Global Water Resources, Inc. 10-Q

ITEM 2. 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 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 Certain statements in this Quarterly Report on Form 10-Q are forward-looking in nature and may constitute “forward-looking information” within the meaning of applicable securities laws. Often, but not always, forward-looking statements can be identified by the words “believes”, “anticipates”, “plans”, “expects”, “intends”, “projects”, “estimates”, “objective”, “goal”, “focus”, “aim”, “should”, “could”, “may”, and similar expressions. These forward-looking statements include future estimates described in “Business Outlook”, “Factors Affecting our Results of Operations”, and “Liquidity and Capital Resources”. These forward-looking statements include, but are not limited to, statements about our strategies; expectations about future business plans, prospective performance, growth, and opportunities; future financial performance; regulatory and Arizona Corporation Commission (“ACC”) proceedings, decisions, and approvals, such as the anticipated benefits resulting from rate decisions, including any collective revenue increases due to new water and wastewater rates, our beliefs and expectations pertaining to ACC actions relating to our Southwest Plant, as well as the outcome and timing of our rate case and other applications with the ACC; 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 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; technologies, including expected benefits from implementing such technologies; revenues; metrics; operating expenses; trends relating to our industry, market, population and job growth, and housing permits; the adequacy of our water supply to service our current demand and growth for the foreseeable future; liquidity and capital resources; plans and expectations for capital expenditures; cash flows and uses of cash; dividends; depreciation and amortization; tax payments; our ability to repay indebtedness and invest in initiatives; the anticipated impact and resolutions of legal matters; the anticipated impact of new or proposed laws, including regulatory requirements, tax changes, and judicial decisions; and the anticipated impact of accounting changes and other pronouncements. Forward-looking statements should not be read as a guarantee of future performance or results. They are based on numerous assumptions that we believe are reasonable, but they are open to a wide range of uncertainties and business risks. Consequently, actual results may vary materially from what is contained in a forward-looking statement. Investors are cautioned not to place undue reliance on forward-looking information. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including risks related to legal, regulatory, and legislative matters; risks related to our business and operations; risks related to market and financial matters; risk related to technology; risks related to the ownership of our common stock; and certain general risks, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. 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 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. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Overview GWRI is a water resource management company that owns, operates, and manages thirty-two water, wastewater, and recycled water systems in strategically located communities, principally in metropolitan Phoenix and Tucson, Arizona. The Company seeks to deploy an integrated approach, referred to as “Total Water Management.” Total Water Management is a comprehensive approach to water utility management that reduces demand on scarce non-renewable water sources and costly renewable water supplies, in a manner that ensures sustainability and greatly benefits communities both environmentally and economically. This approach employs a series of principles and practices that can be tailored to each community: • Reuse of recycled water, either directly or to non-potable uses, through aquifer recharge, or possibly direct potable reuse in the future; -23- Table of Contents • Regional planning; • Use of advanced technology and data; • Employing respected subject matter experts and retaining thought and application leaders; • Leading outreach and educational initiatives to ensure all stakeholders including customers, development partners, municipalities, regulators, and utility staff are knowledgeable on the principles and practices of the Total Water Management approach; and • Establishing partnerships with communities, developers, and industry stakeholders to gain support of the Total Water Management principles and practices. Business Outlook 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. Census estimates, the Phoenix metropolitan statistical area (“MSA”) is the 10th largest MSA in the U.S. and had an estimated population of 5.1 million, an increase of 4.6% over the 4.8 million people reported in the 2020 Census. Metropolitan Phoenix continues to grow due to its favorable employment opportunities, excellent weather, large and growing universities, a diverse employment base, and low taxes. The Employment and Population Statistics Department of the State of Arizona predicts that the Phoenix metropolitan area will have a population of 5.8 million people by 2030 and 6.5 million by 2040. Arizona’s job growth increased by 2.2% during the first 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 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 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 Our financial condition and results of operations are influenced by a variety of industry-wide factors, including but not limited to: • population and community growth; • economic and environmental utility regulation; • economic environment; • the need for infrastructure investment; • production and treatment costs; • weather and seasonality; and • access to and quality of water supply. We are subject to economic regulation by the state regulator, the ACC. The U.S. federal and state governments also regulate environmental, health and safety, and water quality matters. We continue to execute on our strategy to optimize and focus the Company in order to provide greater value to our customers and shareholders by aiming to deliver predictable financial results, making prudent capital investments, and focusing our efforts on earning an appropriate rate of return on our investments. Population and Community Growth Population and community growth in the metropolitan Phoenix area served by our utilities have a direct impact on our earnings. An increase or decrease in our active service connections will affect our revenues and variable expenses in a corresponding manner. 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 -24- Table of Contents areas. 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 September 30, 2024. The graph below presents the historical change in active connections for our ongoing operations over the past five years. Economic and Environmental Utility Regulation We are subject to extensive regulation of our rates by the ACC, which is charged with establishing rates based on the provision of reliable service at a reasonable cost while also providing an opportunity to earn a fair rate of return on rate base for investors of utilities. The ACC uses a historical test year to evaluate whether the plant in service is used and useful, to assess whether costs were prudently incurred, and to set “just and reasonable” rates. Rate base is typically the depreciated original cost of the plant in service (net of contributions in aid of construction (“CIAC”) and advances in aid of construction (“AIAC”) which are funds or property provided to a utility under the terms of a main extension agreement, the value of which may be refundable), that has been determined to have been “prudently invested” and “used and useful”, although the reconstruction cost of the utility plant may also be considered in determining the rate base. The ACC also decides on an applicable capital structure based on actual or hypothetical analyses. The ACC determines a “rate of return” on that rate base, which includes the approved capital structure and the actual cost of debt and a fair and reasonable cost of equity based on the ACC’s judgment. The overall revenue requirement for rate making purposes is established by multiplying the rate of return by the rate base and adding reasonably incurred operating expenses for the test year, depreciation, and any applicable pro forma adjustments. -25- Table of Contents To ensure an optimal combination of access to water and water conservation balanced with a fair rate of return for investors, our water utility operating revenue is based on two components: a fixed fee and a consumption or volumetric fee. For our water utilities, the fixed fee, or “basic service charge,” provides access to water for residential usage and has generally been set at a level to produce approximately 50% of total water revenue. The volumetric fee is based on the total volume of water supplied to a given customer after the minimum number of gallons, if any, covered by the basic service charge, multiplied by a price per gallon set by a tariff approved by the ACC. A discount to the volumetric rate applies for customers that use less than an amount specified by the ACC. For all investor-owned water utilities, the ACC has, as a policy matter, required the establishment of inverted tier conservation-oriented rates, meaning that the price of water increases as consumption increases. For wastewater utilities, wastewater collection and treatment can be based on volumetric or fixed fees. 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. We are required to file rate cases with the ACC to obtain approval for a change in rates. Rate cases and other rate-related proceedings can take a year or more to complete. As a result, there is frequently a delay, or regulatory lag, between the time of a capital investment or incurrence of an operating expense increase and when those costs are reflected in rates. 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 (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. federal, state, and local regulatory agencies that enforce environmental, health, and safety requirements, which affect all of our regulated subsidiaries. Environmental, health and safety, and water quality regulations are complex, change frequently, and have tended to become more stringent over time. Although it is difficult to project the ultimate costs of complying with pending or future requirements, we do not expect requirements under current regulations to have a material impact on our operations or financial condition, though it is possible new methods of treating drinking water may be required if additional regulations become effective in the future. On April 10, 2024, the U.S. Environmental Protection Agency (“EPA”) finalized the National Primary Drinking Water Regulation (“NPDWR”) establishing legally enforceable levels, called maximum contaminant levels (“MCLs”), for six per- and polyfluoroalkyl substances or compounds (“PFAS”) in drinking water. The EPA also finalized health-based, non-enforceable maximum contaminant level goals for these PFAS. The final rule requires that public water systems, such as the Company, must monitor for these PFAS and have three years to complete initial monitoring, followed by ongoing compliance monitoring. 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 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. The Company expects that compliance with the NPDWR will require increased capital expenditures for PFAS-contaminated water treatment and other operating costs. If other newer or stricter standards are introduced in the future, they could also increase our operating expenses. We generally expect to recover expenses associated with compliance for environmental and health and safety standards through rate increases, but this recovery may be affected by regulatory lag. Capital expenditures and operating costs required as a result of water quality standards have been traditionally recognized by the ACC as appropriate for inclusion in establishing rates or in a separate surcharge. 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. -26- Table of Contents 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 Capital expenditures for infrastructure investment are a component of the rate base on which our regulated utility subsidiaries are allowed to earn an equity rate of return. Capital expenditures for infrastructure provide a basis for earnings growth by expanding our “used and useful” rate base, which is a component of our permitted return on investment and revenue requirement. We are generally able to recover a rate of return on these capital expenditures (return on equity and debt), together with debt service and certain operating costs, through the rates we charge. We have an established capital improvement plan to make targeted capital investments to repair and replace existing infrastructure as needed, address operating redundancy requirements, improve our overall financial performance and expand our infrastructure in areas where growth is occurring. Production and Treatment 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. Our most significant costs include labor, chemicals used to treat water and wastewater, and power used to operate pumps and other equipment. Power and chemical costs can be volatile. However, we employ a variety of technologies and methodologies to minimize costs and maximize operational efficiencies. Weather and Seasonality Our ability to meet the existing and future water demands of our customers depends on an adequate supply of water. Drought, overuse of sources of water, the protection of threatened species or habitats, or other factors may limit the availability of ground and surface water. Also, customer usage of water and recycled water is affected by weather conditions, particularly during the summer. Our water systems generally experience higher demand in the summer due to the warmer temperatures and increased usage by customers for irrigation and other outdoor uses. However, summer weather that is cooler or wetter than average generally suppresses customer water demand and can have a downward effect on our operating revenue and operating income. 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 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. Access to and Quality of Water Supply In many areas of Arizona (including certain areas that we service), water supplies are limited and, in some cases, current usage rates exceed sustainable levels for certain water resources. We currently rely predominantly (and are likely to continue to rely) on the pumping of groundwater and the generation and delivery of recycled water for non-potable uses to meet future demands in our service areas. At present, groundwater (and recycled water derived from groundwater) is the primary water supply available to us. In addition, regulatory restrictions on the use of groundwater and the development of groundwater wells, lack of available water rights, drought, overuse of local or regional sources of water, protection of threatened species or habitats, or other factors, including climate change, may limit the availability of ground or surface water. 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 -27- Table of Contents 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. 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 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 periods as well as recovery of the acquisition premium related to our Farmers Water Co. acquisition. 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 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 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. 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 -28- Table of Contents 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. 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: (i) the consolidation of water rates to one single rate for these utilities; (ii) acquisition premiums relating to the Company’s acquisitions of its Global Water-Mirabell Water Company, Inc. (“GW-Mirabell”), Global Water-Lyn Lee Water Company, Inc. (“GW-Lyn Lee”), Global Water-Francesca Water Company, Inc. (“GW-Francesca”), Global Water-Tortolita Water Company, Inc. (“GW-Tortolita”), Global Water-Rincon Water Company, Inc. (“GW-Rincon”), 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. 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. Recent Acquisition Activity 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 ACC. The estimated rate base of the seven water systems is approximately $7.8 million. 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. -29- Table of Contents Segment Reporting 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 in deciding how to allocate resources and in assessing operating performance. In consideration of the Financial Accounting Standards Board’s Accounting Standards Codification 280, Segment Reporting , 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 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. Additionally, the chief operating decision maker uses consolidated financial information to evaluate performance, which is the same basis on which he communicates results and performance to the Company’s 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. 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, 2024 2023 Revenues $ 14,321 $ 14,532 Operating expenses 10,337 10,695 Operating income 3,984 3,837 Total other income (expense) 2 (315) Income before income taxes 3,986 3,522 Income tax expense (1,061) (888) Net income $ 2,925 $ 2,634 Basic earnings per common share $ 0.12 $ 0.11 Diluted earnings per common share $ 0.12 $ 0.11 Revenues – The following table summarizes revenues for the three months ended September 30, 2024 and 2023 (in thousands): Three Months Ended September 30, 2024 2023 Water service $ 7,493 $ 7,520 Wastewater and recycled water service 6,828 6,494 Unregulated revenues — 518 Total revenues $ 14,321 $ 14,532 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. -30- Table of Contents 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, 2024 2023 Operations and maintenance $ 3,444 $ 3,587 General and administrative 3,960 3,923 Depreciation and amortization 2,933 3,185 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, 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 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. -31- Table of Contents 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). 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: 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. -32- Table of Contents 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, 2024 2023 Revenues $ 39,441 $ 40,660 Operating expenses 31,393 30,036 Operating income 8,048 10,624 Total other expense (793) (1,301) Income before income taxes 7,255 9,323 Income tax expense (1,909) (2,484) Net income $ 5,346 $ 6,839 Basic earnings per common share $ 0.22 $ 0.28 Diluted earnings per common share $ 0.22 $ 0.28 Revenues – The following table summarizes revenues for the nine months ended September 30, 2024 and 2023 (in thousands): Nine Months Ended September 30, 2024 2023 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 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. -33- Table of Contents 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. 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 nine months ended September 30, 2024 and 2023 (in thousands): Nine Months Ended September 30, 2024 2023 Operations and maintenance $ 10,213 $ 9,557 General and administrative 12,317 11,934 Depreciation and amortization 8,863 8,545 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 $0.6 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 $0.3 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. 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 $0.4 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. 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, 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 -34- Table of Contents 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 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 The Company’s capital resources are provided by internally generated cash flows from operations as well as debt and equity financing. Additionally, its regulated utility subsidiaries receive advances and contributions from customers, home builders, and real estate developers to partially fund construction necessary to extend service to new areas. The Company uses capital resources primarily to: • fund operating costs; • fund capital requirements, including construction expenditures; • make debt and interest payments; • fund acquisitions; and • pay dividends. The Company’s utility subsidiaries operate in rate-regulated environments in which the amount of new investment recovery may be limited. Such recovery will take place over an extended period of time because recovery through rate increases is subject to regulatory lag. 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 -35- Table of Contents (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”). Cash from Operating Activities Cash flows provided by operating activities are used for operating needs and to meet capital expenditure requirements. 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 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 $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. The projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors. As a result, the Company may adjust capital expenditures to correspond with any substantial changes in demand for new development in its service areas. Cash from Financing Activities 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. Debt 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. -36- Table of Contents Senior Secured Notes On June 24, 2016, the Company issued two series of senior secured notes with a total principal balance of $115.0 million at a blended interest rate of 4.55%. Series A carries a principal balance of $28.8 million and bears an interest rate of 4.38% over a twelve-year term, with the principal payment due on June 15, 2028 (the “Series A Notes”). Series B carries a principal balance of $86.3 million and bears an interest rate of 4.58% over a 20-year term, with the principal payment due on June 15, 2036 (the “Series B Notes”). The Series B Notes were interest only for the first five years, with $1.9 million principal payments paid semiannually thereafter beginning December 2021. The proceeds of the Series A Notes and the Series B Notes were primarily used to refinance the Company’s long-term tax exempt bonds, pursuant to an early redemption option at 103%, plus accrued interest, as a result of the Company’s U.S. initial public offering of its common stock in May 2016. The Series A Notes and the Series B Notes require the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. Consolidated EBITDA is calculated as net income plus depreciation and amortization, taxes, interest, and other non-cash charges net of non-cash income. Consolidated debt service is calculated as interest expense, principal payments, and dividend or stock repurchases. The Series A Notes and the Series B Notes also contain a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25. 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”). 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. The 6.91% Notes require the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. The 6.91% Notes also contain a provision limiting the payment of dividends if the Company falls below a debt service coverage ratio of 1.25. 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. The Senior Secured Notes also have certain restrictive covenants that limit, among other things, the Company’s ability to: create liens and other encumbrances; incur additional indebtedness; merge, liquidate or consolidate with another entity; dispose of or transfer assets; make distributions or other restricted payments; engage in certain affiliate transactions; and change the nature of the business. Debt issuance costs as of September 30, 2024 and December 31, 2023 were $0.8 million and $0.4 million, respectively. 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. On July 1, 2024, the Company and Northern Trust entered into a fifth amendment to the Northern Trust Loan Agreement, which further amended the scheduled maturity date for the revolving line of credit from July 1, 2025 to July 1, 2026. Similar to the Senior Secured Notes, the Northern Trust Loan Agreement requires the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. The Northern Trust Loan Agreement also contains a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25. Additionally, the Northern Trust Loan Agreement contains certain restrictive covenants that limit, among other things, the Company’s ability to: create liens and other encumbrances; incur additional indebtedness; merge, liquidate or -37- Table of Contents consolidate with another entity; dispose of or transfer assets; make distributions or other restricted payments (including dividends); engage in certain affiliate transactions; and change the nature of the business. The foregoing covenants are subject to various qualifications and limitations as set forth in the Northern Trust Loan Agreement. Pursuant to the Northern Trust Loan Agreement, the revolving credit facility is subject to certain customary events of default after which the revolving credit facility could be declared due and payable if not cured within the grace period or, in certain circumstances, could be declared due and payable immediately. As of 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 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. Insurance Coverage The Company carries various property, casualty, and financial insurance policies with limits, deductibles, and exclusions consistent with industry standards. However, insurance coverage may not be adequate or available to cover unanticipated losses or claims. The Company is self-insured to the extent that losses are within the policy deductible or exceed the amount of insurance maintained. 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 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 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. ITEM 3. Qualitative and Quantitative Disclosures About Market Risk Not applicable