Global Water Resources, Inc. [GWRS] Filings

10-Q 1 gwrs-20230930.htm 10-Q gwrs-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_____________________________________________________________

FORM 10-Q

_____________________________________________________________

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number: 001-37756

______________________________________________________________

Global Water Resources, Inc.

(Exact Name of Registrant as Specified in its Charter)

______________________________________________________________

Delaware

90-0632193

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

21410 N. 19th Avenue #220

Phoenix,

Arizona

85027

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (480) 360-7775

Securities registered pursuant to Section 12(b) of the Act:

______________________________________________________________


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	GWRS	The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

Smaller reporting company

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No

As of November 8, 2023, the registrant had 24,171,517 shares of common stock, $0.01 par value per share, outstanding.

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TABLE OF CONTENTS



PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Shareholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	42
Signatures		43

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Table of Contents PART I—FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

GLOBAL WATER RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in thousands, except share and per share amounts)

(Unaudited)


	September 30, 2023		December 31, 2022
ASSETS
PROPERTY, PLANT AND EQUIPMENT:
Land	$	1,480	$	1,480
Depreciable property, plant and equipment	408,806		344,043
Construction work-in-progress	46,095		66,039
Other	697		697
Less accumulated depreciation	(139,454)		(124,522)
Net property, plant and equipment	317,624		287,737
CURRENT ASSETS:
Cash and cash equivalents	5,289		6,561
Accounts receivable — net	3,077		2,139
Customer payments in-transit	571		462
Unbilled revenue	3,055		2,557
Taxes, prepaid expenses, and other current assets	2,038		2,439
Total current assets	14,030		14,158
OTHER ASSETS:
Goodwill	10,923		4,957
Intangible assets — net	8,765		10,139
Regulatory asset	2,984		3,169
Restricted cash	2,376		1,001
Right-of -use asset	1,706		1,891
Other noncurrent assets	44		34

Total other assets	26,798		21,191
TOTAL ASSETS	$	358,452	$	323,086
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	661	$	2,173
Accrued expenses	9,578		8,056

Customer and meter deposits	1,742		1,682
Long-term debt — current portion	3,880		3,833
Leases — current portion	523		505
Total current liabilities	16,384		16,249
NONCURRENT LIABILITIES:
Line of credit	15		—
Long-term debt	103,258		104,945
Long-term lease liabilities	1,374		1,616
Deferred revenue - ICFA	19,656		20,974
Regulatory liability	6,094		6,371
Advances in aid of construction	113,729		93,656
Contributions in aid of construction — net	35,650		26,404
Deferred income tax liabilities, net	8,112		5,949
Acquisition liability	3,080		1,773
Other noncurrent liabilities	2,020		755
Total noncurrent liabilities	292,988		262,443
Total liabilities	309,372		278,692
Commitments and contingencies (Refer to Note 16)
SHAREHOLDERS’ EQUITY:
Common stock, $0.01 par value, 60,000,000 shares authorized; 24,478,252 and 24,095,139 shares issued as of September 30, 2023 and December 31, 2022, respectively.	240		239
Treasury stock, 306,735 and 224,093 shares at September 30, 2023 and December 31, 2022, respectively.	(2)		(2)
Paid in capital	47,321		44,157
Retained earnings	1,521		—
Total shareholders’ equity	49,080		44,394
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	358,452	$	323,086

See accompanying notes to the condensed consolidated financial statements

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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,
	2023		2022		2023		2022
REVENUES:
Water services	$	7,520	$	5,824	$	18,916	$	15,854
Wastewater and recycled water services	6,494		6,069		18,958		17,770
Unregulated revenues	518		—		2,786		5
Total revenues	14,532		11,893		40,660		33,629

OPERATING EXPENSES:
Operations and maintenance	3,587		2,775		9,557		8,260
General and administrative	3,923		3,923		11,934		11,579
Depreciation and amortization	3,185		2,429		8,545		7,199
Total operating expenses	10,695		9,127		30,036		27,038
OPERATING INCOME	3,837		2,766		10,624		6,591

OTHER INCOME (EXPENSE):

Interest expense	(1,260)		(1,093)		(3,709)		(3,355)
Allowance for equity funds used during construction	263		—		778		—

Other - Net	682		625		1,630		2,251
Total other expense	(315)		(468)		(1,301)		(1,104)

INCOME BEFORE INCOME TAXES	3,522		2,298		9,323		5,487
INCOME TAX EXPENSE	(888)		(612)		(2,484)		(805)
NET INCOME	$	2,634	$	1,686	$	6,839	$	4,682

Basic earnings per common share	$	0.11	$	0.07	$	0.28	$	0.20
Diluted earnings per common share	$	0.11	$	0.07	$	0.28	$	0.20
Dividends declared per common share	$	0.07	$	0.07	$	0.22	$	0.22

Weighted average number of common shares used in the determination of:
Basic	24,171,228		23,467,035		24,046,493		22,937,265
Diluted	24,231,801		23,595,459		24,144,384		23,111,881

See accompanying notes to the condensed consolidated financial statements

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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, 2021	22,832,013	$	228	(182,445)	$	(2)	$	29,803		$	—	$	30,029
Dividend declared $0.07 per share	—	—		—	—		(781)			(889)		(1,670)


Stock option exercise	250	—		—	—		3			—		3
Stock compensation	—	—		—	—		389			—		389
Net income	—	—		—	—		—			889		889
BALANCE - March 31, 2022	22,832,263	228		(182,445)	(2)		29,414			—		29,640
Dividend declared $0.07 per share	—	—		—	—		433			(2,107)		(1,674)

Treasury stock	—	—		(40,756)	—		(257)			—		(257)
Stock option exercise	107,548	—		—	—		—			—		—
Stock compensation	—	—		—	—		45			—		45
Net income	—	—		—	—		—			2,107		2,107
BALANCE - June 30, 2022	22,939,811	228		(223,201)	(2)		29,635			—		29,861
Dividend declared per share	—	—		—	—		537		1	(1,686)		(1,149)
Issuance of Common Stock	1,150,000	11		—	—		14,862		1	—		14,873
Treasury stock	—	—		(899)	—		(282)			—		(282)

Stock compensation	—	—		—	—		45			—		45
Net income	—	—		—	—		—			1,686		1,686
BALANCE - September 30, 2022	24,089,811	239		(224,100)	(2)		44,797			—		45,034

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

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GLOBAL WATER RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Nine Months Ended September 30,
	2023	2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	6,839	$	4,682
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred compensation	698	786
Depreciation and amortization	8,545	7,199
Right of use amortization	240	104
Amortization of deferred debt issuance costs and discounts	33	33
(Gain) Loss on disposal of fixed assets	(83)	(3)
Provision for credit losses	73	79
Deferred income tax expense	2,164	542
Changes in assets and liabilities
Accounts receivable	(938)	(433)
Other current assets	(165)	(717)
Accounts payable and other current liabilities	2,261	1,170
Other noncurrent assets	293	335
Other noncurrent liabilities	2,702	5,961
Net cash provided by operating activities	22,662	19,738

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(18,578)	(25,324)
Cash paid for acquisitions, net of cash acquired	(6,246)	(85)

Other cash flows from investing activities	—	(24)
Net cash used in investing activities	(24,824)	(25,433)

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid	(5,372)	(5,075)
Advances in aid of construction	8,370	2,145
Refunds of advances for construction	(1,076)	(1,105)

Proceeds from stock option exercise	10	3
Payments for taxes related to net shares settlement of equity awards	(367)	—
Principal payments under finance lease	(388)	—
Line of credit borrowings, net	15	—
Loan borrowings	242	—
Loan repayments	—	(103)
Repayments of bond	(1,917)	(1,917)

Proceeds from sale of stock	2,748	14,892



Net cash provided by financing activities	2,265	8,840
INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	103	3,145
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period	7,562	13,443
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – End of period	7,665	16,588

See accompanying notes to the condensed consolidated financial statements

Supplemental disclosure of cash flow information:


	Nine Months Ended September 30,
	2023		2022
Cash and cash equivalents	$	5,289	$	15,613
Restricted Cash	2,376		975
Total cash, cash equivalents, and restricted cash	$	7,665	$	16,588

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GLOBAL WATER RESOURCES, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

1. BASIS OF PRESENTATION, CORPORATE TRANSACTIONS, SIGNIFICANT ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS

Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements of Global Water Resources, Inc. (the “Company”, “GWRI”, “we”, “us”, or “our”) and related disclosures as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 are unaudited. The December 31, 2022 condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These financial statements follow the same accounting policies and methods of their application as the Company’s most recent annual consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2022. 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, 2023 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

Arizona Corporation Commission (“ACC”) Rate Case

On June 27, 2023, seven of the Company’s 13 regulated utilities, all located in Pima County, each filed a rate case application with the ACC for water rates based on a 2022 test year. There can be no assurance that the ACC will approve the requested rate increase or any increase or the consolidation of water rates described above, and the ACC could take other actions as a result of the rate case. Further, it is possible that the ACC may determine to decrease future rates. There can also be no assurance as to the timing of when an approved rate increase (if any) would go into effect.

On July 27, 2022, the ACC issued Rate Decision No. 78644 relating to the Company’s previous rate case. Pursuant to Rate Decision No. 78644, the ACC approved, among other things, a collective annual revenue requirement increase of approximately $2.2 million (including the acquisition premiums discussed below) based on 2019 test year service connections, and phased-in over approximately two years.

The ACC also approved: (i) the consolidation of water and/or wastewater rates to create economies of scale that are beneficial to all customers when rates are consolidated; (ii) acquisition premiums relating to the Company’s acquisitions of its Red Rock and Global Water-Turner Ranches Irrigation, Inc. (“Turner Ranches”) utilities, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement; (iii) the Company’s ability to annually adjust rates to flow through certain changes in tax expense, primarily related to income taxes, without the necessity of a rate case proceeding; and (iv) a sustainable water surcharge, which will allow semiannual surcharges to be added to customer bills based on verified costs of new water resources.

Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” for additional information.

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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.

Public Offering of Common Stock

On August 1, 2022, the Company completed a public offering of 1,150,000 shares of common stock at a public offering price of $13.50 per share, which included 150,000 shares issued and sold to the underwriter following the exercise in full of its option to purchase additional shares of common stock. The Company received net proceeds of approximately $14.9 million from the offering after deducting underwriting discounts and commissions and offering expenses paid by the Company. Certain of the Company’s directors and/or their affiliates purchased an aggregate of 652,000 shares of common stock at the public offering price.

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 the agreement. The Company received growth premiums of $0.7 million and $0.6 million for the three months ended September 30, 2023 and 2022, respectively, and $1.6 million and $2.2 million for the nine months ended September 30, 2023 and 2022, respectively, and is included in “Other - Net” on the Condensed Consolidated Statements of Operations.

Significant Accounting Policies

Basic and Diluted Earnings per Common Share

Basic earnings per share (“EPS”) in each period of this report were calculated by dividing net income by the weighted-average number of shares during those periods. Diluted EPS includes additional weighted-average common stock equivalents (options and restricted stock awards), if dilutive. Unless otherwise noted, the term “earnings per share” refers to basic EPS. A reconciliation of the denominator used in basic and diluted EPS calculations is shown in the following table:


	Three Months Ended September 30,		Nine Months Ended September 30,
(In thousands)	2023	2022	2023	2022

Basic weighted average common shares outstanding	24,171	23,467	24,046	22,937
Effect of dilutive securities:
2017 Option grant	54	99	72	114
2019 Option grant	7	21	14	30
2020 Restricted stock awards	—	8	6	31
2021 Restricted stock awards	—	—	6	—
Total dilutive securities	61	128	98	175
Diluted weighted average common shares outstanding	24,232	23,595	24,144	23,112
Anti-dilutive shares excluded from earnings per diluted shares (1)	138	133	94	133

(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.

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

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In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changed the impairment model for certain financial assets that have a contractual right to receive cash, including trade and loan receivables. The new model required recognition based upon an estimation of expected credit losses rather than recognition of losses based on the probability of occurrence.

The Company is a public business entity that qualifies as a smaller reporting company, and therefore ASU 2016-13 was effective for annual reporting periods beginning after December 15, 2022. The Company adopted the standard utilizing the modified retrospective method for its trade receivables and unbilled revenue on January 1, 2023. Based on the composition of the Company’s trade receivables and unbilled revenue, and expected future losses, the adoption of ASU 2016-13 did not have a material impact on its consolidated financial statements.

2. REGULATORY DECISION AND RELATED ACCOUNTING AND POLICY CHANGES

The Company’s regulated utilities and certain other balances are subject to regulation by the ACC and meet the requirements for regulatory accounting found within Accounting Standards Codification (“ASC 980”), Regulated Operations.

In accordance with ASC 980, rates charged to utility customers are intended to recover the costs of the provision of service plus a reasonable return in the same period. Changes to the rates are made through formal rate applications with the ACC, which the Company has done for all of the operating utilities and which are described below.

On July 3, 2023, Global Water-Palo Verde Utilities Company, Inc. (“Palo Verde”) and Global Water-Santa Cruz Water Company, Inc. (“Santa Cruz”) 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 Palo Verde’s and Santa Cruz’s most recent rate order, until the plant is considered for recovery in the utilities’ next rate case. The Southwest Plant was substantially constructed prior to 2009 to provide water, wastewater, and recycled water utility 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. In July 2023, $27.5 million related to the water production plant and a portion of the wastewater processing plant was placed in service, with the remaining parts of the Southwest Plant to be placed in service once sufficient flows, provided by connection growth, are established. There can be no assurance, however, that the ACC will approve the application as submitted and the ACC could take other actions regarding the application.

On June 27, 2023, seven of the Company’s 13 regulated utilities each filed a rate case application with the ACC for increased water rates based on a 2022 test year. In addition to a rate increase, the Company requested, among other things, the consolidation of water rates for certain of its utilities, including Global Water-Mirabell Water Company, Inc. (“Mirabell”), Global Water-Lyn Lee Water Company, Inc. (“Lyn Lee”), Global Water-Francesca Water Company, Inc. (“Francesca”), Global Water-Tortolita Water Company, Inc. (“Tortolita”), Global Water-Rincon Water Company, Inc. (“Rincon”), Global Water-Las Quintas Serenas Water Company, Inc. (“Las Quintas Serenas”), and Global Water-Red Rock Water Company, Inc. (“Red Rock”), each located in Pima County. Of the Company’s utilities, these utilities filing rate applications make up approximately 3% of the Company’s active service connections. There can be no assurance that the ACC will approve the requested rate increase or any increase or the consolidation of water rates described above, and the ACC could take other actions as a result of the rate case. Further, it is possible that the ACC may determine to decrease future rates. There can also be no assurance as to the timing of when an approved rate increase (if any) would go into effect.


	Incremental		Cumulative
August 1, 2022	$	1,457,462	$	1,457,462
January 1, 2023	$	675,814	$	2,133,277
January 1, 2024	$	98,585	$	2,231,861

To the extent that the number of active service connections has increased and continues to increase from 2019 levels, the additional revenues may be greater than the amounts set forth above. On the other hand, if active connections decrease or the Company experiences declining usage per customer, the Company may not realize all of the anticipated revenues.

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Rate Decision No. 78644 also addressed the primary impacts of the Federal Tax Cuts and Jobs Act (the “TCJA”) on the Company, which includes the reduction of the federal income tax rate from 35 percent to 21 percent beginning on January 1, 2018. The TCJA required the Company to re-measure all existing deferred income tax assets and liabilities to reflect the reduction in the federal tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates are expected to be recovered from or refunded to customers. Rate Decision No. 78644 approved an adjustor mechanism for income taxes (as described below) that permits the Company to flow through potential changes to state and federal income tax rates as well as refund or collect funds related to TCJA.

The ACC also approved:

(i) the consolidation of water and/or wastewater rates to create economies of scale that are beneficial to all customers when rates are consolidated;

(ii) acquisition premiums relating to the Company’s acquisitions of its Red Rock and Turner Ranches utilities, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement included in the table above;

(iii) the Company’s ability to annually adjust rates to flow through certain changes in tax expense, primarily related to income taxes, without the necessity of a rate case proceeding; and

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

Finally, Rate Decision No. 78644 required the Company to work with ACC staff and the Residential Utility Consumer Office to prepare a Private Letter Ruling request to the Internal Revenue Service (“IRS”) to clarify whether the failure to eliminate the deferred taxes attributable to assets condemned in a transaction governed by Section 1033 of the Internal Revenue Code (“IRC”) would violate the normalization provisions of Section 168(i)(9) of the IRC. The IRS accepted the request and issued its Private Letter Ruling, dated September 22, 2023. The Private Letter Ruling determined that the deferred taxes attributable to assets condemned in a transaction governed by Section 1033 of the IRC must be eliminated and failure to do so would violate the normalization provisions of Section 168(i)(9) of the IRC. As required by Rate Decision No. 78644, the Private Letter Ruling has been provided to the ACC. Within 90 days after receiving the ruling, ACC Staff is required to prepare, for ACC consideration, a memorandum and proposed order regarding guidance issued within the Private Letter Ruling. The Private Letter Ruling was consistent with the adjustments used to determine the revenue requirements in Rate Decision No. 78644. Accordingly, the Company has requested that no further action be taken by the ACC. However, there can be no assurance provided until the ACC process is complete.

Certain accounting implications related to Rate Decision No. 78644 were recognized and recorded as of June 30, 2022, and are as follows:

•Reclassification of Red Rock Water, Red Rock Wastewater, and Turner Ranches acquisition premiums of approximately $0.8 million in the aggregate from goodwill to regulatory assets to be included in rate base. The premiums are to be amortized over 25 years.

•Reversal of the 2017 TCJA tax reform regulatory liability of approximately $0.8 million, which was recorded as a reduction to income tax expense for approximately $0.7 million, and as a reduction to interest expense for approximately $0.1 million.

•Write-off of approximately $0.3 million in capitalized rate case costs.

Infrastructure Coordination and Financing Agreements

Infrastructure Coordination and Financing Agreements (“ICFAs”) are agreements with developers and homebuilders where the Company provides services to plan, coordinate, and finance the water and wastewater infrastructure that would otherwise be required to be performed or subcontracted by the developer or homebuilder. Rate Decision No. 74364, issued by the ACC in February 2014, established the policy for the treatment of ICFA funds and also prohibited the Company from entering into any new ICFAs. Rate Decision No. 74364 requires a hook-up fee (“HUF”) tariff to be established for all ICFAs that come due and are paid subsequent to December 31, 2013, which is a set amount per equivalent dwelling unit determined by the ACC based on the utility and meter size. In addition, since ICFA funds are generally received in installments, Rate Decision No. 74364 prescribes that 70% of funds received must be recorded as a HUF liability, with the remaining 30% to be recorded as deferred revenue, until the HUF liability is fully funded. 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

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overall ICFA funds as deferred revenue. Refer to Note 3 – “Revenue Recognition - Unregulated Revenue” for additional information.

The Company accounts for the portion allocated to the HUF as a contribution in aid of construction (“CIAC”). However, in accordance with the ACC directives, the CIAC is not deducted from rate base until the HUF funds are expended for utility plant. Such funds are segregated in a separate bank account and used for plant.

A HUF liability is established and amortized as a reduction of depreciation expense over the useful life of the related plant once the HUF funds are utilized for the construction of 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.

Regulatory Assets and Liabilities

Regulatory assets and liabilities are the result of operating in a regulated environment in which the ACC establish 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, 2023		December 31, 2022
Regulatory Assets
Income taxes recoverable through future rates (1)	Various	$	1,423	1,482
Rate case expense surcharge(2)	2 years	284		467
Acquisition premiums(3)	25 years	1,277		1,220
Total regulatory assets		$	2,984	$	3,169

Regulatory Liabilities
Income taxes payable through future rates(1)		493		508
Acquired ICFAs(4)		4,896		5,863
Depreciation adjustment(5)		705		—
Total regulatory liabilities		$	6,094	$	6,371

(1) The TCJA required the Company to re-measure all existing deferred income tax assets and liabilities to reflect the reduction in the federal tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates are expected to be recovered from or refunded to customers.

(2) Rate Decision No. 78743, issued on October 24, 2022, approved approximately $0.5 million in rate case expenses to be recovered through a rate case expense surcharge over a two-year period.

(3) Rate Decision No. 78319, issued on December 3, 2021, approved an acquisition premium to be amortized over 25 years related to the acquisition of the Company’s Rincon utility. Amortization will begin once the Company receives a decision on the recently filed rate case and the acquisition premium is approved to be included in customer rates. The acquisition premium balance as of September 30, 2023 was approximately $0.5 million.

Rate Decision No. 78644, issued on July 27, 2022, approved acquisition premiums related to the acquisitions of the Company’s Turner Ranches and Red Rock utilities. Amortization began in 2022 as the acquisition premiums were included in customer rates as approved in the decision. The acquisition premium balance as of September 30, 2023 was approximately $0.8 million.

(4) The acquired ICFA regulatory liability relates to the offset of intangible assets related to ICFA contracts obtained in connection with the Santa Cruz, Palo Verde, and Sonoran Utility Services, LLC (“Sonoran”) acquisitions. When ICFA funds

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are received, a portion of the funds reduce the acquired ICFA liability as a partial offset to the amortization expense recognition of the related intangible asset.

(5) Rate Decision No. 78644 issued on July 27, 2022, approved an adjustment to update previously approved depreciation rates.

3. REVENUE RECOGNITION

Regulated Revenue

The Company’s operating revenues are primarily attributable to regulated services based upon tariff rates approved by the ACC. Regulated service revenues consist of amounts billed to customers based on approved fixed monthly fees and consumption fees, as well as unbilled revenues estimated from the last meter reading date to the end of the accounting period utilizing historical customer data recorded as accrued revenue. The measurement of sales to customers is generally based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, the Company estimates consumption since the date of the last meter reading and a corresponding unbilled revenue is recognized. The unbilled revenue estimate is based upon the number of unbilled days that month and the average daily customer billing rate from the previous month (which fluctuates based upon customer usage). The Company applies the invoice practical expedient and recognizes revenue from contracts with customers in the amount for which the Company has a right to invoice. The Company has the right to invoice for the volume of consumption, service charge, and other authorized charges.

The Company satisfies its performance obligation to provide water, wastewater, and recycled water services over time as the services are rendered. Regulated services may be terminated by the customers at will, and, as a result, no separate financing component is recognized for the Company’s collections from customers, which generally require payment within 15 days of billing. The Company applies judgment, based principally on historical payment experience, in estimating its customers’ ability to pay.

Total revenues do not include sales tax as the Company considers itself a pass-through conduit for collecting and remitting sales taxes.

Unregulated Revenue

Unregulated revenues represent those revenues that are not subject to the ratemaking process of the ACC. For the three and nine months ended September 30, 2023, unregulated revenues primarily related to the revenues recognized on a portion of ICFA funds received.

ICFAs are agreements with developers and homebuilders where the Company provides services to plan, coordinate, and finance the water and wastewater infrastructure that would otherwise be required to be performed or subcontracted by the developer or homebuilder. Services provided within these agreements include coordination of construction services for water and wastewater treatment facilities as well as financing, arranging, and coordinating the provision of utility services. In return, the developers and homebuilders pay the Company an agreed-upon amount per dwelling unit for the land legally described in the agreement, or a portion thereof. Under ICFA agreements, the Company has a contractual obligation to ensure physical capacity exists through its regulated utilities for the provision of water and wastewater utility service to the land when needed. This obligation persists regardless of connection growth.

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 the regulated utilities’ ability to provide fitted capacity for water and wastewater service.

Fees for these services are typically a negotiated amount per equivalent dwelling unit for the 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.

Rate Decision No. 74364 requires a 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.

As ICFA funds are generally received in installments, Rate Decision No. 74364 prescribes that 70% of funds received must be recorded as a HUF liability, with the remaining 30% to be recorded as deferred revenue, until the HUF liability is fully funded.

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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.

Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” for additional information on the accounting treatment of HUF.

The Company believes that these services are not distinct in the context of the contract because they are highly interdependent with the regulated utilities’ ability to provide fitted capacity for water and wastewater services. The Company concluded that the goods and services provided under ICFA contracts constitute a single performance obligation.

ICFA revenue is recognized at a point in time when the regulated utilities have the necessary capacity in place within their infrastructure to provide water/wastewater services to the developer. The Company exercises judgment when estimating the number of equivalent dwelling units that the regulated utilities have capacity to serve.

As of September 30, 2023 and December 31, 2022, ICFA deferred revenue recorded on the consolidated balance sheet totaled $19.7 million and $21.0 million, respectively, which represents deferred revenue recorded for ICFA funds received on contracts.

For the three and nine months ended September 30, 2023, ICFA revenue recognized totaled $0.5 million and $2.8 million, respectively. No ICFA revenue was recognized for the three months or nine months ended September 30, 2022.

Disaggregated Revenues

For the three and nine months ended September 30, 2023 and 2022, 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,
	2023		2022		2023		2022
REGULATED REVENUE
Water Services
Residential	$	4,900	$	4,104	$	13,261	$	11,395
Irrigation	1,393		955		2,739		2,283
Commercial	457		295		1,184		907
Construction	537		246		1,036		586
Other water revenues	233		224		696		683
Total water revenues	7,520		5,824		18,916		15,854
Wastewater and recycled water services
Residential	5,630		5,488		16,725		15,858
Commercial	317		73		906		600
Recycled water revenues	469		428		1,062		1,017
Other wastewater revenues	78		80		265		296
Total wastewater and recycled water revenues	6,494		6,069		18,958		17,770
TOTAL REGULATED REVENUE	14,014		11,893		37,874		33,624
UNREGULATED REVENUE
ICFA revenues	518		—		2,786		—
Rental revenues	—		—		—		5

TOTAL UNREGULATED REVENUE	518		—		2,786		5
TOTAL REVENUE	$	14,532	$	11,893	$	40,660	$	33,629

Contract Balances

The Company’s contract assets and liabilities consist of the following (in thousands):

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	September 30, 2023		December 31, 2022
CONTRACT ASSETS
Accounts receivable
Water services	$	1,916	$	1,179
Wastewater and recycled water services	1,303		1,124
Total contract assets	$	3,219	$	2,303
CONTRACT LIABILITIES
Deferred revenue - ICFA	$	19,656	$	20,974


Total contract liabilities	$	19,656	$	20,974

Remaining Performance Obligations

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted revenue expected to be recognized in future periods was approximately $19.7 million and $21.0 million at September 30, 2023 and December 31, 2022, respectively. Deferred revenue - ICFA is recognized as revenue once the obligations specified within the applicable ICFA are met, including construction of sufficient operating capacity to serve the customers for which revenue was deferred. Due to the uncertainty of future events, the Company is unable to estimate when to expect recognition of deferred revenue - ICFA.

4. LEASES

The Company measures the lease liability at the present value of future lease payments, excluding variable payments based on usage or performance, and calculates the present value using implicit rates. Leases with an initial term of twelve months or less are not recorded on the balance sheet.

During the year ended December 31, 2022, the Company entered into nine new finance leases for vehicles with either 48 or 60 month terms, all of which include a purchase option.

In January 2022, the Company entered into a five-year finance lease for office equipment which expires on January 31, 2027. There is no purchase option in the lease agreement but the Company controls and obtains substantially all of the benefit from the identified asset.

In December 2021, the Company entered into a new five-year corporate office lease agreement with a commencement date of May 1, 2022. The new monthly rent expense increased to $23,750 for each full calendar month commencing on May 1, 2022 through April 30, 2025 and will increase to $41,572 for each calendar month commencing on May 1, 2025 through April 30, 2027. On March 1, 2022 the Company amended the terms of the lease to incorporate construction of tenant improvements.

Rent expense arising from the operating leases totaled approximately $100,000 and $97,000 for the three months ended September 30, 2023 and 2022, respectively. Rent expense arising from the operating leases totaled approximately $295,000 and $223,000 for the nine months ended September 30, 2023 and 2022, respectively.

The right-of-use (“ROU”) asset recorded represents the Company’s right to use an underlying asset for the lease term and ROU lease liability represents the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

ROU assets at September 30, 2023 and December 31, 2022 consist of the following (in thousands):


	September 30, 2023		December 31, 2022
Financing Lease	$	443	$	405
Operating Lease	1,263		1,486
Total	$	1,706	$	1,891

Lease liabilities at September 30, 2023 and December 31, 2022 consist of the following (in thousands):

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	September 30, 2023		December 31, 2022
Financing Lease	$	534	$	597
Operating Lease	1,363		1,524
Total	$	1,897	$	2,121

At September 30, 2023, the remaining aggregate annual minimum lease payments are as follows (in thousands):


	Finance Lease Obligations		Operating Lease Obligations
2023 (remaining period)	$	57	$	74
2024	199		294
2025	171		431
2026	125		499
2027	25		166
Thereafter	—		—
Subtotal	577		1,464
Less: amount representing interest	(43)		(101)
Total	$	534	$	1,363

5. PROPERTY, PLANT AND EQUIPMENT

Depreciable property, plant, and equipment at September 30, 2023 and December 31, 2022 consist of the following (in thousands):


	September 30, 2023		December 31, 2022
Equipment	$	60,200	$	55,178
Office buildings and other structures	64,353		54,647
Transmission and distribution plant	284,253		234,218
Total property, plant, and equipment	$	408,806	$	344,043

Depreciation of property, plant and equipment is computed based on the estimated useful lives as follows:


						Useful Lives
Equipment						3 to 30 years
Office buildings and other structures						30 years
Transmission and distribution plant						10 to 50 years

6. ACCOUNTS RECEIVABLE

Accounts receivable as of September 30, 2023 and December 31, 2022 consist of the following (in thousands):


	September 30, 2023		December 31, 2022
Billed receivables	$	3,219	$	2,303
Less provision for credit losses	(142)		(164)
Accounts receivable — net	$	3,077	$	2,139

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7. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The goodwill balance was $10.9 million at September 30, 2023 and is related to the Turner, Red Rock, Mirabell, Francesca, Tortolita, Lyn Lee, Las Quintas Serenas, Rincon, Twin Hawks, and Farmers acquisitions. As of June 30, 2022, the Company reclassified approximately $0.8 million of goodwill to regulatory assets related to Red Rock Water, Red Rock Wastewater, and Turner Ranches acquisition premiums as a result of Rate Decision No. 78644 (refer to Note 2 - “Regulatory Decision and Related Accounting and Policy Changes” for additional information). The Farmers acquisition contributed approximately $6.0 million to the change in the goodwill balance (refer to Note 15 - “Acquisitions” for additional information). 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 of September 30, 2023 and December 31, 2022, the goodwill balance consisted of the following (in thousands):


	December 31, 2022 Balance		Acquisition Activity		Adjustments Subsequent to Acquisition Date		September 30, 2023 Balance
Goodwill	$	4,957	$	5,956	$	10	$	10,923

Intangible Assets

As of September 30, 2023 and December 31, 2022, intangible assets consisted of the following (in thousands):


	September 30, 2023						December 31, 2022
	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		132				132
Organizational costs	87				87		87				87
Total indefinite lived intangible assets	1,771				1,771		1,764				1,764
DEFINITE LIVED INTANGIBLE ASSETS:
Acquired ICFAs	17,978		(16,105)		1,873		17,978		(14,785)		3,193
Sonoran contract rights	7,406		(2,285)		5,121		7,406		(2,224)		5,182
Total definite lived intangible assets	25,384		(18,390)		6,994		25,384		(17,009)		8,375
Total intangible assets	$	27,155	$	(18,390)	$	8,765	$	27,148	$	(17,009)	$	10,139

A Certificate of Convenience & Necessity (“CC&N”) is a permit issued by the ACC allowing a public service corporation to serve a specified area, and preventing other public service corporations from offering the same services within the specified area. The CP Water CC&N intangible asset was acquired through the acquisition of CP Water Company in 2006. This CC&N permit has no outstanding conditions that would require renewal.

Franchise contract rights and organizational costs relate to the 2018 acquisition of Red Rock and the 2023 acquisition of Farmers. Franchise contract rights are agreements with Pima and Pinal counties for Red Rock and Pima county for Farmers that allow the Company to place infrastructure in public right-of-way and permits expected to be renewable indefinitely. The organizational costs represent fees paid to federal or state governments for the privilege of incorporation and expenditures incident to organizing the corporation and preparing it to conduct business.

Acquired ICFAs and contract rights related to the 2005 acquisition of Sonoran assets 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 $1.4 million of amortization recorded for these balances for both the three and nine months ended September 30, 2023. There was $0.1 million of amortization recorded for these balances for both the three and nine months ended September 30, 2022.

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8. TRANSACTIONS WITH RELATED PARTIES

The Company provides medical benefits to employees through its participation in a pooled plan sponsored by an affiliate of a significant shareholder and director of the Company. Medical claims paid to the plan were approximately $0.3 million for the three months ended September 30, 2023 and $0.4 million for the three months ended September 30, 2022. Medical claims paid to the plan were approximately $0.6 million for the nine months ended September 30, 2023 and $0.7 million for the nine months ended September 30, 2022.

Refer to Note 1 — “Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions” (specifically the “Public Offering of Common Stock” and “Private Placement Offering of Common Stock” sections) for additional information regarding other related party disclosures.

9. ACCRUED EXPENSES

Accrued expenses at September 30, 2023 and December 31, 2022 consist of the following (in thousands):


	September 30, 2023		December 31, 2022
Property taxes	$	1,890	$	1,195
Interest	1,707		483

Accrued Bonus	895		557
Customer prepayments	836		588
Accrued project liabilities	812		1,585
Asset retirement obligations	697		697
Dividend payable	600		593
Deferred compensation	377		818
Accrued payroll	263		50
Accrued sales taxes	247		152
Accrued professional fees	224		60
Other accrued liabilities	1,030		1,278
Total accrued expenses	$	9,578	$	8,056

10. FAIR VALUE

Fair Value of Financial Instruments

FASB ASC 820, Fair Value Measurement, establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels, as follows:

•Level 1 - Quoted market prices in active markets for identical assets or liabilities.

•Level 2 - Inputs other than Level 1 that are either directly or indirectly observable.

•Level 3 - Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that the Company believes market participants would use.

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Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 were as follows (in thousands):


	September 30, 2023								December 31, 2022
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Asset/Liability Type:
HUF Funds - restricted cash(1)	$	1,533	$	—	$	—	$	1,533	$	161	$	—	$	—	$	161
Demand Deposit(2)	1		—		—		1		50		—		—		50
Certificate of Deposit - Restricted(1)	—		843		—		843		—		840		—		840
Acquisition Liability(3)	—		—		2,146		2,146		—		—		838		838
Total	$	1,534	$	843	$	2,146	$	4,523	$	211	$	840	$	838	$	1,889

(1) HUF Funds - restricted cash and Certificate of Deposit - Restricted are presented on the Restricted cash line item of the Company’s consolidated balance sheets and are valued at amortized cost, which approximates fair value. The increase was primarily driven by additional funds received in growth areas of several utilities.

(2) Demand Deposit is presented on the Cash and cash equivalents line item of the Company’s consolidated balance sheets and is valued at amortized cost, which approximates fair value.

(3) As part of the Red Rock acquisition, the Company is required to pay to the seller a growth premium equal to $750 (not in thousands) for each new account established within three specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten years after such first installation date, or twenty years from the acquisition date. The fair value of the acquisition liability was calculated using a discounted cash flow technique which utilized unobservable inputs developed using the Company’s estimates and assumptions. Significant inputs used in the fair value calculation are as follows: year of the first meter installation, total new accounts per year, years to complete full build out, and discount rate.

In addition, as part of the 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 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 ten years after the date of closing if a new account (as previously described) has not been established.

11. DEBT

The outstanding balances and maturity dates for short-term (including the current portion of long-term debt) and long-term debt as of September 30, 2023 and December 31, 2022 are as follows (in thousands):


	September 30, 2023				December 31, 2022
	Short-term		Long-term		Short-term		Long-term
BONDS AND NOTES PAYABLE -
4.380% Series A 2016, maturing June 2028	$	—	28,750		$	—	$	28,750
4.580% Series B 2016, maturing June 2036	3,833		74,750		3,833		76,667



	3,833		103,500		3,833		105,417
OTHER
Debt issuance costs	—		(437)		—		(472)
Loan Payable	47		195		—		—
Total debt	$	3,880	$	103,258	$	3,833	$	104,945

Debt is measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 as follows (in thousands):


	September 30, 2023				December 31, 2022
	Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Long-term debt(3)	—	100,113	—	100,113	—	103,611	—	103,611

(3) The fair value of debt was estimated based on interest rates considered available for instruments of similar terms and remaining maturities.

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2016 Senior Secured Notes

On June 24, 2016, the Company issued two series of senior secured notes with an aggregate 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. Series B carries a principal balance of $78.6 million and bears an interest rate of 4.58% over a 20-year term. Series B was interest only for the first five years, with $1.9 million principal payments paid semiannually thereafter beginning December 2021. 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 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 senior secured notes also contain a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25. However, for the quarter ended June 30, 2021 through the quarter ending March 31, 2024, the debt service ratio drops to 1.20. The debt service ratio increases to 1.25 for any fiscal quarter during the period from and after June 30, 2024. As of September 30, 2023, the Company was in compliance with its financial debt covenants.

Note Purchase Agreement

On October 26, 2023, the Company entered into a note purchase agreement with Jackson National Life Insurance Company pursuant to which the Company will, subject to customer closing conditions, issue an aggregate principal amount of $20,000,000 of 6.91% Senior Secured Notes due on January 3, 2034 (the “Notes”). The Company plans to use the proceeds from the Notes offering to refinance existing indebtedness, to support capital investments associated with growth and for general corporate purposes.

Revolving Credit Line

On April 30, 2020, the Company entered into an agreement with Northern Trust for a two-year revolving line of credit initially up to $10.0 million with an initial maturity date of April 30, 2022 (as amended, the “Northern Trust Loan Agreement”). 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 London Interbank Offered Rate (LIBOR) plus 2.00% and had no unused line fee.

On April 30, 2021, the Company and Northern Trust entered into an amendment to the Northern Trust Loan Agreement pursuant to which, among other things, the maturity date for the Company’s revolving credit line was extended from April 30, 2022 to April 30, 2024.

On July 26, 2022, the Company and Northern Trust entered into a second amendment to the Northern Trust Loan Agreement, which, among other things, further extended the scheduled maturity date for the revolving line of credit from April 30, 2024 to July 1, 2024, increased the maximum principal amount available for borrowing from $10.0 million to $15.0 million, and replaced the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR).

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On June 28, 2023, the Company and Northern Trust entered into a third amendment to the Northern Trust Loan Agreement, which, among other things, (i) further amended the scheduled maturity date for the revolving line of credit from July 1, 2024 to July 1, 2025 and (ii) added a quarterly facility fee equal to 0.35% of the average daily unused amount of the revolving line of credit.

On October 26, 2023, the Company and Northern Trust entered into a fourth amendment to the Northern Trust Loan Agreement, which, among other things, further amended the terms and conditions set forth in the Loan Agreement to make certain conforming changes to reflect the issuance of the Notes and related matters.

The Northern Trust Loan Agreement requires the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. The Northern Trust Loan Agreement also contains a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25. However, for the quarter ending June 30, 2021 through the quarter ending March 31, 2024, the ratio drops to 1.20. As of September 30, 2023, the Company was in compliance with its financial debt covenants.

As of September 30, 2023 and December 31, 2022, the outstanding borrowings on this credit line were approximately $15,000 and $0, respectively. There were approximately $4,000 and $9,812 unamortized debt issuance costs as of September 30, 2023 and December 31, 2022, respectively.

In 2020, ASU 2020-04 was issued establishing ASC 848, Reference Rate Reform, and in 2021 ASU 2021-01, Reference Rate Reform (Topic 848): Scope was issued (collectively, “ASC 848”). ASC 848 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASC 848 is optional and may be elected over time as reference rate reform activities occur. In 2022, ASU 2022-06, Deferral of the Sunset Date of Topic 848 (ASU 2022-06) was issued to defer the sunset date of ASC 848 to December 31, 2024. ASU 2022-06 was effective immediately for all companies. The Company continues to evaluate the impact of ASC 848.

At September 30, 2023, the remaining aggregate annual maturities of debt obligations are as follows (in thousands):


	Debt
2023 (remaining period)	$	1,917
2024	3,836
2025	3,839
2026	3,843
2027	3,847
2028	32,568
Thereafter	57,287
Subtotal	107,137
Less: amount representing interest	—
Total	$	107,137

12. INCOME TAXES

For the three months ended September 30, 2023, the Company recorded tax expense of $0.9 million as compared to $0.6 million for the three months ended September 30, 2022. The $0.3 million increase in tax expense was primarily driven by the increase in pre-tax income for the three months ended September 30, 2023.

For the nine months ended September 30, 2023, the Company recorded tax expense of $2.5 million as compared to $0.8 million for the nine months ended September 30, 2022. The $1.7 million increase in tax expense was primarily driven by the increase in pre-tax income for the nine months ended September 30, 2023, partially offset by a tax benefit of approximately $0.7 million from the reversal of the regulatory liability related to Rate Decision No. 78622 (refer to Note 2 - “Regulatory Decision and Related Accounting and Policy Changes” for additional information) for the nine months ended September 30, 2022.

13. DEFERRED COMPENSATION AWARDS

Stock-based compensation

Stock-based compensation related to option awards is measured based on the fair value of the award. The fair value of stock option awards is determined using a Black-Scholes option-pricing model. The Company recognizes compensation expense associated with the options over the vesting period.

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2017 stock option grant

In August 2017, GWRI’s Board of Directors granted stock options to acquire 465,000 shares of GWRI’s common stock to employees throughout the Company. The options were granted with an exercise price of $9.40, the market price of the Company’s common shares on the NASDAQ Global Market at the close of business on August 10, 2017. The options vested over a four-year period, with 25% having vested in August 2018, 25% having vested in August 2019, 25% having vested in August 2020, and 25% having vested in August 2021. The options have a 10-year life. The Company expensed the $1.1 million fair value of the stock option grant ratably over the four-year vesting period. As of August 2021, these options were fully expensed. As of September 30, 2023, 128,454 options have been exercised and 69,225 options have been forfeited with 267,321 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 vest over a four-year period, with 25% having vested in August 2020, 25% having vested in August 2021, 25% having vested in August 2022, and 25% vesting in August 2023. The options have a 10-year life. The Company will expense the $0.8 million fair value of the stock option grant ratably over the four-year vesting period. Stock-based compensation expense of $20,000 and $45,000 was recorded for the three months ended September 30, 2023 and 2022, respectively, and $92,000 and $135,000 was recorded for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, 42,217 options have been exercised and 30,520 options have been forfeited with 177,263 options outstanding.

Phantom stock/Restricted stock units compensation

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, 2023, along with the amounts paid to holders of the phantom stock units (“PSUs”) and/or restricted stock units (“RSUs”) for the three and nine months ended September 30, 2023 and 2022 (in thousands, except unit amounts):


			Amounts Paid For the Three Months Ended September 30,				Amounts Paid For the Nine Months Ended September 30,
Grant Date	Units Granted	Units Outstanding	2023		2022		2023		2022







Q1 2019	32,190	—	$	—	$	—	$	—	$	45
Q1 2020	22,481	—	—		25		—		86
Q1 2021(1)	27,403	4,267	27		31		85		105
Q1 2022(1)	22,262	10,669

Global Water Resources, Inc. [GWRS] Filings
10-Q	[2023-11-09]
10-Q	[2023-08-10]
10-Q	[2023-05-03]
10-K	[2023-03-09]
10-Q	[2022-11-10]
10-Q	[2022-08-10]
10-Q	[2022-05-04]
10-K	[2022-03-10]
10-Q	[2021-11-09]
10-Q	[2021-08-05]
10-Q	[2021-05-06]
10-K	[2021-03-04]
10-Q	[2020-11-06]
10-Q	[2020-08-06]
10-Q	[2020-05-07]
10-K	[2020-03-05]
10-Q	[2019-11-07]
10-Q	[2019-08-08]
10-Q	[2019-05-09]
10-K	[2019-03-07]
10-Q	[2018-11-08]
10-Q	[2018-08-09]
10-Q	[2018-05-10]
10-K	[2018-03-09]
10-Q	[2017-11-09]
10-Q	[2017-08-09]
10-Q	[2017-05-10]
10-K	[2017-03-10]
10-Q	[2016-11-14]
10-Q	[2016-08-11]
10-Q	[2016-06-09]
S-1	[2016-01-19]