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Item 2. Management’s Discussion and Analysis

2024-11-06 compared with 2024-08-07 · 205 added, 162 removed, 292 unchanged (56% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis of Global Water Resources, Inc.’s (the “Company”, “GWRI”, “we”, or “us”) financial condition and results of operations (“MD&A”) relate to the three and six months ended June 30, 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 nine months ended September 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

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

acquisition plans and our ability to complete additional acquisitions, including the anticipated acquisition of seven public water systems from the City of Tucson and the expected increase in active water service connections resulting from such acquisition;

acquisition plans and our ability to complete additional acquisitions, including the anticipated acquisition of seven isolated public water systems from the City of Tucson and the expected increase in active water service connections resulting from such acquisition;

population and growth projections;

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These and other factors are discussed in the risk factors described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”) as updated from time to time in our subsequent filings with the Securities and Exchange Commission (the “SEC”).

Additional risks and uncertainties include, but are not limited to, whether all conditions precedent in the asset purchase agreement to acquire the seven public water systems from the City of Tucson will be satisfied, including the receipt of ACC approval, and other risks to consummation of the acquisition, including circumstances that could give rise to the termination of the asset purchase agreement and the risk that the transaction will not be consummated without undue delay, cost or expense, or at all.

Additional risks and uncertainties include, but are not limited to, whether all conditions precedent in the asset purchase agreement to acquire the seven isolated public water systems from the City of Tucson will be satisfied, including the receipt of ACC approval, and other risks to consummation of the acquisition, including circumstances that could give rise to the termination of the asset purchase agreement and the risk that the transaction will not be consummated without undue delay, cost or expense, or at all.

Any forward-looking statement speaks only as of the date of this report.

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Business Outlook

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.

We continue to experience an increasing rate of organic growth evidenced by our year over year organic increase in active connections (i.e., exclusive of acquisition related growth) of 4.7% as of September 30, 2024 as compared to 2.6% for the same period in 2023.

According to the most recent U.S.

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

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.

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

Further, the Greater Phoenix Blue Chip Panel concluded that the subsequent 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.

Further, single family permits in the City of Maricopa increased 13% for the nine months ended September 30, 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 service areas, and increased activity related to multi-family developments.

Factors Affecting our Results of Operations

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

As of June 30, 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.

As of September 30, 2024, active service connections increased 2,853, or 4.7%, to 63,889 compared to 61,036 active service connections as of September 30, 2023, primarily due to organic growth in our service

Approximately 89.6% of the 63,889 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 June 30, 2024.

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

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

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

Our wastewater utility services are billed based solely on a fixed fee, determined by the size of the water meter installed.

Our wastewater service is billed based solely on a fixed fee, determined by the size of the water meter installed.

Recycled water is sold on a volumetric basis with no fixed fee component.

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We believe it is common industry practice to file for a rate increase every three to five years.

Refer to “—Rate Case and Regulatory Activity” below and 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.

Refer to “—Rate Case and Regulatory Activity” below and Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements (unaudited) included in Part I, Item 1 of this report for additional information.

Additionally, our water and wastewater utility operations are subject to extensive regulation by U.S.

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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 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.

Public water systems have until 2029 to implement solutions that reduce these PFAS if monitoring shows that drinking water levels exceed the applicable MCLs.

Beginning in 2029, 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 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.

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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.

In April 2024, the federal Judicial Panel on Multidistrict Litigation approved the consolidation of approximately 500 separate cases against multiple defendant manufacturers into a single multi-district civil class action lawsuit known as Aqueous Film-Forming Foams (“AFFF”) Products Liability Litigation MDL No.

2873 (the “AFFF MDL”).

The AFFF MDL was filed in the U.S.

District Court for the District of South Carolina (the “Court”) and is intended to resolve claims associated with PFAS contamination in water systems from the manufacture and widespread use of AFFF, which is believed to be a significant source of PFAS contamination in water systems.

AFFF containing PFAS (and until 2002, perfluorooctanoic acid (“PFOA”), a related compound) was widely used in fire suppression systems, firefighting vehicles, and at fire training facilities nationwide.

The Company is in the class of plaintiffs in the AFFF MDL, and settlement talks continue to progress with several defendants.

Any settlement reached in the AFFF MDL will be subject to the final approval of the Court.

There can be no assurance as to the outcome of the AFFF MDL, including any decision or resolution thereof, timing, or the ultimate amounts, if any, involved.

In October 2024, the EPA announced a final rule requiring drinking water systems to identify and replace lead pipes within ten years.

In accordance with the 2021 Lead and Copper Rule Revision and in connection with the 2024 Lead and Copper Rule Improvements, the Company has conducted an inventory of its pipes.

The inventory has been substantially completed and found no lead pipes in our water systems.

While the Company is evaluating the full impact of this new rule, we do not believe it will have a material impact on our results of operations.

Infrastructure Investment

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Production and Treatment Costs

Our water and wastewater services require significant production resources and therefore result in significant production costs.

Our water and wastewater service requires significant production resources and therefore results in significant production costs.

Although we are permitted to recover these costs through the rates we charge, regulatory lag can decrease our margins and earnings if production costs or other operating expenses increase significantly before we are able to recover them through increased rates.

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Conversely, when weather conditions are extremely dry, our business may be affected by government-issued drought-related warnings and/or water usage restrictions that would artificially lower customer demand and reduce our operating revenue.

The limited geographic diversity of our service areas makes the results of our operations more sensitive to the effect of local weather extremes.

The second and third quarters of the year are generally those in which water services revenue and wastewater services revenues are highest.

The limited geographic diversity of our service areas makes the results of our operations more sensitive to the effect of extreme weather patterns.

The second and third quarters of the year are generally those in which water service revenue and wastewater service revenue are highest.

For additional information and risks associated with weather and seasonality, see “Risk Factors,” included in Part I, Item 1A of the 2023 Form 10-K.

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Additionally, in the majority of the Phoenix Active Management Area, the Arizona Department of Water Resources (“ADWR”) has paused the issuance of new certificates of assured water supply based on groundwater and paused modifications of any designations of assured water supply for the increase in groundwater.

Approximately 1.76% of the Company’s water connections are located within the Phoenix Active Management Area.

Approximately 1.76% of the

Company’s water connections are located within the Phoenix Active Management Area.

We believe that we have an adequate supply of water to service our current demand and growth for the foreseeable future in our service areas.

For additional information and risks associated with the access to and quality of water supply, see “Risk Factors,” included in Part I, Item 1A of the 2023 Form 10-K.

Rate Case and Regulatory Activity

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.

Farmers Designation of Assured Water Supply (“DAWS”)

The Company’s GW-Farmers utility filed a DAWS application with the ADWR on June 30, 2023 to facilitate future growth in the utility’s service area.

The Company anticipates a final decision from the ADWR in the fourth quarter of 2024.

Recent Rate Case and Regulatory Activity

Below is a summary of certain 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 (unaudited) 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

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(“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.

The application requests, among other things, a revenue increase of approximately $1.3 million phased-in over two periods as well as recovery of the acquisition premium related to our Farmers Water Co.

On July 25, 2024, ACC Utilities Division Staff determined our application to be administratively complete and estimates its testimony regarding the application will be filed in early December 2024.

There can be no assurance that the ACC will approve the requested rate increase or the requested recovery of the acquisition premium, 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.

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.

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

On June 10, 2024, ACC Utilities Division Staff found the application administratively complete and estimates its testimony regarding the application will be filed on or about November 5, 2024.

The Company expects to complete the acquisition in the first quarter of 2025, subject to customary closing conditions and approval by the ACC.

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.

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.

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.

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.

Certificate of Convenience & Necessity Extension - Maricopa Business Park

In May 2024, the Company’s GW-Santa Cruz and GW-Palo Verde utilities filed an application with the ACC for a CC&N extension.

The Administrative Law Judge issued a Recommended Opinion and Order on October 18, 2024, which is scheduled to be heard by the ACC at the November 6, 2024 open meeting.

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 Decision No.

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.

of customer rates in Decision No.

71878 (September 15, 2010).

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

The ACC may take further action during the next GW-Palo Verde rate case.

Such action may include requiring the Company to reduce rates further going forward or taking other actions that would be unfavorable to the Company.

79383 - Issued June 20, 2024 - Saguaro Rate Case

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

The approved rates will be phased-in over five periods with the first increase effective July 1, 2024.

The subsequent four increases will be effective on January 1 of each subsequent year, with the majority of the revenue increase phased in by January 1, 2025.

To the extent that the number of active service connections has increased and continues to increase from 2022 levels, the additional revenues may be greater than the amount 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:

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

Corporate Transactions

Recent Acquisition Activity

Asset Purchase Agreement with City of Tucson

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(“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.

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 isolated 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 isolated public water systems are located in and around Pima County.

The Company expects to complete the acquisition in the first quarter of 2025, 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

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

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

Refer to Note 9 - “Debt” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional details.

Private Placement Offering of Common Stock

On June 8, 2023, the Company entered into a securities purchase agreement for the issuance and sale by the Company of an aggregate of 230,000 shares of the Company’s common stock at a purchase price of $12.07 per share in an offering exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder.

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

Farmers Water Co.

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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

On July 14, 2015, the Company closed the stipulated condemnation to transfer the operations and assets of Valencia to the City of Buckeye.

Terms of the condemnation were agreed upon through a settlement agreement and stipulated final judgment of condemnation wherein the City of Buckeye acquired all the operations and assets of Valencia and assumed operation of the utility upon close.

The City of Buckeye is obligated to pay the Company a growth premium equal to $3,000 for each new water meter installed within Valencia’s prior service areas in the City of Buckeye, for a 20-year period ending December 31, 2034, subject to a maximum payout of $45.0 million over the term of the agreement.

Segment Reporting

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

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

While the Company reports revenue, disaggregated by service type, on the face of its condensed consolidated financial statements (unaudited), 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.

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

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

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

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

Three Months Ended

September 30,

Revenues $ 14,321 $ 14,532

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Operating income 3,984 3,837

Total other expense (469) (540)

Total other income (expense) 2 (315)

Income before income taxes 3,986 3,522

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Diluted earnings per common share $ 0.12 $ 0.11

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

Wastewater and recycled water services 6,842 6,443

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

Three Months Ended

September 30,

Water service

$ 7,493 $ 7,520

Wastewater and recycled water service

Unregulated revenues — 518

Total revenues $ 14,321 $ 14,532

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,

Total revenues decreased $0.2 million, or 1.5%, to $14.3 million for the three months ended September 30, 2024 compared to $14.5 million for the three months ended September 30, 2023.

The decrease in revenue was primarily attributable to the recognition of $0.5 million in infrastructure coordination and financing agreement (“ICFA”) related revenue during the prior year period that did not recur in the current period, partially offset by an increase of $0.3 million in regulated revenue primarily attributable to the increase in wastewater and recycled water service revenue largely as a result of a 5.0% increase in active wastewater connections.

Water Service – Water service revenue was $7.5 million for both the three months ended September 30, 2024 and 2023.

Water service revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.2 million, or 5.1%, to $3.4 million for the three months ended September 30, 2024 compared to $3.2 million for the three months ended September 30, 2023.

The increase was primarily due to the 4.4% growth in active water connections and a rate increase resulting from the Saguaro Rate Case that was effective August 1, 2024.

Active water connections increased 4.4% to 35,464 as of September 30, 2024 from 33,976 as of September 30, 2023, primarily due to organic growth in our service areas.

Water service revenue based on consumption decreased $0.1 million, or 4.3%, to $4.0 million for the three months ended September 30, 2024 compared to $4.1 million for the three months ended September 30, 2023.

The moderate decrease in revenue was primarily the result of reduced consumption in irrigation and construction customers, all partially offset by a rate increase from the Saguaro Rate Case that was effective August 1, 2024 and the organic growth discussed above.

Water consumption was consistent at 1.3 billion gallons for both the three months ended September 30, 2024 and 2023.

The consumption decreases in irrigation, commercial and construction customers were largely offset by consumption increases in residential, multi-family and lake customers.

Wastewater and Recycled Water Service – Wastewater and recycled water service revenue increased $0.3 million, or 5.1%, to $6.8 million for the three months ended September 30, 2024 compared to $6.5 million for the three months ended September 30, 2023.

Wastewater service revenue increased $0.2 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, driven by a 5.0% increase in active wastewater connections from 27,060 as of September 30, 2023 to 28,425 as of September 30, 2024.

Recycled water service revenue, which is based on the volume of recycled gallons delivered, increased $0.1 million, or 29.4%, to $0.6 million for the three months ended September 30, 2024 compared to $0.5 million for the three months ended September 30, 2023.

The increase was primarily driven by a 309.2 million gallon, or 113.8%, increase in consumption during the period.

The increase in wastewater and recycled water service revenue was partially offset by $0.1 million in bill credits related to the Company’s Southwest Plant.

Refer to Note 2 - “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements (unaudited) included in Part I, Item 1 of this report for additional information.

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

Three Months Ended

September 30,

Operations and maintenance $ 3,444 $ 3,587

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Total operating expenses $ 10,337 $ 10,695

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.

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased electrical power), maintenance costs, and property tax, decreased $0.2 million, or 4.0%, to $3.4 million for the three months ended September 30, 2024 compared to $3.6 million for the three months ended September 30, 2023.

Total personnel expenses decreased $0.1 million, or 10.9%, to $1.1 million for the three months ended September 30, 2024 compared to $1.2 million for the three months ended September 30, 2023.

The decrease in personnel expenses was primarily related to a decrease of 51.7% in medical insurance expenses and a 2.3% decrease in salary and wages.

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 $0.1 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,

These costs increased less than $0.1 million, 0.9%, to $4.0 million for the three months ended September 30, 2024 compared to $3.9 million for the three months ended September 30, 2023.

Total personnel expenses increased $0.2 million, or 7.8%, to $2.1 million for the three months ended September 30, 2024 compared to $1.9 million for the three months ended September 30, 2023.

The increase was primarily related to higher hiring and relocation costs and deferred compensation expense, partially offset by lower medical insurance expenses.

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

Board compensation expense increased $0.2 million, to $0.2 million for the three months ended September 30, 2024 compared to board compensation income of less than $0.1 million for the three months ended September 30, 2023.

The increase in expense was a direct result of the change in the stock price impacting certain equity-like awards (i.e., the stock price increased $0.49 during the three months ended September 30, 2024 as compared to a $3.19 decrease during the three months ended September 30, 2023).

These increases were partially offset by:

Information technology (“IT”) expenses decreased $0.1 million, or 48.6%, to $0.2 million for the three months ended September 30, 2024 compared to $0.3 million for the three months ended September 30, 2023.

The decrease was primarily the result of lower costs for IT service agreements.

Professional fees decreased $0.1 million, or 25.8%, to $0.4 million for the three months ended September 30, 2024 compared to $0.5 million for the three months ended September 30, 2023.

The decrease was primarily related to lower legal fees associated with acquisition activity.

Depreciation and amortization - Depreciation and amortization expense decreased $0.3 million, or 7.9%, to $2.9 million for the three months ended September 30, 2024, compared to $3.2 million for the three months ended September 30, 2023.

The decrease was primarily driven by lower amortization of an intangible asset related to acquired ICFAs that did not recur in the same period in 2024, partially offset by additional depreciation expense recorded as a direct result of the increase in fixed assets.

Other Income (Expense) – Other income was immaterial for the three months ended September 30, 2024 compared to other expense of $0.3 million for the three months ended September 30, 2023.

The increase in other income (expense) was primarily related to a $0.2 million increase in income associated with Buckeye growth premiums as a result of additional new meter connections in the area as well as a $0.1 million gain related to adjustments to our estimated contingent consideration liability.

Interest income also increased $0.2 million compared to the three months ended September 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 “—Liquidity and Capital Resources—Recent Financing Activity” below for additional information).

Income Tax Expense – Income tax expense of $1.1 million was recorded for the three months ended September 30, 2024 compared to income tax expense of $0.9 million for the three months ended September 30, 2023.

The primary driver for the change was the increase in pre-tax income for three months ended September 30, 2024.

Net Income – The increase in net income of $0.3 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 was a result of the items discussed above.

Comparison of Results of Operations for the Nine Months Ended September 30, 2024 and 2023

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

Nine Months Ended

September 30,

Revenues $ 39,441 $ 40,660

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Diluted earnings per common share $ 0.22 $ 0.28

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

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

Nine Months Ended

September 30,

Water service

$ 19,387 $ 18,916

Wastewater and recycled water service

20,054 18,958

Unregulated revenues — 2,786

Total revenues $ 39,441 $ 40,660

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,

Total revenues decreased approximately $1.3 million, or 3.0%, to $39.4 million for the nine months ended September 30, 2024 compared to $40.7 million for the nine months ended September 30, 2023.

The decrease in revenue was primarily attributable to the recognition of $2.8 million in ICFA related revenue during the nine months ended September 30, 2023 that did not recur in the current period, partially offset by a $1.6 million increase in regulated revenue primarily from organic connection growth.

Water Service – Water service revenue increased $0.5 million, or 2.5%, to $19.4 million for the nine months ended September 30, 2024 compared to $18.9 million for the nine months ended September 30, 2023.

Water service revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.6 million, or 6.7%, to $10.2 million for the nine months ended September 30, 2024 compared to $9.6 million for the nine months ended September 30, 2023.

Active water connections increased 4.4% to 35,464 as of September 30, 2024 from 33,976 as of September 30, 2023, primarily due to organic growth in our service areas.

Water service revenue based on consumption decreased $0.1 million to $8.8 million for the nine months ended September 30, 2024 from $8.9 million for the nine months ended September 30, 2023.

While there was a moderate increase in overall water consumption, the increase consisted largely of lower rate water usage, primarily for residential customers.

However, lower consumption of higher rate water usage, particularly for construction and irrigation, resulted in an overall decrease in water service revenue based on consumption.

Water consumption increased 0.7% to 3.12 billion gallons for the nine months ended September 30, 2024 compared to 3.10 billion for the nine months ended September 30, 2023.

Wastewater and Recycled Water Service – Wastewater and recycled water service revenue increased $1.1 million, or 5.8%, to $20.1 million for the nine months ended September 30, 2024 compared to $19.0 million for the nine months ended September 30, 2023.

The increase was primarily driven by higher wastewater service revenue of $1.0 million resulting from the 5.0% increase in active wastewater connections from 27,060 as of September 30, 2023 to 28,425 as of September 30, 2024.

Recycled water service revenue, which is based on the number of gallons delivered and directly impacted by wastewater volume, was $1.1 million for both the nine months ended September 30, 2024 and 2023.

The volume of recycled water delivered increased by 40.2% with 882 million gallons delivered for the nine months ended September 30, 2024 compared to 629 million gallons delivered for the nine months ended September 30, 2023.

The increase in wastewater and recycled water service revenue was partially offset by $0.1 million in bill credits related to the Company’s Southwest Plant.

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

Nine Months Ended

September 30,

Operations and maintenance $ 10,213 $ 9,557

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Total operating expenses $ 31,393 $ 30,036

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.

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 $0.6 million, or 6.9%, to $10.2 million for the nine months ended September 30, 2024 compared to $9.6 million for the nine months ended September 30, 2023.

Total personnel expenses increased approximately $0.3 million, or 9.1%, to $3.6 million for the nine months ended September 30, 2024 compared to $3.3 million for the nine months ended September 30, 2023.

The increase was primarily attributable to the increased medical costs of $0.1 million, an increase in headcount, and an increase in hiring and relocation costs.

Utility power and related expenses increased $0.1 million to $2.2 million for the nine months ended September 30, 2024 compared to $2.1 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.

Repairs and maintenance expenses increased $0.1 million to $0.3 million for the nine months ended September 30, 2024 compared to $0.2 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.

These costs increased $0.4 million, or 3.2%, to $12.3 million for the nine months ended September 30, 2024 compared to $11.9 million for the nine months ended September 30, 2023.

Personnel related costs increased $0.4 million, or 6.1%, to $6.5 million for the nine months ended September 30, 2024 compared to $6.1 million for the nine months ended September 30, 2023.

The increase was primarily related to higher salary and wages as a result of an increase in headcount, increased hiring and relocation costs, partially offset by decreased deferred compensation expense of $0.1 million.

Board compensation expense increased $0.2 million, or 116.4%, to $0.4 million for the nine months ended September 30, 2024 compared to board compensation income of $0.2 million for the nine months ended September 30, 2023.

The change in board compensation expense was a direct result of the change in the stock price impacting certain equity-like awards (i.e., the stock price decreased $0.49 during the nine months ended September 30, 2024 as compared to a decrease of $3.40 during the nine months ended September 30, 2023).

Refer to Note 11 — “Deferred Compensation Awards” of the Notes to

the Condensed Consolidated Financial Statements (unaudited) included in Part I, Item 1 of this report for additional information.

These increases were partially offset by:

Professional fees decreased $0.2 million, or 14.1%, to $1.3 million for the nine months ended September 30, 2024 compared to $1.5 million for the nine months ended September 30, 2023.

The decrease was primarily related to lower legal fees associated with acquisition activity.

Depreciation and amortization - Depreciation and amortization expense increased $0.4 million, or 3.7%, to $8.9 million for the nine months ended September 30, 2024 compared to $8.5 million for the nine months ended September 30, 2023.

The increase was primarily driven by additional depreciation expense recorded as a direct result of the increase in fixed assets, partially offset by lower amortization of an intangible asset related to acquired ICFAs that did not occur in the same period in 2024.

Other Expense – Other expense totaled $0.8 million for the nine months ended September 30, 2024 compared to $1.3 million for the nine months ended September 30, 2023.

The decrease of $0.5 million in other expense was related to a $0.6 million increase in income associated with Buckeye growth premiums as a result of additional new meter connections in the area and a $0.7 million increase in interest income, partially offset by an increase in interest expense of $0.9 million primarily related to the senior secured notes issued in January 2024.

Income Tax Expense – Income tax expense of $1.9 million was recorded for the nine months ended September 30, 2024 compared to $2.5 million for the nine months ended September 30, 2023.

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

Net Income – Net income totaled $5.3 million for the nine months ended September 30, 2024 compared to net income of $6.8 million for the nine months ended September 30, 2023.

The $1.5 million decrease was the result of the items discussed above.

Outstanding Share Data

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.

As of November 5, 2024, there were 24,221,626 shares of the Company’s common stock outstanding and stock-based awards outstanding to acquire an additional 399,061 shares of the Company’s common stock.

Liquidity and Capital Resources

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

As of June 30, 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.

As of September 30, 2024, the Company has no notable near-term cash expenditures, other than the anticipated acquisition of seven isolated public water systems from the City of Tucson and 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, including for any strategic acquisitions, as well as remain in compliance with its debt covenants, for the next twelve months and beyond.

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

On November 30, 2023, the Company announced a monthly dividend increase to 0.02508 per share (0.30096 per share annually) from 0.02483 per share (0.29796 per share annually).

On November 30, 2023, the Company announced a monthly dividend increase to 0.02508 per share (0.30096 per share annually) from 0.02483 per share

(0.29796 per share annually).

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

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

For the six months ended June 30, 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.

For the nine months ended September 30, 2024, net cash provided by operating activities totaled approximately $15.8 million compared to $22.7 million for the nine months ended September 30, 2023.

The $6.9 million decrease in cash from operating activities was primarily driven by an increase in accounts payable and other current liabilities for the nine months ended September 30, 2024 as a result of increased accruals for capital expenditures, as well as lower net income in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

Cash from Investing Activities

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 net cash used in investing activities totaled approximately $19.2 million for the nine months ended September 30, 2024 compared to $24.8 million for the nine months ended September 30, 2023.

The $5.7 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, partially offset by an increase in capital expenditures of $0.6 million for the nine months ended September 30, 2024 compared to the nine months ended September 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.

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Cash from Financing Activities

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.

The net cash provided by financing activities totaled $20.7 million for the nine months ended September 30, 2024, an $18.5 million increase, as compared to the $2.3 million in cash provided by financing activities for the nine months ended September 30, 2023.

This increase was primarily driven by the $20 million received from the senior secured notes issuance in January 2024 and $2.1 million borrowings under our 2024 Water Infrastructure Finance Authority of Arizona (“WIFA”) loan in the third quarter of 2024, partially offset by $2.3 million of repayments on the Company’s revolving line of credit in the nine months ended September 30, 2024 as compared to less than $0.1 million of net borrowings against the line of credit in the nine months ended September 30, 2023.

Recent Financing Activity

The Company has entered into certain debt and equity transactions in 2024 and 2023 in order to meet its liquidity needs.

Refer to Note 9 - “Debt” of the Notes to the Condensed Consolidated Financial Statements (unaudited) included in Part I, Item 1 of this report for additional details regarding our debt financing.

2024 WIFA Loan

On April 30, 2024, the Company’s GW-Rincon utility entered into a loan agreement with WIFA 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%.

Funding occurs through one or more draw requests submitted by the Company and the subsequent disbursement of principal by WIFA.

As of September 30, 2024, the Company has received approximately $2.1 million in disbursements under this agreement.

Senior Secured Notes

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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.

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.

As of September 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”).

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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.

As of September 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.

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and change the nature of the business.

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

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

Revolving Credit Line

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incur additional indebtedness;

merge, liquidate or consolidate with another entity;

merge, liquidate or

consolidate with another entity;

dispose of or transfer assets;

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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 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

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

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

There were less than $0.1 million of unamortized debt issuance costs as of September 30, 2024 and December 31, 2023, respectively.

Private Placement Offering of Common Stock

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

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

Contractual Obligations

Except as described below, there have been no additional material changes in our reported contractual obligations from those disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contractual Obligations” in the 2023 10-K.

On January 3, 2024, the Company issued $20.0 million aggregate principal amount of 6.91% Senior Secured Notes due on January 3, 2034.

Refer to additional details under “– Liquidity and Capital Resources – Debt ” above.

Contractual Obligations and Off-Balance Sheet Arrangements

A summary of contractual obligations is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contractual Obligations” of our 2023 Form 10-K.

Except for our January 2024 issuance of 6.91% Notes and borrowings under our 2024 WIFA loan, there have been no additional material changes in our reported contractual obligations from those disclosed in our 2023 Form 10-K.

Refer to Note 9 - “Debt” of the Notes to the Condensed Consolidated Financial Statements (unaudited) included in Part I, Item 1 of this report for additional details.

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

Critical Accounting Estimates

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

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

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

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

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

A summary of our critical accounting estimates is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Critical Accounting Estimates” of our 2023 Form 10-K.

There were no material changes made as of September 30, 2024.

Qualitative and Quantitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis