Global Water Resources, Inc. 10-Q

ITEM 1. Financial Statements (Unaudited) GLOBAL WATER RESOURCES, INC. Condensed Consolidated Balance Sheet (in thousands, except share and per share amounts) (Unaudited) September 30, 2024 December 31, 2023 ASSETS PROPERTY, PLANT AND EQUIPMENT: Land $ 2,729 $ 2,674 Depreciable property, plant and equipment 427,671 414,170 Construction work-in-progress 66,703 48,147 Other 697 697 Less accumulated depreciation ( 151,093 ) ( 142,367 ) Net property, plant and equipment 346,707 323,321 CURRENT ASSETS: Cash and cash equivalents 18,145 3,087 Accounts receivable, net 3,271 2,845 Customer payments in-transit 667 543 Unbilled revenue 3,403 2,755 Taxes, prepaid expenses and other current assets 2,614 2,494 Total current assets 28,100 11,724 OTHER ASSETS: Goodwill 9,486 10,820 Intangible assets, net 8,573 8,841 Regulatory assets 4,110 2,898 Restricted cash 3,933 1,676 Right-of-use assets 1,928 1,741 Other noncurrent assets 80 74 Total other assets 28,110 26,050 TOTAL ASSETS $ 402,917 $ 361,095 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 1,284 $ 1,027 Accrued expenses 9,713 7,129 Customer and meter deposits 1,598 1,628 Long-term debt, current portion 3,931 3,880 Leases, current portion 766 553 Total current liabilities 17,292 14,217 NONCURRENT LIABILITIES: Line of credit — 2,315 Long-term debt 120,427 101,341 Long-term lease liabilities 1,359 1,370 Deferred revenue - ICFA 20,285 19,656 Regulatory liabilities 5,863 6,076 Advances in aid of construction 124,226 111,529 Contributions in aid of construction, net 39,946 36,409 Deferred income tax liabilities, net 10,063 8,284 Acquisition liabilities 2,881 3,048 Other noncurrent liabilities 11,734 8,230 Total noncurrent liabilities 336,784 298,258 Total liabilities 354,076 312,475 Commitments and contingencies (Refer to Note 13) SHAREHOLDERS’ EQUITY: Common stock, $ 0.01 par value, 60,000,000 shares authorized; 24,565,955 and 24,492,918 shares issued as of September 30, 2024 and December 31, 2023, respectively. 240 240 Treasury stock, 344,329 and 317,677 shares at September 30, 2024 and December 31, 2023, respectively. ( 2 ) ( 2 ) Paid in capital 46,795 47,585 Retained earnings 1,808 797 Total shareholders’ equity 48,841 48,620 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 402,917 $ 361,095 See accompanying notes to the condensed consolidated financial statements (unaudited) -3- Table of Contents GLOBAL WATER RESOURCES, INC. Condensed Consolidated Statements of Operations (in thousands, except share and per share amounts) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 REVENUES: Water service $ 7,493 $ 7,520 $ 19,387 $ 18,916 Wastewater and recycled water service 6,828 6,494 20,054 18,958 Unregulated revenues — 518 — 2,786 Total revenues 14,321 14,532 39,441 40,660 OPERATING EXPENSES: Operations and maintenance 3,444 3,587 10,213 9,557 General and administrative 3,960 3,923 12,317 11,934 Depreciation and amortization 2,933 3,185 8,863 8,545 Total operating expenses 10,337 10,695 31,393 30,036 OPERATING INCOME 3,984 3,837 8,048 10,624 OTHER INCOME (EXPENSE): Interest income 240 4 744 11 Interest expense ( 1,504 ) ( 1,260 ) ( 4,577 ) ( 3,709 ) Allowance for equity funds used during construction 238 263 682 778 Other, net 1,028 678 2,358 1,619 Total other income (expense) 2 ( 315 ) ( 793 ) ( 1,301 ) INCOME BEFORE INCOME TAXES 3,986 3,522 7,255 9,323 INCOME TAX EXPENSE ( 1,061 ) ( 888 ) ( 1,909 ) ( 2,484 ) NET INCOME $ 2,925 $ 2,634 $ 5,346 $ 6,839 Basic earnings per common share $ 0.12 $ 0.11 $ 0.22 $ 0.28 Diluted earnings per common share $ 0.12 $ 0.11 $ 0.22 $ 0.28 Dividends declared per common share $ 0.08 $ 0.07 $ 0.23 $ 0.22 Weighted average number of common shares used in the determination of: Basic 24,219,564 24,171,228 24,198,270 24,046,493 Diluted 24,302,521 24,231,801 24,301,974 24,144,384 See accompanying notes to the condensed consolidated financial statements (unaudited) -4- Table of Contents GLOBAL WATER RESOURCES, INC. Condensed Consolidated Statements of Shareholders’ Equity (in thousands, except share and per share amounts) (Unaudited) Common Stock Shares Common Stock Treasury Stock Shares Treasury Stock Paid-in Capital Retained Earnings Total Equity BALANCE - December 31, 2023 24,492,918 $ 240 ( 317,677 ) $ ( 2 ) $ 47,585 $ 797 $ 48,620 Dividend declared $ 0.08 per share — — — — ( 1,128 ) ( 691 ) ( 1,819 ) Stock option exercise 5,277 — ( 4,405 ) — 198 — 198 Net income — — — — — 691 691 BALANCE - March 31, 2024 24,498,195 240 ( 322,082 ) ( 2 ) 46,655 797 47,690 Dividend declared $ 0.075 per share — — — — — ( 1,821 ) ( 1,821 ) Stock compensation 62,840 — ( 21,543 ) — 16 — 16 Net income — — — — — 1,730 1,730 BALANCE - June 30, 2024 24,561,035 240 ( 343,625 ) ( 2 ) 46,671 706 47,615 Dividend declared $ 0.08 per share — — — — — ( 1,823 ) ( 1,823 ) Stock option exercise — — ( 704 ) — — — — Stock compensation 4,920 — — — 124 — 124 Net income — — — — — 2,925 2,925 BALANCE - September 30, 2024 24,565,955 $ 240 ( 344,329 ) $ ( 2 ) $ 46,795 $ 1,808 $ 48,841 BALANCE - December 31, 2022 24,095,139 $ 239 ( 224,093 ) $ ( 2 ) $ 44,157 $ — $ 44,394 Dividend declared $ 0.07 per share — — — — — ( 1,778 ) ( 1,778 ) Stock compensation — — — — 299 — 299 Net income — — — — — 2,466 2,466 BALANCE - March 31, 2023 24,095,139 239 ( 224,093 ) ( 2 ) 44,456 688 45,381 Dividend declared $ 0.07 per share — — — — ( 55 ) ( 1,739 ) ( 1,794 ) Issuance of Common Stock 230,000 1 — — 2,747 — 2,748 Stock option exercise 152,113 — ( 82,642 ) — — — — Stock compensation — — — — ( 47 ) — ( 47 ) Net income — — — — — 1,739 1,739 BALANCE - June 30, 2023 24,477,252 240 ( 306,735 ) ( 2 ) 47,101 688 48,027 Dividend declared $ 0.07 per share — — — — — ( 1,801 ) ( 1,801 ) Stock option exercise 1,000 — — — 9 — 9 Stock compensation — — — — 211 — 211 Net income — — — — — 2,634 2,634 BALANCE - September 30, 2023 24,478,252 $ 240 ( 306,735 ) $ ( 2 ) $ 47,321 $ 1,521 $ 49,080 See accompanying notes to the condensed consolidated financial statements (unaudited) -5- Table of Contents GLOBAL WATER RESOURCES, INC. Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) Nine Months Ended September 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,346 $ 6,839 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,863 8,545 Deferred compensation 873 698 Deferred income tax expense 1,838 2,164 Allowance for equity funds used during construction ( 682 ) ( 778 ) Right of use amortization 298 240 Other adjustments 6 23 Changes in assets and liabilities Accounts receivable ( 496 ) ( 938 ) Other current assets ( 891 ) ( 165 ) Accounts payable and other current liabilities 705 2,261 Other noncurrent assets 38 293 Other noncurrent liabilities ( 102 ) 3,480 Net cash provided by operating activities 15,796 22,662 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 19,171 ) ( 18,578 ) Cash paid for acquisitions, net of cash acquired — ( 6,246 ) Net cash used in investing activities ( 19,171 ) ( 24,824 ) CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid ( 5,462 ) ( 5,372 ) Advances and contributions in aid of construction 10,455 8,370 Refunds of advances for construction ( 1,256 ) ( 1,076 ) Payments for taxes related to net shares settlement of equity awards ( 268 ) ( 367 ) Principal payments under finance leases ( 183 ) ( 388 ) Repayments of notes payable ( 1,952 ) ( 1,917 ) Line of credit borrowings — 21,050 Line of credit repayments ( 2,315 ) ( 21,035 ) Loan borrowings 22,137 242 Debt issuance costs paid ( 418 ) — Proceeds from sale of stock — 2,748 Other financing activities ( 48 ) 10 Net cash provided by financing activities 20,690 2,265 INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 17,315 103 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period 4,763 7,562 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — End of period $ 22,078 $ 7,665 See accompanying notes to the condensed consolidated financial statements (unaudited) Supplemental disclosure of cash flow information: Nine Months Ended September 30, 2024 2023 Cash and cash equivalents $ 18,145 $ 5,289 Restricted cash 3,933 2,376 Total cash, cash equivalents, and restricted cash $ 22,078 $ 7,665 -6- Table of Contents GLOBAL WATER RESOURCES, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION, CORPORATE TRANSACTIONS, SIGNIFICANT ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS Basis of Presentation and Principles of Consolidation The condensed consolidated financial statements (unaudited) of Global Water Resources, Inc. (the “Company”, “GWRI”, “we”, “us”, or “our”) and related disclosures as of September 30, 2024 and for the three and nine months ended September 30, 2024 and 2023 are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These financial statements follow the same accounting policies and methods of their application as the Company’s most recent annual consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2023. In the Company’s opinion, these financial statements include all normal and recurring adjustments necessary for the fair statement of the results for the interim period. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the full year, due to the seasonality of our business. The Company prepares its financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Corporate Transactions 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 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 Arizona Corporation Commission (“ACC”). The estimated rate base of the seven water systems is approximately $ 7.8 million. Private Placement Offering of Common Stock On June 8, 2023, the Company entered into a securities purchase agreement for the issuance and sale by the Company of an aggregate of 230,000 shares of the Company’s common stock at a purchase price of $ 12.07 per share in an offering exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder. The Company received gross proceeds of approximately $ 2.8 million from the offering. One of the Company’s directors purchased an aggregate of 30,000 shares of common stock in the offering at the purchase price. Farmers Water Co. Acquisition On February 1, 2023, the Company acquired all of the equity of Farmers Water Co., an operator of a water utility with service area in Pima County, Arizona. The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles of service area in Sahuarita, Arizona and the surrounding unincorporated area of Pima County at the time of the acquisition. Stipulated Condemnation of the Operations and Assets of Valencia Water Company, Inc. On July 14, 2015, the Company closed the stipulated condemnation to transfer the operations and assets of Valencia Water Company, Inc. (“Valencia”) to the City of Buckeye. Terms of the condemnation were agreed upon through a settlement agreement and stipulated final judgment of condemnation wherein the City of Buckeye acquired all the operations and assets of Valencia and assumed operation of the utility upon close. The City of Buckeye is obligated to pay the Company a growth premium equal to $ 3,000 for each new water meter installed within Valencia’s prior service areas in the City of Buckeye, for a 20-year period ending December 31, 2034, subject to a maximum payout of $ 45.0 million over the term of -7- Table of Contents the agreement. The Company received growth premiums of $ 0.9 million and $ 2.2 million for the three and nine months ended September 30, 2024, respectively. The Company received growth premiums of $ 0.7 million and $ 1.6 million for the three and nine months ended September 30, 2023, respectively. An aggregate of $ 12.9 million in growth premiums have been received to date. The growth premiums are included in “Other, net” on the Company’s condensed consolidated statements of operations (unaudited). Significant Accounting Policies Basic and Diluted Earnings per Common Share Basic earnings per share (“EPS”) in each period of this report were calculated by dividing net income by the weighted-average number of shares during those periods. Diluted EPS includes additional weighted-average common stock equivalents (options and restricted stock awards), if dilutive. Unless otherwise noted, the term “earnings per share” refers to basic EPS. A reconciliation of the denominator used in basic and diluted EPS calculations is shown in the following table: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (In thousands) Basic weighted average common shares outstanding 24,220 24,171 24,198 24,046 Effect of dilutive securities: 2017 Option grant 66 54 67 72 2019 Option grant 13 7 13 14 2020 Restricted stock awards — — — 6 2021 Restricted stock awards 4 — 24 6 Total dilutive securities 83 61 104 98 Diluted weighted average common shares outstanding 24,303 24,232 24,302 24,144 Anti-dilutive shares excluded from earnings per diluted shares (1) — 138 — 94 (1) Shares excluded from the dilutive-effect calculation because the outstanding awards’ exercise prices were greater than the average market price of the Company’s common stock. Segments Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing operating performance. The Company is not organized around specific products and services, geographic regions, or regulatory environments. The Company currently operates in one geographic region within the State of Arizona, wherein each operating utility operates within the same regulatory environment. While the Company reports its revenue, disaggregated by service type, on the face of its condensed consolidated statements of operations (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. Additionally, the CODM uses consolidated financial information to evaluate the Company’s performance, which is the same basis on which he communicates the Company’s results and performance to the Board of Directors. It is upon this consolidated basis from which he bases all significant decisions regarding the allocation of the Company’s resources on a consolidated level. Based on the information described above and in accordance with the applicable literature, management has concluded that the Company is currently organized and operated as one operating and reportable segment. Governmental Funding & Assistance Occasionally, the Company participates in various U.S. federal, state and local programs under which governmental funding is received to offset certain specified costs of the Company associated with water conservation efforts, the provision of utility service or facilities in designated locations (such as unserved or underserved rural areas), and the replacement and upgrading of outdated equipment with advanced metering infrastructure. In certain instances, our receipt of awarded governmental funds may be conditioned on the Company meeting specified progress and inspection milestones during construction of associated utility infrastructure projects. Certain programs are subject to audits of compliance with -8- Table of Contents program commitments and, subject to the outcomes of those assessments, the Company may be required to reimburse the government entity for cash previously received, or, in some cases, pay a penalty. The Company evaluates each program and establishes a liability under the principles of Accounting Standards Codification (“ASC”) 450 if it is probable support payments will be recaptured or a penalty will be imposed. In April 2024, the Company’s Global Water - Rincon Water Company, Inc. (“GW-Rincon”) utility entered into a loan agreement with the Water Infrastructure Finance Authority of Arizona (“WIFA”) to improve the utility’s infrastructure, including enhancements to the fluoride treatment system and other projects. A portion of the loan is forgivable, which the Company accounts for as a contribution in aid of construction (“CIAC”). Refer to Note 9 - “Debt,” for additional information. In December 2023, the Company’s GW-Farmers utility was awarded a $ 1.6 million grant from WIFA to replace manual read meters with advanced metering infrastructure (“AMI”) smart meters. Disbursement of the award occurs through one or more reimbursement requests submitted by the Company for costs incurred and activities performed between July 6, 2022 and June 30. 2026. Award payments are accounted for as CIAC. For the nine months ended September 30, 2024, the Company received $ 0.8 million in award disbursements. The Company received no award disbursements in 2023. Recent Accounting Pronouncements Future Adoption of Accounting Standards In December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is assessing the timing and impact that adopting this new standard will have on its consolidated financial statements. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures that expands disclosures of significant segment expenses and includes new disclosures for entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company will implement and provide the required annual disclosures beginning in its Annual Report on Form 10-K for the year ended December 31, 2024. 2 . REGULATORY DECISION AND RELATED ACCOUNTING AND POLICY CHANGES The Company’s regulated utilities and certain other balances are subject to regulation by the ACC and meet the requirements for regulatory accounting found within ASC 980, Regulated Operations . In accordance with ASC 980, rates charged to utility customers are intended to recover the costs of the provision of service plus a reasonable return in the same period. Changes to the rates are made through formal rate applications with the ACC, which the Company has customarily done. 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. The application requests, among other things, a revenue increase of approximately $ 1.3 million phased-in over two steps and recovery of the acquisition premium related to the Farmers Water Co. acquisition. On July 25 , 2024, ACC Utilities Division Staff found the application administratively complete and estimates its testimony regarding the application will be file d on or about December 9 , 2024. Acquisition of Seven Systems from City of Tucson 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. -9- Table of Contents 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. The Company has begun stakeholder outreach for the rate case. 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. The Southwest Plant was substantially constructed prior to 2009 to provide water, wastewater, and recycled water service for the area southwest of the City of Maricopa. Due to the unprecedented collapse of the housing market during the Great Recession, the nearly completed plant remained idle for well over a decade. The total cost of the Southwest Plant was approximately $ 38.4 million. Since July 2023, construction costs of $ 25.0 million related to the water production plant and a portion of the wastewater processing plant were placed in service, with the remaining parts of the Southwest Plant to be placed in service once sufficient flows, provided by connection growth, are established. There can be no assurance, however, that the ACC will approve the application as submitted and the ACC could take other actions regarding the application. In January 2024, the Company discovered that approximately $ 7.8 million of construction costs for the Southwest Plant had been prematurely included as “plant in service” for rate making purposes in 2007 and were reflected in the calculation of customer rates in Decision No. 71878 (September 15, 2010). 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. 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. 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. Decision No. 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. Decision No. 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. The ACC also approved: (i) the consolidation of water rates to one single rate for the seven 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. (“GW-Lyn Lee”), Global Water-Francesca Water Company, Inc. (“GW-Francesca”), Global Water-Tortolita Water Company, Inc. (“GW-Tortolita”), 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; (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. -10- Table of Contents Decision No. 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. Decision No. 78644 also addressed the primary impacts of the Federal Tax Cuts and Jobs Act (the “TCJA”) on the Company, which includes the reduction of the federal income tax rate from 35 percent to 21 percent beginning on January 1, 2018. The TCJA required the Company to re-measure all existing deferred income tax assets and liabilities to reflect the reduction in the federal tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates are expected to be recovered from or refunded to customers. Decision No. 78644 approved an adjustor mechanism for income taxes (as described below) that permits the Company to flow through potential changes to state and federal income tax rates as well as refund or collect funds related to TCJA. Regulatory Assets and Liabilities Regulatory assets and liabilities are the result of operating in a regulated environment in which the ACC establishes rates that are designed to permit the recovery of the cost of service and a return on investment. The Company capitalizes and records regulatory assets for costs that would otherwise be charged to expense if it is probable that the incurred costs will be recovered in future rates. Regulatory assets are amortized over the future periods that the costs are expected to be recovered. Final determination of whether a regulatory asset can be recovered is decided by the ACC in regulatory proceedings. If the Company determines that a portion of the regulatory assets is not recoverable in customer rates, the Company would be required to recognize the loss of the assets disallowed. If costs expected to be incurred in the future are currently being recovered through rates, the Company records those expected future costs as regulatory liabilities. The Company’s regulatory assets and liabilities consist of the following (in thousands): Recovery Period September 30, 2024 December 31, 2023 Regulatory Assets Acquisition premiums (1) 25 or 50 years $ 2,616 $ 1,269 Income taxes recoverable through future rates (2) Various 1,345 1,404 Rate case expense surcharge (3) 2 years 104 221 Other regulatory assets 45 4 Total regulatory assets $ 4,110 $ 2,898 Regulatory Liabilities Acquired ICFAs (4) $ 4,708 $ 4,896 Income taxes payable through future rates (2) 473 488 Depreciation adjustment (5) 682 692 Total regulatory liabilities $ 5,863 $ 6,076 (1) Decision No. 78319, issued on December 3, 2021, approved an acquisition premium related to the acquisition of the Company’s GW-Rincon utility. The acquisition premium balance relating to the Company’s GW-Rincon utility as of September 30, 2024 was approximately $ 0.6 million. Decision No. 79383, issued on June 20, 2024, allowed the Company to begin amortization of the acquisition premium through customer rates over 50 years. Decision No. 79383 also approved acquisition premiums related to the acquisition of the Company’s GW-Francesca, GW-Las Quintas Serenas, GW-Lyn Lee, GW-Mirabell, and GW-Tortolita utilities. The acquisition premiums will be amortized through customer rates over 50 years as approved in the decision. The acquisition premium balance relating to these utilities as of September 30, 2024 was approximately $ 1.3 million. Decision No. 78644, issued on July 27, 2022, approved acquisition premiums related to the acquisitions of the Company’s GW-Turner Ranches and Global Water – Red Rock Water Company, Inc. (“GW-Red Rock”) utilities. Amortization began in 2022 as the acquisition premiums were included in customer rates as approved in the decision and will continue over a 25 -year period. The acquisition premium balance relating to these utilities as of September 30, 2024 was approximately $ 0.7 million. -11- Table of Contents (2) The TCJA required the Company to re-measure all existing deferred income tax assets and liabilities to reflect the reduction in the federal tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates are expected to be recovered from or refunded to customers. (3) Decision No. 78743, issued on October 24, 2022, approved approximately $ 0.5 million in rate case expenses to be recovered through a rate case expense surcharge over a period of up to two years . Decision No. 79383 also approved approximately $ 0.1 million in rate case expenses to be recovered through a rate case expense surcharge over a period of up to a two-years . (4) The acquired Infrastructure Coordination and Financing Agreements (“ICFA”) regulatory liability relates to the offset of intangible assets related to ICFA contracts obtained in connection with the GW-Santa Cruz, GW-Palo Verde, and Sonoran Utility Services, LLC (“Sonoran”) acquisitions. When funds are received related to the acquired ICFA, a portion of these funds reduce the acquired ICFA regulatory liability and partially offset the amortization expense recognition of the related intangible asset. (5) Decision No. 78644 approved an adjustment to update previously approved depreciation rates. The adjustment was incorporated into rates in accordance with the rate decision. 3. REVENUE RECOGNITION Regulated Revenue The Company’s operating revenues are primarily attributable to regulated water, wastewater, and recycled water service based upon tariff rates approved by the ACC. Regulated service revenues consist of amounts billed to customers based on approved fixed monthly fees and consumption fees, as well as unbilled revenues estimated from the last meter reading date to the end of the accounting period utilizing historical customer data recorded as accrued revenue. The measurement of sales to customers is generally based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, the Company estimates consumption since the date of the last meter reading and a corresponding unbilled revenue is recognized. The unbilled revenue estimate is based upon the number of unbilled days that month and the average daily customer billing rate from the previous month (which fluctuates based upon customer usage). The Company applies the invoice practical expedient and recognizes revenue from contracts with customers in the amount for which the Company has a right to invoice. The Company has the right to invoice for the volume of consumption, service charge, and other authorized charges. The Company satisfies its performance obligation to provide water, wastewater, and recycled water service over time as the service is rendered. Regulated water and wastewater service may be terminated by the customers at will, and, as a result, no separate financing component is recognized for the Company’s collections from customers, which generally require payment within 15 days of billing. The Company applies judgment, based principally on historical payment experience, in estimating its customers’ ability to pay. Total revenues do not include sales tax as the Company considers itself a pass-through conduit for collecting and remitting sales taxes. Unregulated Revenue Unregulated revenues represent those revenues that are not subject to the ratemaking process of the ACC. Unregulated revenues are primarily related to the revenues recognized on a portion of ICFA funds received. ICFAs are agreements with developers and homebuilders where the Company, which owns the operating utilities, provides service to plan, coordinate, and finance the water and wastewater infrastructure that would otherwise be required to be performed or subcontracted by the developer or homebuilder. Service provided within these agreements include coordination of construction service for water and wastewater treatment facilities as well as financing, arranging, and coordinating the provision of utility service. In return, the developers and homebuilders pay the Company an agreed-upon amount per dwelling unit for the land legally described in the agreement, or a portion thereof. Under ICFA agreements, the Company has a contractual obligation to ensure physical capacity exists through its regulated utilities for the provision of water and wastewater utility service to the land when needed. This obligation persists regardless of connection growth. Fees for this service are typically a negotiated amount per equivalent dwelling unit for the land legally described in the agreement, or a portion thereof. Payments are generally due in installments, with a portion due upon signing of the agreement, a portion due upon completion of certain milestones, and the final payment due upon final plat approval or sale of the subdivision. The payments are non-refundable. The agreements are generally recorded against the land with the appropriate recorder’s office and must be assumed in the event of a sale or transfer of the land. The regional planning and coordination of the infrastructure in the various service areas has been an important part of the Company’s business model. -12- Table of Contents Payments for ICFAs are usually received in advance. Decision No. 74364 requires a hook-up fee (“HUF”) tariff to be established for all ICFAs that come due and are paid subsequent to December 31, 2013, which is a set amount per equivalent dwelling unit determined by the ACC based on the utility and meter size. Also pursuant to Decision No. 74364, as payments are received, 70 % of the payment must be recorded as a HUF liability until the HUF liability is fully funded, with the remaining amount initially recorded to deferred revenue until earned. The Company is responsible for assuring that the full HUF tariff, which is the set amount determined by the rate decision, is funded in the HUF liability, even if it results in recording less than 30 % of the overall ICFA funds as deferred revenue. ICFA revenue is recognized when the Company completes the performance obligations under the agreement. Following its issuance in February 2014, Decision No. 74364 prohibits the Company from entering into any new ICFAs. The Company accounts for the portion of ICFA funds allocated to the HUF liability as a CIAC. However, in accordance with the ACC directives, the CIAC is not deducted from rate base until the HUF funds are expended for utility plant. Such funds are restricted and segregated in a separate bank account and used for plant. For facilities required under a HUF or ICFA, the utilities must first use the HUF moneys received, after which, it may use debt or equity financing for the remainder of construction. As these arrangements are with developers and not with the end water or wastewater customer, revenue recognition coincides with the completion of the Company’s performance obligations under the agreement with the developer and its regulated utilities’ ability to provide fitted capacity for water and wastewater service. The Company exercises judgment when estimating the number of equivalent dwelling units that its regulated utilities have capacity to serve. The Company believes that service provided within these agreements is not distinct in the context of the contract because it is highly interdependent with its regulated utilities’ ability to provide fitted capacity for water and wastewater service. The Company concluded that the goods and service provided under ICFA contracts constitute a single performance obligation. December 31, 2023 Balance Payments Allocated to Deferred Revenue Revenue Recognized September 30, 2024 Balance Deferred Revenue - ICFA $ 19,656 $ 629 $ — $ 20,285 Disaggregated Revenues For the three and nine months ended September 30, 2024 and 2023, disaggregated revenues from contracts with customers by major source and customer class are as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 REGULATED REVENUE Water Service Residential $ 5,034 $ 4,900 $ 14,003 $ 13,261 Irrigation 1,205 1,393 2,459 2,739 Commercial 541 457 1,389 1,184 Construction 469 537 861 1,036 Other water revenues 244 233 675 696 Total water revenues 7,493 7,520 19,387 18,916 Wastewater and recycled water service Residential 5,796 5,630 17,607 16,725 Commercial 336 317 1,034 906 Recycled water revenues 607 469 1,133 1,062 Other wastewater revenues 89 78 280 265 Total wastewater and recycled water revenues 6,828 6,494 20,054 18,958 TOTAL REGULATED REVENUE 14,321 14,014 39,441 37,874 UNREGULATED REVENUE ICFA revenues — 518 — 2,786 TOTAL REVENUE $ 14,321 $ 14,532 $ 39,441 $ 40,660 -13- Table of Contents Contract Balances The Company’s contract assets and liabilities consist of the following (in thousands): September 30, 2024 December 31, 2023 CONTRACT ASSETS Accounts receivable Water service $ 2,125 $ 1,588 Wastewater and recycled water service 1,297 1,379 Total contract assets $ 3,422 $ 2,967 CONTRACT LIABILITIES Deferred revenue - ICFA $ 20,285 $ 19,656 Total contract liabilities $ 20,285 $ 19,656 Remaining Performance Obligations Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Deferred revenue - ICFA is recognized as revenue once the obligations specified within the applicable ICFA are met, including construction of sufficient operating capacity to serve the customers for which revenue was deferred. Due to the uncertainty of future events, the Company is unable to estimate when to expect recognition of deferred revenue - ICFA. Accounts Receivable and Allowance for Credit Losses Accounts receivable as of September 30, 2024 and December 31, 2023 consist of the following (in thousands): September 30, 2024 December 31, 2023 Billed receivables $ 3,422 $ 2,967 Less provision for credit losses ( 151 ) ( 122 ) Accounts receivable, net $ 3,271 $ 2,845 The following table summarizes the allowance for credit loss activity for the nine months ended September 30, 2024 and the year ended December 31, 2023 (in thousands): September 30, 2024 December 31, 2023 Beginning of Period $ ( 122 ) $ ( 164 ) Credit Loss Expense ( 69 ) ( 76 ) Write Offs 67 124 Recoveries ( 27 ) ( 6 ) End of Period $ ( 151 ) $ ( 122 ) 4. PROPERTY, PLANT AND EQUIPMENT Depreciable property, plant and equipment as of September 30, 2024 and December 31, 2023 consist of the following (in thousands): September 30, 2024 December 31, 2023 Equipment $ 61,519 $ 60,536 Office buildings and other structures 64,622 64,084 Transmission and distribution plant 301,530 289,550 Total property, plant and equipment $ 427,671 $ 414,170 -14- Table of Contents Depreciation of property, plant and equipment is computed based on the estimated useful lives as follows: Useful Lives Equipment 3 to 30 years Office buildings and other structures 30 years Transmission and distribution plant 10 to 50 years 5. GOODWILL AND INTANGIBLE ASSETS Goodwill The goodwill balance was $ 9.5 million as of September 30, 2024 and is related to our historical acquisitions. There were no indicators of impairment identified as a result of the Company’s review of events and circumstances related to its goodwill subsequent to the acquisitions. As a result of Decision No. 79383 issued by the ACC on June 20, 2024, the Company reclassified $ 1.3 million of goodwill to regulatory assets for certain impacted utilities to establish the approved $ 1.8 million of acquisition premiums net of the $ 0.5 million that was previously recorded for GW-Rincon. Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” for additional information. As of September 30, 2024 and December 31, 2023, the goodwill balance consisted of the following (in thousands): December 31, 2023 Balance Acquisition Activity Adjustments Subsequent to Acquisition Date September 30, 2024 Balance Goodwill $ 10,820 $ — $ ( 1,334 ) $ 9,486 Intangible Assets As of September 30, 2024 and December 31, 2023, intangible assets consisted of the following (in thousands): September 30, 2024 December 31, 2023 Gross Amount Accumulated Amortization Net Amount Gross Amount Accumulated Amortization Net Amount INDEFINITE LIVED INTANGIBLE ASSETS: CP Water Certificate of Convenience & Necessity service area $ 1,532 $ — $ 1,532 $ 1,532 $ — $ 1,532 Intangible trademark 13 — 13 13 — 13 Franchise contract rights 139 — 139 139 — 139 Organizational costs 164 — 164 163 — 163 Total indefinite lived intangible assets 1,848 — 1,848 1,847 — 1,847 DEFINITE LIVED INTANGIBLE ASSETS: Acquired ICFAs 17,978 ( 16,374 ) 1,604 17,978 ( 16,105 ) 1,873 Sonoran contract rights 7,406 ( 2,285 ) 5,121 7,406 ( 2,285 ) 5,121 Total definite lived intangible assets 25,384 ( 18,659 ) 6,725 25,384 ( 18,390 ) 6,994 Total intangible assets $ 27,232 $ ( 18,659 ) $ 8,573 $ 27,231 $ ( 18,390 ) $ 8,841 A Certificate of Convenience & Necessity (“CC&N”) is a permit issued by the ACC allowing a public service corporation to serve a specified area, and preventing other public service corporations from offering the same water and wastewater service within the specified area. The CP Water Company (“CP Water”) CC&N intangible asset was acquired through the acquisition of CP Water in 2006. This CC&N permit has no outstanding conditions that would require renewal. Franchise contract rights and organizational costs relate to the 2018 acquisition of GW-Red Rock and the 2023 acquisition of GW-Farmers. Franchise contract rights are agreements with Pima and Pinal counties for GW-Red Rock and Pima county for GW-Farmers that allow the Company to place infrastructure in public right-of-way and permits expected to be renewable -15- Table of Contents indefinitely. The organizational costs represent fees paid to federal or state governments for the privilege of incorporation and expenditures incident to organizing the corporation and preparing it to conduct business. Acquired ICFAs and Sonoran contract rights relate to acquired rights under certain ICFAs through the 2004 acquisition of GW-Santa Cruz and GW-Palo Verde and the 2005 acquisition of Sonoran assets, respectively, which are amortized when cash is received in proportion to the amount of total cash expected to be received under the underlying agreements. Due to the uncertainty of the timing of when cash will be received under ICFA agreements and contract rights, the Company cannot reliably estimate when the remaining intangible assets’ amortization will be recorded. There was zero and $ 0.3 million of amortization recorded for these balances during the three and nine months ended September 30, 2024, respectively. There was $ 1.4 million of amortization recorded for these balances during the three and nine months ended September 30, 2023. 6. TRANSACTIONS WITH RELATED PARTIES The Company provides medical benefits to employees through its participation in a pooled plan sponsored by an affiliate of a significant shareholder and director of the Company. Medical claims paid to the plan were approximately $ 0.3 million for both the three months ended September 30, 2024 and 2023. Medical claims paid to the plan were approximately $ 0.8 million for the nine months ended September 30, 2024 and $ 0.6 million for the nine months ended September 30, 2023. Refer to Note 1 — “Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions” (specifically the “Private Placement Offering of Common Stock” section) for additional information regarding other related party disclosures. 7. ACCRUED EXPENSES Accrued expenses as of September 30, 2024 and December 31, 2023 consist of the following (in thousands): September 30, 2024 December 31, 2023 Accrued project liabilities $ 2,310 $ 1,001 Interest 2,003 480 Accrued bonus 981 602 Property taxes 678 1,242 Dividend payable 606 606 Accrued purchase orders 583 200 Customer prepayments 577 883 Accrued payroll 328 67 Accrued sales taxes 238 179 Deferred compensation 228 239 Accrued electric 213 109 Other accrued liabilities 968 1,521 Total accrued expenses $ 9,713 $ 7,129 8. FAIR VALUE Fair Value of Financial Instruments ASC 820, Fair Value Measurement , establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels, as follows: • Level 1 - Quoted market prices in active markets for identical assets or liabilities. • Level 2 - Inputs other than Level 1 that are either directly or indirectly observable. • Level 3 - Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that the Company believes market participants would use. -16- Table of Contents Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 were as follows (in thousands): September 30, 2024 December 31, 2023 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: HUF funds - restricted cash $ 2,986 $ — $ — $ 2,986 $ 822 $ — $ — $ 822 Certificate of deposit - restricted 947 — — 947 — 854 — 854 Demand deposit 1 — — 1 1 — — 1 Total $ 3,934 $ — $ — $ 3,934 $ 823 $ 854 $ — $ 1,677 Liabilities: Contingent consideration $ — $ — $ 1,946 $ 1,946 $ — $ — $ 2,113 $ 2,113 Total $ — $ — $ 1,946 $ 1,946 $ — $ — $ 2,113 $ 2,113 HUF Funds - restricted cash and Certificate of deposit - restricted are presented on the Restricted cash line item of the Company’s condensed consolidated balance sheets (unaudited) and are valued at amortized cost, which approximates fair value. Demand Deposit is presented on the Cash and cash equivalents line item of the Company’s condensed consolidated balance sheets (unaudited) and is valued at amortized cost, which approximates fair value. As part of the GW-Red Rock acquisition, the Company is required to pay to the seller a growth premium equal to $ 750 (not in thousands) for each new account established within specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten years after such first installation date, or twenty years from the acquisition date. The fair value of the contingent consideration was calculated using a discounted cash flow technique which utilized unobservable inputs developed using the Company’s estimates and assumptions. Significant inputs used in the fair value calculation are as follows: year of the first meter installation, total new accounts per year, years to complete full build out, and discount rate. In addition, as part of the GW-Farmers acquisition, the Company is required to pay the seller a growth premium equal to $ 1,000 (not in thousands) for each new account established in the service area, up to a total aggregate growth premium of $ 3.5 million. The obligation period of the growth premium commences on the closing date of the acquisition and ends (i) ten years after the first new account for residential purposes is established on land that is, at the time of the closing date of the acquisition, undeveloped or unplatted and owned by the seller within the service area or (ii) ten years after the date of closing if a new account (as previously described) has not been established. The fair value of the contingent consideration was calculated using a discounted cash flow technique which utilized unobservable inputs developed using the Company’s estimates and assumptions. Significant inputs used in the fair value calculation are as follows: year of the first meter installation, total new accounts per year, years to complete full build out, and discount rate. Contingent consideration is included within acquisition liabilities on the condensed consolidated balance sheets (unaudited). Refer to Note 13 — “Commitments and Contingencies” for additional information about contingent consideration. -17- Table of Contents 9. DEBT The outstanding balances and maturity dates for short-term (including the current portion of long-term debt) and long-term debt as of September 30, 2024 and December 31, 2023 are as follows (in thousands): September 30, 2024 December 31, 2023 Short-term Long-term Short-term Long-term NOTES PAYABLE - 4.38 % Senior Secured Notes, Series A, maturing June 2028 (“Series A Notes”) $ — 28,750 $ — $ 28,750 4.58 % Senior Secured Notes, Series B, maturing June 2036 (“Series B Notes”) 3,833 70,917 3,833 72,833 6.91 % Senior Secured Notes, maturing January 2034 (“6.91% Notes”) — 20,000 — — 4.911 % WIFA Note, maturing April 2044 (“4.911% WIFA Note”) 49 1,399 — — 3,882 121,066 3,833 101,583 OTHER Debt issuance costs — ( 784 ) — ( 426 ) Loan Payable 49 145 47 184 Total debt $ 3,931 $ 120,427 $ 3,880 $ 101,341 Debt is measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 as follows (in thousands): September 30, 2024 December 31, 2023 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Long-term debt (1) — 124,648 — 124,648 — 100,746 — 100,746 (1) The fair value of debt was estimated based on interest rates considered available for instruments of similar terms and remaining maturities. 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. On October 26, 2023, the Company entered into a note purchase agreement for the issuance of an aggregate principal amount of $ 20 million of 6.91 % Senior Secured Notes due on January 3, 2034 (the “ 6.91 % Notes”). Pursuant to the terms of the 6.91 % Note purchase agreement, the Company issued the 6.91 % Notes on January 3, 2024. The 6.91 % Notes accrue interest at 6.91 % per annum from the date of issuance, payable semi-annually on January 3 and July 3 of each year, beginning on July 3, 2024, with a balloon payment due on January 3, 2034. As of September 30, 2024, the Company was in compliance with its financial debt covenants relating to the Series A Notes, Series B Notes, and the 6.91 % Notes. Revolving Credit Line On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation (“Northern Trust”), which was initially for a two-year revolving line of credit up to $ 10.0 million with a maturity date of April 30, 2022. This credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand the Company’s business, and for general corporate purposes, initially bore an interest rate equal to the London Interbank Offered Rate (LIBOR) plus 2.00 % and had no unused line fee. The Company and Northern Trust subsequently amended the credit facility agreement on multiple occasions (as amended, the “Northern Trust Loan Agreement”) to, among other things, (i) extend the scheduled maturity date to July 1, 2025; (ii) increase the maximum principal amount available for borrowing to $ 15.0 million; (iii) replace the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR); and (iv) add a quarterly facility fee equal to 0.35 % of the average daily unused amount of the revolving line of credit. -18- Table of Contents 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. As of September 30, 2024, the Company had no outstanding borrowings under this credit line. As of December 31, 2023, the outstanding borrowings on this credit line were approximately $ 2.3 million. There were less than $ 0.1 million of unamortized debt issuance costs as of September 30, 2024 and December 31, 2023. As of September 30, 2024, the Company was in compliance with its financial debt covenants under the Northern Trust Loan Agreement. Refer to Note 11 - “Debt” in our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information regarding the Company’s outstanding debt. 10 . INCOME TAXES Our interim effective tax rates reflect the estimated annual effective tax rates for 2024 and 2023 applied to year-to-date pretax income, adjusted for tax expense associated with certain discrete items. The effective tax rates for the three months ended September 30, 2024 and 2023 were 26.6 % and 25.2 %, respectively. The effective tax rates for the nine months ended September 30, 2024 and 2023 were 26.3 % and 26.6 %, respectively. The increase in the effective tax rate for the three months ended September 30, 2024 compared to the prior year period was primarily attributable to the vesting of restricted stock awards and stock options in the prior year period. The decrease in the effective tax rate for the nine months ended September 30, 2024 compared to the prior year period was primarily attributable to a decrease in non-deductible permanent differences. 11. DEFERRED COMPENSATION AWARDS Stock-based compensation Stock-based compensation related to option awards is measured based on the fair value of the award. The fair value of stock option awards is determined using a Black-Scholes option-pricing model. The Company recognizes compensation expense associated with the options over the vesting period. 2017 stock option grant In August 2017, GWRI’s Board of Directors granted stock options to acquire 465,000 shares of GWRI’s common stock to employees throughout the Company. The options were granted with an exercise price of $ 9.40 , the market price of the Company’s common shares on the NASDAQ Global Market at the close of business on August 10, 2017. The options are fully vested and expire 10 years from the grant date. As of August 2021, these options were fully expensed. As of September 30, 2024, 125,750 options have been exercised and 70,425 options have been forfeited with 268,825 options outstanding. 2019 stock option grant In August 2019, GWRI’s Board of directors granted stock options to acquire 250,000 shares of GWRI’s common stock to employees throughout the Company. The options were granted with an exercise price of $ 11.26 , the market price of the Company’s common shares on the NASDAQ Global Market at the close of business on August 13, 2019. The options are fully vested and expire 10 years from the grant date. As of August 2023, these options were fully expensed. Stock-based compensation expense of $ 20,000 and $ 92,000 was recorded for the three and nine months ended September 30, 2023, respectively. As of September 30, 2024, 55,994 options have been exercised and 63,770 options have been forfeited with 130,236 options outstanding. -19- Table of Contents Restricted stock units Restricted stock units are granted in the first quarter based on the prior year’s performance and vest over a three-year period. The units are credited quarterly using the closing price of the Company’s common stock on the applicable record date for the respective quarter. The following table details total awards granted and the number of units outstanding as of September 30, 2024, along with the amounts paid to holders of the restricted stock units (“RSUs”) for the three and nine months ended September 30, 2024 and 2023 (in thousands, except unit amounts): Three Months Ended September 30, Nine Months Ended September 30, Grant Date Units Granted Units Outstanding 2024 2023 2024 2023 Q1 2021 27,403 — $ — $ 27 $ 28 $ 85 Q1 2022 22,262 1,778 21 23 67 70 Q1 2023 30,366 11,852 29 31 92 62 Q1 2024 30,962 22,706 31 — 64 — Total 110,993 36,336 $ 81 $ 81 $ 251 $ 217 These are liability awards, so when the stock price decreases, cumulative compensation expense is reduced, which can lead to negative compensation expense in a given period. Based on GWRI’s closing share price on September 30, 2024 (the last trading date of the quarter), deferred compensation expense to be recognized over future periods is estimated for the years ending December 31 as follows (in thousands): RSUs 2024 (remaining period) $ 84 2025 246 2026 127 Total $ 457 Stock appreciation rights Stock appreciation rights (“SARs”) were granted to certain members of management and are fully vested. The following table details the grant date, units granted, exercise price, outstanding units as of September 30, 2024 and amounts paid during the three and nine months ended September 30, 2024 and 2023 (in thousands, except unit and per unit amounts): Three Months Ended September 30, Nine Months Ended September 30, Grant Date Units Granted Exercise Price Units Outstanding 2024 2023 2024 2023 Q1 2015 (1) 299,000 $ 4.26 12,500 $ — $ — $ — $ 165 Q1 2018 (2) 33,000 $ 8.99 8,250 — — — — Total 332,000 20,750 $ — $ — $ — $ 165 (1) The exercise price was determined to be the fair market value of one share of GWR Global Water Resources Corp. stock on the grant date of February 11, 2015. (2) The exercise price was determined to be the fair market value of one share of GWRI stock on the grant date of March 12, 2018. Restricted stock awards On May 7, 2020, the Company’s stockholders approved the Global Water Resources, Inc. 2020 Omnibus Incentive Plan, which allows restricted stock awards as a form of compensation. A restricted stock award (“RSA”) represents the right to receive a share of the Company’s common stock. RSAs vest over two to three years , beginning on the date of the grant. The Company assumes that forfeitures will be minimal and recognizes forfeitures as they occur, which results in a reduction in compensation expense. -20- Table of Contents During the three and nine months ended September 30, 2024, 9,537 RSAs were issued. During the three and nine months ended September 30, 2023, 6,000 RSAs were issued. The following table details the compensation expense related to the grant and partial vesting of previously granted RSAs for the three and nine months ended September 30, 2024 and 2023 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Compensation expense $ 55 $ 200 $ 450 $ 737 12. SUPPLEMENTAL CASH FLOW INFORMATION The following is supplemental cash flow information for the nine months ended September 30, 2024 and 2023 (in thousands): Nine Months Ended September 30, 2024 2023 Supplemental cash flow information: Cash paid for interest - net of amounts capitalized $ 3,114 $ 2,343 Cash paid for income taxes 107 276 Non-cash financing and investing activities: Capital expenditures included in accounts payable and accrued liabilities 3,417 2,251 Utility Plant constructed by developers and conveyed 10,831 11,276 Business acquisition through issuance of contingent consideration payable — 1,330 Finance lease additions 604 94 13. COMMITMENTS AND CONTINGENCIES Commitments The Company has operating and finance leases for vehicles, office equipment, and office space. Refer to Note 4 – “Leases” in our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information. On February 1, 2023, the Company acquired all of the equity of Farmers Water Co., an operator of a water utility with service area in Pima County, Arizona. Under the terms of the purchase agreement, the Company is obligated to pay the seller a growth premium for each new account established within the specified growth premium areas. The estimated fair value of the remaining liability was $ 1.2 million and $ 1.3 million as of September 30, 2024 and December 31, 2023, respectively, and is included in Acquisition liabilities on the condensed consolidated balance sheets (unaudited). On October 16, 2018, the Company completed the acquisition of GW-Red Rock, an operator of a water and a wastewater utility with service areas in the Pima and Pinal counties of Arizona. Under the terms of the purchase agreement, the Company is obligated to pay to the seller a growth premium for each new account established within specified growth premium areas. During the three months ended September 30, 2024, the Company revised the fair value of the estimated liability of the contingent consideration based on modified building plans from the landowners in the growth premium areas, which resulted in a net $ 0.1 million gain on remeasurement, which is included in Other, net on the condensed consolidated statements of operations (unaudited) for the three and nine months ended September 30, 2024. As of September 30, 2024, no meters have been installed and no accounts have been established in any of the specified growth premium areas. The estimated fair value of the remaining liability was $ 0.7 million and $ 0.8 million as of September 30, 2024 and December 31, 2023, respectively, and is included in Acquisition liabilities on the condensed consolidated balance sheets (unaudited). Refer to Note 8 — “Fair Value” for additional information about contingent consideration. The Company has previously received certain ICFA advances related to its CP Water utility, which the Company is obligated to repay in the form of specified future ICFA fee reductions when those ICFA fees are due. The liability was $ 0.9 million as of both September 30, 2024 and December 31, 2023 and is included in Acquisition liabilities on the condensed consolidated balance sheets (unaudited). -21- Table of Contents Contingencies From time to time, in the ordinary course of business, the Company may be subject to pending or threatened lawsuits in which claims for monetary damages are asserted. Management is not aware of any legal proceeding of which the ultimate resolution could materially affect the Company’s financial position, results of operations, or cash flows. -22- Table of Contents