024 as a whole.

Further, single family permits in the City of Maricopa increased 43% for the first half of 2024 as compared to the same period in the prior year.

Management believes that we are well-positioned to benefit from the growth expected in the Phoenix metropolitan area due to the availability of lots, existing infrastructure in place within our services areas, and increased activity related to multi-family developments.

14 unchanged sentences

An increase or decrease in our active service connections will affect our revenues and variable expenses in a corresponding manner.

As of March 31, 2024, active service connections increased 2,642, or 4.4%, to 62,451 compared to 59,809 active service connections as of March 31, 2023, primarily due to organic growth in our service areas.

As of June 30, 2024, active service connections increased 2,965, or 4.9%, to 63,256 compared to 60,291 active service connections as of June 30, 2023, primarily due to organic growth in our service areas.

Approximately 89.5% of the 63,256 active service connections are serviced by our Global Water - Santa Cruz Water Company, Inc.

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

(“GW-Palo Verde”) utilities as of March 31, 2024.

(“GW-Palo Verde”) utilities as of June 30, 2024.

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

27 unchanged sentences

The EPA also finalized health-based, non-enforceable maximum contaminant level goals for these PFAS.

The final rule requires:

that public water systems, such as the Company, must monitor for these PFAS and have three years to complete initial monitoring, followed by ongoing compliance monitoring.

The final rule requires that public water systems, such as the Company, must monitor for these PFAS and have three years to complete initial monitoring, followed by ongoing compliance monitoring.

Public water systems must also provide the public with information on the levels of these PFAS in their drinking water beginning in 2027.

Public water systems have five years to implement solutions that reduce these PFAS if monitoring shows that drinking water levels exceed the MCLs applicable.

Public water systems have five years to implement solutions that reduce these PFAS if monitoring shows that drinking water levels exceed the applicable MCLs.

Beginning in five years, public water systems that have PFAS in drinking water which violate one or more of these MCLs must take action to reduce levels of these PFAS in their drinking water and must provide notification to the public of the violation.

We are in process of complying with the first requirement of the rule mandating initial monitoring for all of our utilities.

Initial monitoring completed through March 31, 2024 indicated PFAS levels in quantities that exceed the NPDWR for two of our smaller utilities in which treatment options are being evaluated, and monitoring at all of our utilities will occur in accordance with the rule requirements.

We are committed to compliance with the NPDWR and are in process of complying with the first requirement of the rule mandating initial monitoring for all of our utilities.

The Company expects that compliance with the NPDWR will require increased capital expenditures for PFAS-contaminated water treatment and other operating costs.

If other newer or stricter standards are introduced in the future, they could also increase our operating expenses.

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

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

30 unchanged sentences

Rate Case and Regulatory Activity

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.

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

Below is a summary of rate case and regulatory activity.

Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information regarding the Company’s rate case and regulatory activity.

2024 Farmers Rate Case

On June 27, 2024, Global Water-Farmers Water Company, Inc.

(“GW-Farmers”), one of the Company’s regulated utilities, filed a rate case application with the ACC for increased water rates based on a 2023 test year with updates for changes in post-test year plant through December 31, 2024.

Acquisition of Seven Systems from City of Tucson

On May 10, 2024, GW-Ocotillo filed an Application at the ACC for approval to acquire seven isolated systems from the City of Tucson.

On June 10, 2024, ACC Utilities Division Staff found the application administratively complete.

2025 Santa Cruz and Palo Verde 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.

Southwest Plant Accounting Order and Bill Credit

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.

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.

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

74364 (February 26, 2014) and 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.

The ACC issued Decision No.

79424 on July 18, 2024 approving the bill credit with an effective date of August 1, 2024, which will reduce revenue earned subsequent to the order by approximately $570,000 annually.

The bill credit will be in place until the conclusion of the next GW-Palo Verde rate case, which Decision No.

79424 requires GW-Palo Verde to file no later than December 31, 2025.

79383 - Issued June 20, 2024 - Saguaro Rate Case

On June 20, 2024, the ACC issued Decision No.

79383 relating to each of the rate case applications filed by seven of the Company’s regulated utilities for increased water rates based on a 2022 test year.

79383 approved, among other things, a collective annual revenue increase of approximately $351,000.

The ACC also approved:

(i) the consolidation of water rates to one single rate for these utilities;

(ii) acquisition premiums relating to the Company’s acquisitions of its Global Water-Mirabell Water Company, Inc.

(“GW-Mirabell”), Global Water-Lyn Lee Water Company, Inc.

2 unchanged sentences

(“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.

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

78644 relating to the Company’s previous rate case involving 12 of the Company’s regulated utilities, which consisted of approximately 96% of the Company’s active service connections at the time of the rate case application filing.

Pursuant to Rate Decision No.

78644, the ACC approved, among other things, a collective annual revenue requirement increase of approximately $2.2 million (including the acquisition premiums discussed below) based on 2019 test year service connections, and phased-in over approximately two years, as follows:

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.

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.

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;

(“GW-Rincon”), and Global Water-Las Quintas Serenas Water Company, Inc.

(“GW-Las Quintas Serenas”) utilities, each located in Pima County, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement;

(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.

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

(v) a capital structure matching the Company’s previous rate case of 55% equity with a 9.6% return on equity;

and (vi) a depreciation expense accounting deferral for GW-Rincon.

78644 - Issued July 27, 2022

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

78644 pursuant to which the ACC approved, among other things, a collective annual revenue requirement increase of approximately $2.2 million (including acquisition premiums) based on 2019 test year service connections, and phased-in over approximately two years.

The effective date of the final phase was January 1, 2024.

Corporate Transactions

Asset Purchase Agreement with City of Tucson

Effective April 25, 2024, Global Water - Ocotillo Water Company, Inc.

(“GW-Ocotillo”), formerly Global Water - 2024 Acquisition A, Inc.

and a wholly owned subsidiary of the Company, entered into an asset purchase agreement with the City of Tucson, pursuant to which GW-Ocotillo 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.

Private Placement Offering of 6.91% Senior Secured Notes

8 unchanged sentences

The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles of service area in Sahuarita, Arizona and the surrounding unincorporated area of Pima County at the time of the acquisition.

Refer to Note 15 - “Acquisitions” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional details.

Stipulated Condemnation of the Operations and Assets of Valencia

11 unchanged sentences

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

Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023

The following table summarizes results of operations for the three months ended March 31, 2024 and 2023 (in thousands, except for share amounts):

For the Three Months Ended March 31,

Comparison of Results of Operations for the Three Months Ended June 30, 2024 and 2023

The following table summarizes results of operations for the three months ended June 30, 2024 and 2023 (in thousands, except for share amounts):

For the Three Months Ended June 30,

Revenues $ 13,510 $ 13,000

7 unchanged sentences

Diluted earnings per common share $ 0.07 $ 0.07

Revenues – The following table summarizes revenues for the three months ended March 31, 2024 and 2023 (in thousands):

For the Three Months Ended March 31,

Revenues – The following table summarizes revenues for the three months ended June 30, 2024 and 2023 (in thousands):

For the Three Months Ended June 30,

Water services $ 6,668 $ 6,557

2 unchanged sentences

Total revenues $ 13,510 $ 13,000

Total revenues decreased $1.5 million, or 11.6%, to $11.6 million for the three months ended March 31, 2024 compared to $13.1 million for the three months ended March 31, 2023.

The decrease in revenue was primarily attributable to the recognition of $2.3 million in unregulated revenue related to infrastructure coordination and financing agreements (“ICFA”) during the three months ended March 31, 2023 that did not occur in the current period, partially offset by an increase of $0.8 million in regulated revenue primarily from organic connection growth and one additional month of revenue resulting from the February 2023 acquisition of GW-Farmers for the three months ended March 31, 2024 as compared to the same period for the prior year.

Water Services – Water services revenue increased $0.4 million, or 8.0%, to $5.2 million for the three months ended March 31, 2024 compared to $4.8 million for the three months ended March 31, 2023.

The increase in water services revenue was primarily related to the organic connection growth of 4.4%.

Water services revenue based on consumption increased $0.1 million, or 9.5%, to $1.7 million for the three months ended March 31, 2024 compared to $1.6 million for the three months ended March 31, 2023.

The moderate increase was primarily driven by organic growth.

Active water connections increased 4.4% to 34,715 as of March 31, 2024 from 33,298 as of March 31, 2023, primarily due to organic growth in our service areas.

Water consumption increased 6.8% to 0.7 billion gallons for the three months ended March 31, 2024 from 0.6 billion for the three months ended March 31, 2023.

The increase in consumption was primarily attributable to organic growth in our service areas.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.3 million, or 8.0%, to $3.4 million for the three months ended March 31, 2024 compared to $3.1 million for the three months ended March 31, 2023.

The increase was primarily due to growth in active service connections.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.4 million, or 6.0%, to $6.4 million for the three months ended March 31, 2024 compared to $6.0 million for the three months ended March 31, 2023.

The increase in wastewater and recycled water services revenue was primarily driven by a $0.4 million increase in wastewater services revenue, which reflects a 4.6% increase in active wastewater connections from 26,511 as of March 31, 2023 to 27,736 as of March 31, 2024.

Recycled water services revenue, which is based on the volume of recycled gallons delivered, was $0.1 million for both the three months ended March 31, 2024 and March 31, 2023.

Consumption of recycled water was consistent for both periods.

Operating Expenses – The following table summarizes operating expenses for the three months ended March 31, 2024 and 2023 (in thousands):

For the Three Months Ended March 31,

Total revenues increased $0.5 million, or 3.9%, to $13.5 million for the three months ended June 30, 2024 compared to $13.0 million for the three months ended June 30, 2023.

The increase in revenue was primarily attributable to the 4.9% organic growth in active connections (including both water and wastewater connections), partially offset by a slight decrease in overall consumption.

Water Services – Water services revenue increased $0.1 million, or 1.7%, to $6.7 million for the three months ended June 30, 2024 compared to $6.6 million for the three months ended June 30, 2023.

The increase in water services revenue was primarily related to the organic connection growth in active water connections of 4.6%, partially offset by a 2.9% decrease in consumption.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.2 million, or 7.1%, to $3.4 million for the three months ended June 30, 2024 compared to $3.2 million for the three months ended June 30, 2023.

The increase was primarily due to the 4.6% growth in active water connections.

Active water connections increased 4.6% to 35,128 as of June 30, 2024 from 33,580 as of June 30, 2023, primarily due to organic growth in our service areas.

Water services revenue based on consumption decreased $0.1 million, or 2.9%, to $3.1 million for the three months ended June 30, 2024 compared to $3.2 million for the three months ended June 30, 2023.

The slight decrease was primarily driven by reduced consumption.

Water consumption decreased by 0.02 billion gallons, or 1.7%, to 1.11 billion gallons for three months ended June 30, 2024 from 1.13 billion gallons for the three months June 30, 2023.

While residential consumption increased 6.3% during the three months ended June 30, 2024 as compared to the same period for the prior year, such increase was more than offset by reductions in construction related consumption.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.4 million, or 6.2%, to $6.8 million for the three months ended June 30, 2024 compared to $6.4 million for the three months ended June 30, 2023.

The increase in wastewater and recycled water services revenue was primarily driven by a $0.5 million increase in wastewater services revenue, which reflects a 5.3% increase in active wastewater connections from 26,711 as of June 30, 2023 to 28,128 as of June 30, 2024, partially offset by a $0.1 million decrease in recycled water services revenue.

Recycled water services revenue, which is based on the volume of recycled gallons delivered, decreased $0.1 million, or 14.3%, to $0.4 million for the three months ended June 30, 2024 compared to $0.5 million for the three months ended June 30, 2023.

The decrease was primarily driven by reduced consumption during the period.

Operating Expenses – The following table summarizes operating expenses for the three months ended June 30, 2024 and 2023 (in thousands):

For the Three Months Ended June 30,

Operations and maintenance $ 3,485 $ 3,181

2 unchanged sentences

Total operating expenses $ 10,713 $ 9,990

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased electrical power), maintenance costs, and property tax, increased $0.5 million, or 17.7%, to $3.3 million for the three months ended March 31, 2024 compared to $2.8 million for the three months ended March 31, 2023.

Total personnel expenses increased $0.3 million, or 36.7%, to $1.3 million for the three months ended March 31, 2024 compared to $0.9 million for the three months ended March 31, 2023.

The increase in personnel expenses was primarily related to an increase of $0.1 million in salary and wages, higher medical insurance expenses of $0.2 million, and an additional month of personnel expenses attributable to GW-Farmers for the three months ended March 31, 2024 as compared to the same period for the prior year.

Other notable increases were related to purchased power and property taxes, partially offset by a moderate decrease in chemicals, consumables and supplies.

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased electrical power), maintenance costs, and property tax, increased $0.3 million, or 9.6%, to $3.5 million for the three months ended June 30, 2024 compared to $3.2 million for the three months ended June 30, 2023.

Total personnel expenses increased $0.1 million, or 7.8%, to $1.2 million for the three months ended June 30, 2024 compared to $1.1 million for the three months ended June 30, 2023.

The increase in personnel expenses was primarily related to a 5.5% increase in salary and wages and a increase of 38.1% in medical insurance expenses.

Other notable increases were related to repairs and maintenance, office expenses related to information technology services, chemicals, consumables and supplies and office expenses, partially offset by a moderate decreases in contract services and rent expense.

General and Administrative – General and administrative costs include the day-to-day expenses of office operations, personnel costs, legal and other professional fees, insurance, rent, and regulatory fees.

These costs increased $0.2 million, or 5.6%, to $4.1 million for the three months ended March 31, 2024 compared to $3.9 million for the three months ended March 31, 2023.

Total personnel expenses increased $0.2 million, or 11.5%, to $1.9 million for the three months ended March 31, 2024 compared to $1.7 million for the three months ended March 31, 2023.

The increase was primarily related to higher medical insurance expenses and increased salaries and wages as a result of an increase in employee headcount.

Other notable increases were related to contract services, regulatory expenses, and board compensation expenses as a direct result of the change in the Company’s stock price impacting certain valuations, which were partially offset by a decrease in professional fees.

Depreciation and amortization - Depreciation and amortization expense increased $0.2 million, or 10.5%, to $2.9 million for the three months ended March 31, 2024, compared to $2.7 million for the three months ended March 31, 2023.

Other Expense – Other expense decreased $0.1 million, or 26.9%, to $0.3 million for three months ended March 31, 2024 from $0.4 million for the three months ended March 31, 2023, which was primarily attributable an increase of $0.4 million in Buckeye growth premiums and a $0.2 million increase in interest income, which was partially offset by an increase of $0.4 million in interest expense primarily related to the senior secured notes issued in January 2024 (refer to “—Corporation Transactions” above for additional information) and a decrease of $0.1 million in the equity portion of the allowance for funds used during construction (“AFUDC”).

Income Tax Expense – Income tax expense of $0.3 million was recorded for the three months ended March 31, 2024 compared to income tax expense of $0.9 million for the three months ended March 31, 2023.

The primary driver for the change was due to the decrease in pre-tax income for three months ended March 31, 2024.

Net Income – Net income totaled $0.7 million for the three months ended March 31, 2024 compared to net income of $2.5 million for the three months ended March 31, 2023.

The $1.8 million decrease was primarily attributable to the recognition of $2.3 million of ICFA related revenue during the three months ended March 31, 2023 that did not occur in the current period and an increase in operating expenses of approximately $1.0 million, partially offset by an increase in regulated revenue of $0.8 million and decreased tax expense of $0.6 million.

These costs increased $0.1 million, or 3.1%, to $4.2 million for the three months ended June 30, 2024 compared to $4.1 million for the three months ended June 30, 2023.

Total personnel expenses increased $0.2 million, or 10.9%, to $1.9 million for the three months ended June 30, 2024 compared to $1.7 million for the three months ended June 30, 2023.

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

Deferred compensation expense decreased $0.1 million, or 35.2%, to $0.3 million for the three months ended June 30, 2024 compared to $0.4 million for the three months ended June 30, 2023.

The decrease was a direct result of the change in the stock price impacting certain equity-like awards (i.e., the stock price decreased $0.74 during the three months ended June 30, 2024 as compared to a $0.49 increase during the three months ended June 30, 2023).

Refer to Note 11 — “Deferred Compensation Awards” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

Depreciation and amortization - Depreciation and amortization expense increased $0.3 million, or 10.8%, to $3.0 million for the three months ended June 30, 2024, compared to $2.7 million for the three months ended June 30, 2023.

The increase was primarily driven by additional depreciation expense recorded as a direct result of the increase in fixed assets, which includes certain assets related to the Southwest Plant put into service July 2023, and $80,000 of amortization of an intangible asset related to acquired ICFAs that did not occur in the same period in 2023.

Other Expense – Other expense was $0.5 million for both the three months ended June 30, 2024 and June 30, 2023.

For the the three months ended June 30, 2024, interest income increased $0.3 million compared to the three months ended June 30, 2023, which was mostly offset by an increase in interest expense primarily related to the senior secured notes issued in January 2024 (refer to “—Corporation Transactions” above for additional information).

Income Tax Expense – Income tax expense of $0.6 million was recorded for the three months ended June 30, 2024 compared to income tax expense of $0.7 million for the three months ended June 30, 2023.

The primary driver for the change was due to the decrease in pre-tax income for three months ended June 30, 2024.

Net Income – Net income totaled $1.7 million for both the three months ended June 30, 2024 and 2023.

The increase in regulated revenue of $0.5 million, decrease in tax expense of $0.1 million and a lower other expense for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was offset by higher operating expenses of $0.7 million in the current period.

Comparison of Results of Operations for the Six Months Ended June 30, 2024 and 2023

The following table summarizes results of operations for the six months ended June 30, 2024 and 2023 (in thousands, except for share amounts):

For the Six Months Ended June 30,

Revenues $ 25,120 $ 26,128

Operating expenses 21,056 19,341

Operating income 4,064 6,787

Total other expense (795) (986)

Income before income taxes 3,269 5,801

Income tax expense (848) (1,596)

Net income $ 2,421 $ 4,205

Basic earnings per common share $ 0.10 $ 0.18

Diluted earnings per common share $ 0.10 $ 0.17

Revenues – The following table summarizes revenues for the six months ended June 30, 2024 and 2023 (in thousands):

For the Six Months Ended June 30,

Water services $ 11,894 $ 11,396

Wastewater and recycled water services 13,226 12,464

Unregulated revenues — 2,268

Total revenues $ 25,120 $ 26,128

Total revenues decreased $1.0 million, or 3.9%, to $25.1 million for the six months ended June 30, 2024 compared to $26.1 million for the six months ended June 30, 2023.

The decrease in revenue was primarily attributable to the recognition of infrastructure coordination and financing agreement (“ICFA”) related revenue during the six months ended June 30, 2023 that did not recur in the current period, partially offset by an increase of $1.3 million in regulated revenue primarily from organic connection growth.

Water Services – Water services revenue increased $0.5 million, or 4.4%, to $11.9 million for the six months ended June 30, 2024 compared to $11.4 million for the six months ended June 30, 2023.

The increase in water services revenue was primarily related to the organic connection growth in active water connections of 4.6%.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.5 million, or 7.6%, to $6.8 million for the six months ended June 30, 2024 compared to $6.3 million for the six months ended June 30, 2023.

The increase was primarily due to the 4.6% growth in active water connections.

Active water connections increased 4.6% to 35,128 as of June 30, 2024 from 33,580 as of June 30, 2023, primarily due to organic growth in our service areas.

Water services revenue based on consumption was $4.8 million for both the six months ended June 30, 2024 and 2023.

Water consumption increased 1.3% to 1.78 billion gallons for the six months ended June 30, 2024 compared to 1.76 billion for the six months ended June 30, 2023.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.7 million, or 6.1%, to $13.2 million for the six months ended June 30, 2024 compared to $12.5 million for the six months ended June 30, 2023.

The increase was primarily driven by higher wastewater services revenue of $0.8 million resulting from the 5.3% increase in active wastewater connections from 26,711 as of June 30, 2023 to 28,128 as of June 30, 2024, partially offset by a $0.1 million decrease in recycled water services revenue.

Recycled water services revenue, which is based on the number of gallons delivered and directly impacted by wastewater volume, decreased by approximately 11.2% to $0.5 million for the six months ended June 30, 2024 from $0.6 million for the six months ended June 30, 2023.

The volume of recycled water delivered decreased by 15.8% with 301 million gallons

delivered for the six months ended June 30, 2024 compared to 357 million gallons delivered for the six months ended June 30, 2023.

Operating Expenses – The following table summarizes operating expenses for the six months ended June 30, 2024 and 2023 (in thousands):

For the Six Months Ended June 30,

Operations and maintenance $ 6,769 $ 5,970

General and administrative 8,357 8,011

Depreciation and amortization 5,930 5,360

Total operating expenses $ 21,056 $ 19,341

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased electrical power), maintenance costs, and property tax, increased approximately $0.8 million, or 13.4%, to $6.8 million for the six months ended June 30, 2024 compared to $6.0 million for the six months ended June 30, 2023.

Total personnel expenses increased approximately $0.4 million, or 21.2%, to $2.4 million for the six months ended June 30, 2024 compared to $2.0 million for the six months ended June 30, 2023.

The increase was primarily attributable to the increased medical costs of $0.2 million, an increase in headcount, and an increase in hiring and moving costs.

Office expenses related to information technology services increased $0.1 million for the six months ended June 30, 2024 compared to the same period in 2023.

Utility power and related expenses increased $0.1 million to $1.3 million for the six months ended June 30, 2024 compared to $1.2 million for the same period in 2023.

The additional power costs were attributable to pump usage for the increase in connections from organic growth.

Repairs and maintenance expenses increased $0.1 million to $0.2 million for the six months ended June 30, 2024 compared to $0.1 million for the same period in 2023.

The increased repairs and maintenance costs were primarily attributable to planned equipment maintenance.

These costs increased $0.4 million, or 4.3%, to $8.4 million for the six months ended June 30, 2024 compared to $8.0 million for the six months ended June 30, 2023.

Personnel related costs increased $0.4 million, or 11.2%, to $3.8 million for the six months ended June 30, 2024 compared to $3.4 million for the six months ended June 30, 2023.

The increase was primarily related to higher salary and wages as a result of increased personnel, increased hiring and moving costs, and higher medical expenses.

Deferred compensation expense decreased $0.2 million, or 22.8%, to $0.5 million for the six months ended June 30, 2024 compared to $0.7 million for the six months ended June 30, 2023.

The decrease was a direct result of the change in the stock price impacting certain equity-like awards (i.e., the stock price decreased $0.98 during the six months ended June 30, 2024 as compared to a decrease of $0.21 during the six months ended June 30, 2023).

Refer to Note 11 — “Deferred Compensation Awards” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

Depreciation and amortization - Depreciation and amortization expense increased $0.6 million, or 10.6%, to $5.9 million for the six months ended June 30, 2024 compared to $5.4 million for the six months ended June 30, 2023.

Other Expense – Other expense totaled $0.8 million for the six months ended June 30, 2024 compared to $1.0 million for the six months ended June 30, 2023.

The decrease of $0.2 million in other expense was related to a $0.4 million increase in income associated with Buckeye growth premiums as a result of additional new meter connections in the area and a $0.5 million increase in interest income, partially offset by an increase in interest expense of $0.6 million primarily related to the senior

secured notes issued in January 2024 (refer to “—Corporation Transactions” above for additional information) and a decrease in the equity portion of allowance for funds used during construction of $0.1 million for the six months ended June 30, 2024.

Income Tax Expense – Income tax expense of $0.8 million was recorded for the six months ended June 30, 2024 compared to $1.6 million for the six months ended June 30, 2023.

The primary driver for the change was the higher pre-tax income for the six months ended June 30, 2023 related to the ICFA revenue recognized during that period that did not recur in 2024.

Net Income – Net income totaled $2.4 million for the six months ended June 30, 2024 compared to net income of $4.2 million for the six months ended June 30, 2023.

The $1.8 million decrease was primarily attributable to the recognition of $2.3 million of ICFA related revenue and an increase in operating expenses of approximately $1.7 million, partially offset by a $1.3 million increase in regulated revenue and lower tax expense of $0.7 million.

Outstanding Share Data

As of May 8, 2024, there were 24,176,113 shares of the Company’s common stock outstanding and stock-based awards outstanding to acquire an additional 395,607 shares of the Company’s common stock.

As of August 7, 2024, there were 24,217,410 shares of the Company’s common stock outstanding and stock-based awards outstanding to acquire an additional 399,811 shares of the Company’s common stock.

Liquidity and Capital Resources

9 unchanged sentences

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

As of March 31, 2024, the Company has no notable near-term cash expenditures, other than the principal payments for its Series B Notes (as defined below) in the amount of $1.9 million due in both June 2024 and December 2024.

As of June 30, 2024, the Company has no notable near-term cash expenditures, other than the principal payments for its Series B Notes (as defined below) in the amount of $1.9 million due in both December 2024 and June 2025.

While specific facts and circumstances could change, the Company believes that with the cash on hand and the ability to draw on its $15.0 million revolving line of credit, it will be able to generate sufficient cash flows to meet its operating cash flow requirements and capital expenditure plan, as well as remain in compliance with its debt covenants, for the next twelve months and beyond.

5 unchanged sentences

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

For the three months ended March 31, 2024, net cash provided by operating activities totaled approximately $8.1 million compared to $6.5 million for the three months ended March 31, 2023.

The $1.6 million increase in cash from operating activities was primarily driven by an increase in noncurrent liabilities for the three months ended March 31, 2024 as a result of funds received related to ICFA payments during the first three months in 2024 compared to an overall decrease in noncurrent liabilities for three months ended March 31, 2023 largely attributable to the recognition of ICFA related revenue, partially offset by a decrease in net income for the three months ended March 31, 2024 compared to the prior year period.

For the six months ended June 30, 2024, net cash provided by operating activities totaled approximately $13.6 million compared to $12.7 million for the six months ended June 30, 2023.

The $0.9 million increase in cash from operating activities was primarily driven by an increase in noncurrent liabilities for the six months ended June 30, 2024 as a result of funds received related to ICFA payments and other developer contributions during the first six months in 2024 compared to the six months ended June 30, 2023.

In addition, there were other notable fluctuations in working capital accounts.

Cash from Investing Activities

The net cash used in investing activities totaled approximately $5.8 million for the three months ended March 31, 2024 compared to $12.8 million for the three months ended March 31, 2023.

The $7.0 million decrease in cash used in investing activities was primarily driven by the $6.2 million cash paid for the acquisition of GW-Farmers (net of cash acquired) in February 2023 and a decrease in capital expenditures of $0.8 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

The net cash used in investing activities totaled approximately $12.2 million for the six months ended June 30, 2024 compared to $19.9 million for the six months ended June 30, 2023.

The $7.7 million decrease in cash used in investing activities was primarily driven by the $6.2 million cash paid for the acquisition of GW-Farmers (net of cash acquired) in February 2023 and a decrease in capital expenditures of $1.5 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

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

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

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

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

Cash from Financing Activities

The net cash provided by financing activities totaled $15.8 million for the three months ended March 31, 2024, a $14.0 million increase, as compared to the $1.8 million in cash provided by financing activities for the three months ended March 31, 2023.

This increase was primarily driven by the $20 million received from the senior secured notes issuance in January 2024, partially offset by $2.3 million of repayments on the Company’s revolving line of credit in the three months ended March 31, 2024 as compared to $3.5 million of net borrowings against the line of credit in the three months ended March 31, 2023.

The net cash provided by financing activities totaled $13.6 million for the six months ended June 30, 2024, a $9.5 million increase, as compared to the $4.1 million in cash provided by financing activities for the six months ended June 30, 2023.

This increase was primarily driven by the $20 million received from the senior secured notes issuance in January 2024, partially offset by $2.3 million of repayments on the Company’s revolving line of credit in the six months ended June 30, 2024 as compared to $9.1 million of net borrowings against the line of credit in the six months ended June 30, 2023.

Senior Secured Notes

9 unchanged sentences

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.

As of June 30, 2024, the Company was in compliance with its financial debt covenants relating to the Series A Notes and the Series B Notes.

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

1 unchanged sentence

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.

As of March 31, 2024, the Company was in compliance with its financial debt covenants relating to 6.91% Notes.

The 6.91% Notes also contain a provision limiting the payment of dividends if the Company falls below a debt service coverage ratio of 1.25.

As of June 30, 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.

7 unchanged sentences

and change the nature of the business.

Debt issuance costs as of March 31, 2024 and December 31, 2023 were $0.8 million and $0.4 million, respectively.

Debt issuance costs as of June 30, 2024 and December 31, 2023 were $0.8 million and $0.4 million, respectively.

Revolving Credit Line

1 unchanged sentence

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;

The Company and Northern Trust 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;

1 unchanged sentence

and (iv) add a quarterly facility fee equal to 0.35% of the average daily unused amount of the revolving line of credit.

On July 1, 2024, the Company and Northern Trust entered into a fifth amendment to the Northern Trust Loan Agreement, which further amended the scheduled maturity date for the revolving line of credit from July 1, 2025 to July 1, 2026.

Similar to the Senior Secured Notes, the Northern Trust Loan Agreement requires the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00.

The Northern Trust Loan Agreement also contains a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25.

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:

8 unchanged sentences

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 the revolving line of credit with Northern Trust.

There were approximately $16,000 and $25,000 unamortized debt issuance costs as of March 31, 2024 and December 31, 2023, respectively.

Refer to Note 11 — “Debt” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information regarding the Senior Secured Notes and the Company’s revolving line of credit.

As of June 30, 2024, the Company was in compliance with its financial debt covenants under the Northern Trust Loan Agreement.

As of June 30, 2024, the Company had no outstanding borrowings under the revolving line of credit with Northern Trust.

There were approximately $12,000 and $25,000 unamortized debt issuance costs as of June 30, 2024 and December 31, 2023, respectively.

Other Recent Financing Activity

15 unchanged sentences

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

There have been no significant changes to our critical accounting policies from those disclosed under “Managements’ Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” in the 2023 10-K.

There have been no significant changes to our critical accounting estimates from those disclosed under “Managements’ Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” in the 2023 10-K.

Off Balance Sheet Arrangements

As of March 31, 2024 and 2023, the Company did not have any off-balance sheet arrangements.

As of June 30, 2024 and 2023, the Company did not have any off-balance sheet arrangements.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis