Global Water Resources, Inc.
21410 N 19th Avenue, Suite 220
Phoenix, AZ 85027 USA
gwresources.com
2016 Annual Report
REGULATED REVENUE GROWTH
REGULATED REVENUE GROWTH
($ IN MILLIONS)
($ IN MILLIONS)
APPROVED RATE ORDER THAT ALLOWS US TO
INCREASE RATES EVERY YEAR UNTIL 2021
APPROVED RATE ORDER THAT ALLOWS US TO
INCREASE RATES EVERY YEAR UNTIL 2021
20.9%
20.9%
CAGR
CAGR
(2004 – 2016)
(2004 – 2016)
Market
Downturn
Market
Downturn
$1.9M
$1.9M
~6.4%
~6.4%
of additional annualized
revenue based on 2016
connections
of additional annualized
revenue based on 2016
connections
increase over 2016
revenue (excluding
Willow revenue)
increase over 2016
revenue (excluding
Willow revenue)
Phased in Revenue Increase
Phased in Revenue Increase
$35M
$35M
$32.0 $32.2
$32.0 $32.2
$
$
$31 3
$31.3
$30.7
$30.7
$29.7
$4.5M
$4.5M
$ in millions
$ in millions
$31.3
$31 3
$29.7
$4.0M
$4.0M
$30M
$30M
$28.5
$28.5
$25M
$25M
$20M
$20M
$19.1
$22.7
$22.7
$19.3
$19.4
$19.1
$19.4
$19.3
$15M
$15M
$14.8
$14.8
$10M
$10.2
$10M
$10.2
$5M
$5M
$3.1
$3.1
N
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$2.0M
$2.2M
$2.2M
$1.5M
$1.5M
$1.0M
$1.0M
$1.2M
$1.2M
$0.5M
$0.5M
$3.5M
$3.5M
$3.0M
$3.0M
$2.5M
$2.5M
$3.3M
$3.3M
$2.9M
$2.9M
$2.6M
$2.6M
$4.1M
$4.1M
$3.7M
$3.7M
$0M
$0M
5
0
0
2
4
0
0
2
6
0
0
2
4
0
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7
0
0
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5
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$0.0M
$0.0M
2015 2016 2017P 2018P 2019P 2020P 2021P
2015 2016 2017P 2018P 2019P 2020P 2021P
Based on 2016 connections, excluding Valencia and Willow Valley.
Based on 2016 connections, excluding Valencia and Willow Valley.
DIVIDEND POLICY & HISTORY
DIVIDEND POLICY & HISTORY
SINCE U.S. IPO
SINCE U.S. IPO
AVERAGE ACTIVE CONNECTION GROWTH OF
3.0% AND PERMITS ARE ACCELERATING
AVERAGE ACTIVE CONNECTION GROWTH OF
3.0% AND PERMITS ARE ACCELERATING
$0.27
$0.27
3.1%
3.1%
current annual dividend
(paid monthly)
current annual dividend
(paid monthly)
dividend yield
(as of 3/24/2017)
dividend yield
(as of 3/24/2017)
37,387
37,387
3.0%
3.0%
active service connections
December 2016
active service connections
December 2016
CAGR
CAGR
(Dec 2011 – Dec 2016)
(Dec 2011 – Dec 2016)
$0.28
$0.28
$0.27
$0.27
$0.26
$0 26
$0.26
$0 26
$0.25
$0.25
$0.23
$0.23
$0.22
$0.22
6
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$0.24
$0.24
$0.24 $0.24
$0.24 $0.24
40,000
40,000
Total Active
Total Active
Total Connections
Total Connections
38,026
38,026
$0.27
$0.27
37,500
37,500
$0.26 $0.26 $0.26 $0.26 $0.26
$0 26
$0 26
$0 26
$0.26 $0.26 $0.26 $0.26 $0.26
$0 26
$0 26
$0 26
$0 26
$0 26
$0 26
$0 26
37,387
37,387
35,000
35,000
31,672
31,672
32,500
32,500
30,000
30,000
31,630
31,630
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Adjusted for Willow Valley and Valencia disposition.
Adjusted for Willow Valley and Valencia disposition.
BOARD OF DIRECTORS
BOARD OF DIRECTORS
Trevor T. Hill
Trevor T. Hill
Chairman of the Board, Co-founder
Chairman of the Board, Co-founder
Phoenix, Arizona, USA
Phoenix, Arizona, USA
Ron L. Fleming
Ron L. Fleming
President, Chief Executive Officer
President, Chief Executive Officer
and Director
and Director
Phoenix, Arizona, USA
Phoenix, Arizona, USA
William S. Levine
William S. Levine
Co-founder & Independent Director
Co-founder & Independent Director
Phoenix, Arizona, USA
Phoenix, Arizona, USA
David Tedesco
David Tedesco
Independent Director
Independent Director
Scottsdale, Arizona, USA
Scottsdale, Arizona, USA
Richard M. Alexander
Richard M. Alexander
Independent Director
Independent Director
Calgary, Alberta, Canada
Calgary, Alberta, Canada
L. Rita Theil
L. Rita Theil
Independent Director
Independent Director
Aurora, Ontario, Canada
Aurora, Ontario, Canada
Cindy M. Bowers
Cindy M. Bowers
Director
Director
Grenada, Mississippi, USA
Grenada, Mississippi, USA
pp ,
pp ,
,
,
EXECUTIVE OFFICERS
EXECUTIVE OFFICERS
Ron L. Fleming
Ron L. Fleming
President, Chief Executive Officer
President, Chief Executive Officer
and Director
and Director
Mike Liebman
Mike Liebman
Senior Vice President and
Senior Vice President and
Chief Financial Officer
Chief Financial Officer
INVESTOR INFORMATION
INVESTOR INFORMATION
Ron Both
Ron Both
Investor Relations, CMA
Investor Relations, CMA
949.432.7566
949.432.7566
rb@cma.bz
rb@cma.bz
Stock Exchange Listings
Stock Exchange Listings
NASDAQ
NASDAQ
Stock symbol: GWRS
Stock symbol: GWRS
The Toronto Stock Exchange
The Toronto Stock Exchange
Stock symbol: GWR
Stock symbol: GWR
Transfer Agent & Registrar
Transfer Agent & Registrar
Continental Stock Transfer & Trust
Continental Stock Transfer & Trust
17 Battery Place
17 Battery Place
New York, NY 10004
New York, NY 10004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
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
(State or other jurisdiction of
incorporation or organization)
21410 N. 19th Avenue #220, Phoenix, AZ
(Address of principal executive offices)
90-0632193
(I.R.S. Employer
Identification No.)
85027
(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
Common Stock, par value $0.01 per share
Name of Each Exchange on Which Registered
The NASDAQ Stock Market, LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act. Yes No
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. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted 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 and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently
completed second fiscal quarter (June 30, 2016) was $172.3 million based upon the closing sale price of the registrant’s common stock as reported on the NASDAQ
Global Select Market. As of March 10, 2017, the registrant had 19,581,266 shares of common stock, $0.01 par value per share, outstanding.
The information required by Part III of this From 10-K, to the extent not set forth herein, is incorporated herein by reference to the registrant’s definitive
proxy statement relating to the 2017 annual meeting of stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of
the registrant’s fiscal year ended December 31, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
-1-
On April 28, 2016, Global Water Resources, Inc. effected a 100.68 to 1.00 stock split. Certain prior period information has
been adjusted to conform to the current year presentation to reflect the stock split. All share and per share amounts presented within
the financial statements and management’s discussion and analysis of financial condition and results of operations have been
retrospectively adjusted to reflect the impact of the stock split.
EXPLANATORY NOTE
TABLE OF CONTENTS
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Item 16.
Signatures
Exhibit Index
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers of the Registrant and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
3
15
31
31
31
31
32
34
35
52
81
81
81
81
81
82
82
82
82
82
83
84
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FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (this “Form 10-K”) of Global Water Resources, Inc. (the
“Company”, “GWRI”, “we”, or “us”) and documents incorporated herein by reference 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, but are not
limited to, statements about our strategies; expectations about future business plans, prospective performance, and opportunities,
including potential acquisitions; future financial performance; population and growth projections; technologies; revenues; metrics;
operating expenses; market trends, including those in the markets in which we operate; liquidity; cash flows and uses of cash;
dividends; amount and timing of capital expenditures; depreciation and amortization; tax payments; hedging arrangements; our ability
to repay indebtedness and invest in initiatives; impact and resolutions of legal matters; and the impact of accounting changes and other
pronouncements. Forward-looking statements should not be read as guarantees of future performance or results, and will not
necessarily be accurate indications of whether or not, or the times at or by which, such performance or results will be achieved.
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, but not limited to, the factors discussed under
“Risk Factors” in Item 1A of this Form 10-K and future reports that we file from time to time with the Securities and Exchange
Commission (“SEC”). Although the forward-looking statements are based upon what management believes to be reasonable
assumptions, investors cannot be assured that actual results will be consistent with these forward-looking statements, and the
differences may be material. 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.
ITEM 1. BUSINESS
Overview
We are a water resource management company that owns, operates, and manages water, wastewater, and recycled water
utilities in strategically located communities, principally in metropolitan Phoenix, Arizona. We seek to deploy our integrated
approach, which we refer to as "Total Water Management," a term we use to mean managing the entire water cycle by owning and
operating the water, wastewater, and recycled water utilities within the same geographic areas in order to both conserve water and
maximize its total economic and social value. We use Total Water Management to promote sustainable communities in areas where
we expect growth to outpace the existing potable water supply. Our model focuses on the broad issues of water supply and scarcity
and applies principles of water conservation through water reclamation and reuse. Our basic premise is that the world's water supply is
limited and yet can be stretched significantly through effective planning, the use of recycled water, and by providing individuals and
communities resources that promote wise water usage practices.
We currently own eight water and wastewater utilities in strategically targeted communities in metropolitan Phoenix. We
currently serve more than 50,000 people in approximately 19,000 homes within our 328 square miles of certificated service areas,
which are serviced by four wholly-owned regulated operating subsidiaries as of December 31, 2016. Approximately 98.9% of our
active service connections are customers of our Santa Cruz Water Company, LLC (“Santa Cruz”) and Palo Verde Utilities Company,
LLC (“Palo Verde”) utilities, which are located within a single service area. We have grown significantly since our formation in 2003,
with total revenues increasing from $4.9 million in 2004 to $29.8 million in 2016, and total service connections increasing from 8,113
as of December 31, 2004 to 38,026 as of December 31, 2016, with regionally planned areas large enough to serve approximately two
million service connections.
Our Corporate History
Global Water Resources, LLC (“GWR”) was organized in 2003 to acquire, own, and manage a portfolio of water and
wastewater utilities in the southwestern region of the United States (“U.S.”). Global Water Management, LLC (“GWM”) was formed
as an affiliated company to provide business development, management, construction project management, operations, and
administrative services to GWR and all of its regulated subsidiaries.
In early 2010, the members of GWR made the decision to raise money through the capital markets, and GWR and GWM
were reorganized to form Global Water Resources, Inc., a Delaware corporation. The members established a new entity, GWR Global
Water Resources Corp. (“GWRC”), which was incorporated under the Business Corporations Act (British Columbia) on March 23,
2010 to acquire shares of our common stock and to actively participate in our management, business, and operations through its
representation on our board of directors and its shared management. On December 30, 2010, GWRC completed its initial public
offering in Canada and its common shares were listed on the Toronto Stock Exchange.
On May 3, 2016, GWRC merged with and into the Company (the “Reorganization Transaction”). At the effective time of the
merger, holders of GWRC’s common shares received one share of the Company’s common stock for each outstanding common share
-3-
of GWRC. As a result of the merger, GWRC ceased to exist as a British Columbia corporation and the Company, governed by the
corporate laws of the State of Delaware, was the surviving entity. The Reorganization Transaction was conditional upon the
concurrent completion of an initial public offering of shares of common stock of the Company in the U.S. (the “U.S. IPO”), which
was completed on May 3, 2016.
“Emerging Growth Company” Reporting Requirements
The Company qualifies as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act (the "JOBS
Act"). For as long as the Company is deemed to be an emerging growth company, the Company may take advantage of certain
exemptions from various regulatory reporting requirements that are applicable to other public companies. Among other things, the
Company is not required to (i) provide an auditor's attestation report on the effectiveness of our system of internal control over
financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”); (ii) comply with any new
rules that may be adopted by the Public Company Accounting Oversight Board ("PCAOB") requiring mandatory audit firm rotation or
a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the
financial statements of the issuer; (iii) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC
determines otherwise; (iv) comply with any new or revised financial accounting standards applicable to public companies until such
standards are also applicable to private companies under Section 102(b)(1) of the JOBS Act; (v) provide certain disclosure regarding
executive compensation required of larger public companies; or (vi) hold a nonbinding advisory vote on executive compensation and
obtain stockholder approval of any golden parachute payments not previously approved.
As an emerging growth company, the Company has elected to take advantage of the extended transition period for complying
with new or revised accounting standards until such standards are also applicable to private companies. As a result of this election, our
financial statements may not be comparable with any other public company that is not an emerging growth company (or an emerging
growth company that has opted out of using the extended transition provision).
The Company will remain an emerging growth company until the earliest of (i) the last day of the first fiscal year in which
our total annual gross revenues exceed $1 billion; (ii) the date on which the Company is deemed to be a "large accelerated filer," as
defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or any successor statute, which
would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of
our most recently completed second fiscal quarter; (iii) the date on which the Company issues more than $1 billion in non-convertible
debt during the preceding three-year period; or (iv) the end of the fiscal year following the fifth anniversary of the date of the first sale
of our common stock pursuant to an effective registration statement filed under the Securities Act of 1933, as amended (the
“Securities Act”).
U.S. Water Industry Overview
U.S. Water Industry Areas of Business
The U.S. water industry has two main areas of business:
Utility Services to Customers. This business includes municipal water and wastewater utilities, which are owned and
operated by local governments or governmental subdivisions, and investor-owned water and wastewater utilities.
Investor-owned water and wastewater utilities are generally economically regulated, including with respect to rate
regulation, by public utility commissions in the states in which they operate. The utility segment is characterized by high
barriers to entry, including high capital spending requirements.
General Water Products and Services. This business includes manufacturing, engineering and consulting companies, and
numerous other fee-for-service businesses. The activities of these businesses include the building, financing, and
operating of water and wastewater utilities, utility repair services, contract operations, laboratory services, manufacturing
and distribution of infrastructure and technology components, and other specialized services. At present, and upon the
prior sale of the FATHOMTM business and the Loop 303 Contracts (as defined in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Recent Events” in Part II, Item 7 of this Form 10-K), the
Company no longer performs any of these unregulated services.
Key Characteristics of the U.S. Water Industry
In the U.S., the water industry is characterized by:
Significant Constraints on the Availability of Fresh Water. In Arizona, the Arizona Department of Water Resources
estimates that annual water usage is 6.96 million acre-feet per year. Arizona has the right to use 2.8 million acre-feet
from the Colorado River and approximately half of that can be delivered through the Central Arizona Project, a 336 mile
-4-
diversion canal from the Colorado River to central Arizona. The Colorado River is presently over-allocated, which
means that more surface water right allocations have been issued than the actual average annual flow, with allocations
being determined based on data from a period during which flows were significantly higher than in recent years. The
Central Arizona Project is the only means of transporting Colorado River water into central Arizona. Approximately
43% of the water used in Arizona comes from groundwater. Water in the western U.S. is being pumped from
groundwater sources faster than it is replenished naturally, a condition known as overdraft. In areas of water scarcity,
such as the arid western U.S., water recycling represents a relatively simple, inexpensive, and energy-efficient means of
augmenting water supply as compared to transporting surface water, groundwater, or desalinated water from other
locations. Approximately 70% of the water provided by municipalities is currently used for non-potable applications
where recycled water could potentially be utilized.
Lack of Technology Utilization to Increase Operating Efficiencies and Decrease Operating Costs. The U.S. water
industry has traditionally not taken advantage of advances in technology available to enhance revenue, increase operating
efficiencies, and decrease operating costs (including labor and energy costs). Areas of opportunity include automated
meter reading, systems management, and administrative functions, such as customer billing and remittance systems. Key
drivers for the lack of investment in technology in water and wastewater utilities have been the historical lack of
incentives offered or standards imposed by regulators to achieve efficiencies and lower costs and the ownership of the
U.S. water utility sector, which largely consists of small, undercapitalized, municipally-owned utilities that lack the
financial and technical resources to pursue technology opportunities.
Highly Fragmented Ownership. The utility segment of the U.S. water industry is highly fragmented, with approximately
52,000 water utilities and approximately 16,000 community wastewater utilities, according to the U.S. Environmental
Protection Agency. The majority of the approximately 52,000 water utilities are small, serving a population of 500 or
less, and 82% of the water utilities serve only 8% of the population.
Large Public Sector Ownership. Municipally-owned utilities provide water and wastewater services for the vast majority
of the U.S. population. For homes connected to a community water system, over 80% are provided service by
municipally-owned utilities. For homes connected to a community wastewater system, over 75% are provided service by
municipally-owned utilities.
Aging Infrastructure in Need of Significant Capital Expenditures. Water infrastructure in the U.S. is aging and requires
significant investment and stringent focus on cost control to upgrade or replace aging facilities and to provide service to
growing populations. Throughout the U.S., utilities are required to make expenditures on the rehabilitation of existing
utilities and on the installation of new infrastructure to accommodate growth and make improvements to water quality
and wastewater discharges mandated by stricter water quality standards. Water quality standards, first introduced with
the Clean Water Act in 1972 and the Safe Drinking Water Act in 1974, are becoming increasingly stringent and
numerous. For water, the American Water Works Association estimates capital investments to restore aging
infrastructure and to build additional infrastructure for the growing population may be as much as $1 trillion over the
next 25 years. The American Society of Civil Engineers estimates capital investment needs to update and grow the
nation’s wastewater and storm water systems may be as much as $298 billion over the next twenty years.
Private Sector Opportunities
Municipal water utilities typically fund their capital expenditure needs through user-based water and wastewater rates,
municipal taxes, or the issuance of bonds. However, raising large amounts of funds required for capital investment is often challenging
for municipal water utilities, which affects their ability to fund capital spending. Many smaller utilities also do not have the in-house
technical and engineering resources to manage significant infrastructure or technology-related investments. In order to meet their
capital spending challenges and take advantage of technology-related operating efficiencies, many municipalities are examining a
combination of outsourcing and partnerships with the private sector or outright privatizations.
Outsourcing involves municipally-owned utilities contracting with private sector service providers to provide services,
such as meter reading, billing, maintenance, or asset management services.
Public-private partnerships among government, operating companies, and private investors include arrangements, such
as design, build, operate contracts; build, own, operate, and transfer contracts; and own, leaseback, and operate contracts.
Privatization involves a transfer of responsibility for, and ownership of, the utility from the municipality to private
investors.
We believe investor-owned utilities that have greater access to capital are generally more capable of making mandated and
other necessary infrastructure upgrades to both water and wastewater utilities, addressing increasingly stringent environmental and
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human health standards, and navigating a wide variety of regulatory processes. In addition, investor-owned utilities that achieve larger
scales are able to spread overhead expenses over a larger customer base, thereby reducing the costs to serve each customer. Since
many administrative and support activities can be efficiently centralized to gain economies of scale and sharing of best practices,
companies that participate in industry consolidation have the potential to improve operating efficiencies, lower costs, and improve
service at the same time.
Our Strategy
We are a water resource management company that provides water, wastewater, and recycled water utility services. We
believe we are a leader in Total Water Management practices, such as water scarcity management and advanced water recycling
applications. Our long-term goal is to become one of the largest investor-owned operators of integrated water and wastewater utilities
in areas of the arid western U.S. where water scarcity management is necessary for long-term economic sustainability and growth.
Our growth strategy involves the elements listed below:
acquiring or forming utilities in the path of prospective population growth;
expanding our service areas geographically and organically growing our customer base within those areas; and
deploying our Total Water Management approach into these utilities and service areas.
We believe this plan can be executed in our current service areas and in other geographic areas where water scarcity
management is necessary to support long-term growth and in which regulatory authorities recognize the need for water conservation
through water recycling.
Total Water Management is a demand-side-management framework (in that it is a solution intended to drive down demand
for renewable supplies versus develop new renewable water supplies) that alleviates the pressures of water scarcity in communities
where growth is reasonably expected to outpace potable water supply. Built on an all-encompassing view of the water cycle, Total
Water Management promotes sustainable community development through reduced potable water consumption while monetizing the
value of water through each stage of delivery, collection, and reuse.
Our business model applies Total Water Management in high growth communities. Components of our Total Water
Management approach include:
Regional planning to reduce overall design and implementation costs, leveraging the benefits of replicable designs,
gaining the benefits of economies of scale, and enhancing the Company’s position as a primary water and wastewater
service provider in the region.
o
For example, the Company has secured three separate area-wide Clean Water Act Section 208 Regional Water
Quality Management Plans in its major planning areas, covering more than 500 square miles of land. To obtain
these plans, a provider must develop, amongst other things, a regional wastewater solution, including plans for
engineering, infrastructure location and size, and goals for the management of treated reclaimed water, which
the Company successfully demonstrated in obtaining its plans.
Stretching a limited resource by maximizing the use of recycled water, using renewable surface water where available
and recharging aquifers with any available excess water.
o
For example, the Company’s water recycling model has been fully implemented in the City of Maricopa. The
Company is the water, wastewater, and recycled water provider for the City of Maricopa, which currently has a
population of approximately 48,000. A community of this size produces approximately an annual average of
2.6 million gallons of wastewater per day. Because the Company requires developers to take back and utilize
recycled water within their communities and invest in “purple pipe” recycled water infrastructure during the
initial development of subdivisions, the Company is now able to distribute almost all of the 2.6 million gallons
back to the community for beneficial purposes. Approximately 60% of the recycled water goes towards
common area non-potable irrigation, and the remaining 40% is either discharged for agricultural purposes at a
local farming facility or into an existing dry river bed, which allows for the recycled water to naturally recharge
into the aquifer. This reduces the total amount of limited ground or surface water that would otherwise be
required within the community by over 25%. To date, the Company has reused 6.0 billion gallons of recycled
water in the City of Maricopa.
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Integrating and standardizing water, wastewater, and recycled water infrastructure delivery systems using a separate
distribution system of purple pipes to conserve water resources, reduce energy, treatment, and consumable costs (e.g.,
chemicals, filter media, other general materials, and supplies), provide operational efficiencies, and align the otherwise
disparate objectives of water sales and conservation.
o
In addition to the previous example, which related to the requirements for recycled water usage, the separate
distribution system of purple pipes, and water conservation achievements, the Company believes that its model
results in additional benefits from an economic perspective due to lower use of power and consumables. For
every gallon of recycled water that is directly reused while already on land surface, the need to pump additional
scarce groundwater and surface water is eliminated. Such additional groundwater and surface water would
otherwise need to be treated and distributed in accordance with the Safe Drinking Water Act, which is costly
and requires a lot of energy.
Gaining market and regulatory acceptance of broad utilization of recycled water through agreements with developers,
strategic relationships with governments, academic research, and publication as industry experts, coupled with public
education and community outreach campaigns.
o
For example, the Company has public-private partnerships formally adopted through memorandums of
understanding with the City of Maricopa, the City of Casa Grande, and the City of Eloy. Each memorandum of
understanding reflects the Company’s intent to deploy Total Water Management. The Company also has
154 infrastructure coordination and financing agreements with landowners or developer entities that include
requirements for usage of recycled water and other attributes that support the Company’s Total Water
Management model. As discussed above, the Company’s integrated provider model, which is focused on the
maximum use of recycled water, underpins its Clean Water Act Section 208 Regional Water Quality
Management Plans and Designations of Assured Water Supply. In addition, the Company has won numerous
awards for education, outreach, and conservation in the water industry. Further, the Company’s experts have
published academic papers regarding Total Water Management, as well as provided insight to industry
publications.
Incorporating automated processes, such as supervisory control and data acquisition, automated meter reading, and back-
office technologies and “green” billing, which reduce operating costs and manpower requirements, improve system
availability and reliability, and improve customer interface.
o
o
o
Supervisory Control and Data Acquisition. The Company employs supervisory control and data acquisition in
all of its utility systems, which provides continuous monitoring, instantaneous alarming, and historical trending
on all key operating assets, including instrumentation and dynamic components (e.g., pumps, motor controlled
valves, treatment systems, etc.). This data is reported back to the appropriate operations personnel through a
standard industry software known as Wonderware. The benefits of this system include the significantly
enhanced ability to: achieve compliance and safety mandates; reduce service outages; troubleshoot systems;
provide for remote operations; and allow for proactive maintenance and lower costs related to efficient real-time
operations.
Automated Meter Reading. The Company implements automated meter reading by utilizing the FATHOM™
platform’s Automated Reading Infrastructure technology, with over 99% of all meters being read by such
technology. This technology reads each meter numerous times per day (often hourly) and continuously
transmits the meter readings back to a centralized data base through a communications tower and radio
transmission units. The data is then presented to the utility, and sometimes to customers, through a simple user
interface. Reading meters at this frequency provides many benefits to both the utility and the customer. With
this data, utilities can better model demand usage, identify system water loss, identify leaks on the customer
side of the meter, monitor for abnormal usage, and present interval, daily, weekly or monthly usage back to the
customers.
Back-Office Technologies and “Green” Billing. The Company employs a series of technologies that allow for
the complete automation of the billing and remittance process. The Company also provides its customers with
over seven ways to pay, with the majority of options being integrated with the Company’s back-office
technologies. In combination with automated meter reading, this suite of technology has minimized the use of
human labor and reduced the potential for human error for the entire billing and remittance process, while
providing better customer service.
We believe our Total Water Management-based business model provides us with a significant competitive advantage in high
growth, water scarce regions. Based on our experience and discussions with developers, we believe developers prefer our approach
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because it provides a bundled solution to infrastructure provision and improves housing density in areas of scarce water resources.
Developers are also focusing on increased consumer and regulatory demands for environmentally friendly or “green” housing
alternatives. Communities prefer the approach because it provides a partnering platform which promotes economic development,
reduces their traditional dependence on bond financing and ensures long term water sustainability.
Our competitive advantage facilitates the execution of our growth strategy. Our proven conservation methods lead to
successful permitting for more connections in expanded and new service areas.
Our Regulated Utilities
We own and operate regulated water, wastewater and recycled water utilities in communities principally located in
metropolitan Phoenix. Our regulated utilities are regulated by the Arizona Corporation Commission (the “ACC”), as described further
under “—Regulation—Arizona Regulatory Agencies” below. As of December 31, 2016, our utilities collectively had 37,387 active
service connections offering predictable rate-regulated cash flows. Revenues from our regulated utilities accounted for approximately
99.7% of total revenues in 2016. Our utilities currently possess the high-level regional permits that allow us to implement our business
model; thus, we believe we are well-positioned for organic growth in our current service areas that are generally located in Arizona’s
strong population growth corridors: Maricopa/Casa Grande, West Valley and Eloy Regions.
A key component of our water utility business is the use of recycled water. Recycled water is highly treated and purified
wastewater that is distributed through a separate distribution system of purple pipes for a variety of beneficial, non-potable uses.
Recycled water can be delivered for all common area irrigation needs, as well as delivered direct to homes where it can be used for
outdoor residential irrigation. Total Water Management model, an integrated approach to the use of potable and non-potable water to
manage the entire water cycle, both conserves water and maximizes its total economic value. The application of the Total Water
Management model has proven to be effective as a means of water scarcity management that promotes sustainable communities and
helps achieve greater dwelling unit density in areas where the availability of sustainable water can be a key constraint on development.
Our implementation of the Total Water Management philosophy in Arizona has led to the development of strong relationships with
key regulatory bodies.
A summary description of our water utilities at December 31, 2016 is set forth in the following table and described in more
detail below:
Date of
Acquisition (A)
or Formation
(F)
Square
Miles of
Service
Area (1)
Active
Service
Connections
Average
Monthly Rate
Per Service
Connection
Service
Provided
Company
MARICOPA / CASA GRANDE REGION
Global Water-Santa Cruz Water Company
2004 (A)
Water
73
18,592
Global Water-Palo Verde Utilities Company
2004 (A)
Wastewater and
Recycled Water
102
18,374
WEST VALLEY REGION
Water Utility of Greater Tonopah
Water Utility of Northern Scottsdale
Balterra Sewer Corp
Hassayampa Utility Company
2006 (A)
2006 (A)
Water
Water
2008 (A)
2005 (F)
Wastewater and
Recycled Water
Wastewater and
Recycled Water
105
1
340
81
2
—
41
—
ELOY REGION
Global Water - Picacho Cove Water Company
Global Water - Picacho Cove Utilities
Company
2006 (F)
Water
2006 (F)
Wastewater and
Recycled Water
2
2
—
—
Total
328
37,387
(1) Certified areas may overlap in whole or in part for separate utilities.
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57
70
108
177
—
—
—
—
Maricopa/Casa Grande Region
The City of Maricopa is located approximately 12 miles south of Phoenix. The relative proximity to a significant urban
center, coupled with relatively abundant and inexpensive land, were the key drivers of the real estate boom experienced by this
community. In 2005, the City of Maricopa was one of the fastest growing cities in the nation. While growth has slowed nationally
since 2007, the City of Maricopa continues to grow, as demonstrated by our addition of 6,349 active service connections (representing
approximately 3,000 homes) from December 2009 to December 2016. Development in the area is considered to be affordable and
represents one of the few areas within the United States where a new home can be purchased from the mid $100,000s.
We operate in this region through Santa Cruz and Palo Verde.
We acquired Santa Cruz and Palo Verde in 2004. Santa Cruz serves 18,592 active service connections as of December 31,
2016 and revenues from Santa Cruz represented approximately 36.8% and 43.9% of our total revenue for the years ended December
31, 2015 and 2016, respectively. Palo Verde serves 18,374 active service connections as of December 31, 2016 and revenues from
Palo Verde represented approximately 47.0% and 53.0% of our total revenue for the years ended December 31, 2015 and 2016,
respectively.
The Santa Cruz and Palo Verde service areas include approximately 175 square miles, which we believe provide further
opportunities for growth once development returns to these areas and water and wastewater utility services are required. Most of the
Santa Cruz and Palo Verde infrastructure is less than fifteen years old. Santa Cruz and Palo Verde provide water and wastewater
services, respectively, under an innovative public- private partnership memorandum of understanding with the City of Maricopa in
Pinal County for approximately 278 square miles of its planning area. We signed a similar memorandum of understanding with the
City of Casa Grande to partner in providing water, wastewater, and recycled water services to an approximate 100 square miles of its
western region for anticipated growth.
Rate proceedings were completed in 2010 for both Santa Cruz and Palo Verde. In July 2012, these two utilities filed
applications with the ACC for increased rates using 2011 as the test year on which the ACC will use to evaluate the utilities’ rates.
The rate proceedings were completed in February 2014. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Recent Rate Case Activity” for additional information.
We acquired CP Water Company (“CP Water”) in 2006. CP Water provided water service within parts of Pinal County. CP
Water received a Certificate of Convenience and Necessity (“CC&N”) for approximately two square miles of service area in 1984 and
currently has 13 active service connections. We acquired this small utility as part of our consolidation strategy to enable the
deployment of new integrated infrastructure as development occurs in the corridor between the cities of Maricopa and Casa Grande.
CP Water’s service area, customers and assets have been transferred to Santa Cruz.
West Valley Region
We operate in this region through Water Utility of Greater Tonopah (“Greater Tonopah”), Water Utility of Northern
Scottsdale, Inc. (“Northern Scottsdale”), Balterra Sewer Corp (“Balterra”) and Hassayampa Utility Company Inc. (“Hassayampa”),
and formerly through Valencia Water Company, Inc. (“Valencia”), Water Utility of Greater Buckeye (“Greater Buckeye”) and Willow
Water Valley Co., Inc. (“Willow Valley”).
We acquired Greater Tonopah in 2006. Greater Tonopah serves 340 active service connections as of December 31, 2016.
Greater Tonopah has a CC&N for 105 square miles of service area and provides water services to Maricopa County west of the
Hassayampa River. The acquisition of Greater Tonopah allowed us to enter into agreements with developers to serve a total of roughly
100,000 home sites plus commercial, schools, parks and industrial developments.
We acquired Northern Scottsdale in 2006. Northern Scottsdale serves 81 active service connections as of December 31, 2016.
Northern Scottsdale has a CC&N for one square mile and provides water services to two small subdivisions in Northern Scottsdale.
Rate proceedings were completed in 2010 for Greater Tonopah. Northern Scottsdale completed a rate proceeding in 2008. In
July 2012, these five utilities filed applications with the ACC for increased rates using 2011 as the test year on which the ACC
evaluates the utilities’ rates. The rate proceedings were completed in February 2014. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Recent Rate Case Activity” for additional information.
We acquired Balterra in 2006. Balterra is a wastewater utility and has a CC&N for two square miles in an area in western
Maricopa County known as Tonopah. Balterra currently has no active service connections; however, its service area lies directly in the
expected path of future growth in the far west valley of metropolitan Phoenix, which we believe should provide opportunities for
growth once development commences in this area.
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We formed Hassayampa in 2005. Hassayampa is a wastewater utility and has a CC&N for 41 square miles in an area that is
contiguous to Balterra. Hassayampa currently has no active service connections; however, like Balterra, its service area lies directly in
the path of future growth in the far west valley of metropolitan Phoenix, which we believe should provide opportunities for growth
once development commences in this area.
In October 2012, we and our subsidiary, 303 Utilities Company, and the City of Glendale entered into an agreement for
future wastewater and recycled water services, advancing our public-private-partnership originally approved by the city council in
March 2010. The agreement named 303 Utilities Company as the future wastewater and recycled water provider for a 7,000-acre
territory within a portion of Glendale’s western planning area known as the Loop 303 Corridor. The 303 Utilities Company also
signed certain wastewater facilities main extension agreements with numerous developers/landowners in the service area to fund the
initial design and construction of a wastewater and recycled water utility. In addition, we signed separate offsite water management
agreements with these same developers/landowners to provide the coordination, permitting, and engineering work for the related water
utility service element of the project. In September 2013, we entered into an agreement to sell the Loop 303 Contracts to a third-party.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Events—Sale of Loop 303
Contracts” for additional information.
We formerly operated additional utilities in the West Valley Region through Valencia Water Company, Greater Buckeye and
Willow Valley. Valencia Water Company was consolidated with Greater Buckeye in 2008, and on July 14, 2015, we closed the
stipulated condemnation to transfer the operations and assets of Valencia Water Company with the City of Buckeye. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Events—Stipulated
Condemnation of the Operations and Assets of Valencia Water Company” for additional information.
In addition, on May 9, 2016, we closed the sale of Willow Valley to EPCOR Water Arizona Inc. (“EPCOR”). See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Events—Sale of Willow Valley”
for additional information.
Eloy Region
The City of Eloy, Arizona is located in Arizona’s “sun corridor” and is approximately equidistant between Phoenix and
Tucson. The City of Eloy represents an area of 100 square miles and has a population of approximately 17,000.
We operate in this region through Global Water-Picacho Cove Water Company and Global Water-Picacho Cove Utilities
Company (collectively, “Picacho Cove”). We formed Picacho Cove in 2006 to provide water and wastewater services in the City of
Eloy and currently have a CC&N for four square miles. The utilities currently have no active service connections and no facilities.
Operations
We treat water to potable standards and also treat, clean and recycle wastewater for a variety of non-potable uses. A
description of these operations follows.
Sources of Water Supply
Our water supplies are primarily derived from groundwater; however, we currently augment these supplies with recycled
water and intend to augment them with surface water and increased use of recycled water in the future.
•
•
Potable Water. Our utilities presently employ groundwater systems for potable water production. Water is brought to the
surface from underground aquifers (water levels vary from 50 to 650 feet below land surface depending on the area),
disinfected and stored in tanks for distribution to customers. In some instances, individual raw water supplies do not
meet the legislative requirements for certain constituents. In those cases, we use well-head, centralized, point-of-use or
blending treatment systems to ensure water quality meets potable standards.
Recycled Water. Recycled water is created by taking wastewater and applying advanced tertiary treatment (i.e.,
screening, biological reduction, and filtration and disinfection processes) to create a high quality, non-potable water
source. Each step is monitored and controlled in order that the stringent requirements for recycled water are continuously
met. Recycled water generated by us meets Arizona’s Aquifer Water Quality Standards before it leaves the treatment
facility and is recognized as Class A+, the highest quality of recycled water regulated by the Arizona Department of
Environmental Quality. Recycled water can be used for irrigation, facilities cooling, and industrial applications and in a
residential setting for toilet flushing and lawn watering.
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Technology
We use sophisticated technology as a principal means of improving our margins. We focus on technological innovations that
allow us to deliver high-quality water and customer service with minimal potential for human error, delays and inefficiencies. Our
comprehensive technology platform includes supervisory control and data acquisition, automated meter reading and geographical
information system technologies, which we use to map and monitor our physical assets and water resources on an automated, real-
time basis with fewer people than the standard water utility model requires. Our systems allow us to detect and resolve potential
problems promptly, accurately and efficiently before they become more serious, which both improves customer service and optimizes
and extends the efficient performance and life of our assets. Our automated meter reading technology, which allows us to read water
meters remotely rather than physically, improves water resources accounting, allows for identification of high water usage and water
theft from disconnected meters. We also use automated voice, internet billing, payment processing and customer service applications
that contribute to additional reduced headcount and a reduction in associated personnel costs.
Decentralized Treatment Facilities
We design and build standard, decentralized facilities that are scaled to the service areas they serve in order to achieve
optimum efficiency in providing both water and wastewater services. The replication of our standard facility also improves design,
construction and operating efficiency because we are able to employ similar, proven processes and equipment and technologies at
each of our facilities. As a result, our operating efficiency is improved significantly by reducing equipment costs and employee
training costs, and our exposure to operational performance risks often associated with larger, custom-built plants is reduced.
Although there has not traditionally been a significant economic incentive or other reward for automation and resource
efficiency in our industry, we believe our use of automation in lieu of labor, together with our emphasis on streamlined operations and
conservation, will position us well for continued profitable growth and allow us to take advantage of future incentives or rewards that
may be available to water utilities that are able to successfully enhance the use of renewable resources.
Regulation
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. These requirements
include the Safe Drinking Water Act, the Clean Water Act and the regulations issued under these laws by the EPA. We are also
subject to state environmental laws and regulations, such as Arizona’s Aquifer Protection Program and other environmental laws and
regulations enforced by the Arizona Department of Environmental Quality, and extensive regulation by the ACC, which regulates
public utilities. The ACC also has broad administrative power and authority to set rates and charges, determine franchise areas and
conditions of service and authorize the issuance of securities as well as authority to establish uniform systems of accounts and approve
the terms of contracts with both affiliates and customers.
We are also subject to various federal, state and local laws and regulations governing the storage of hazardous materials, the
management and disposal of hazardous and solid wastes, discharges to air and water, the cleanup of contaminated sites, dam safety,
fire protection services in the areas we serve and other matters relating to the protection of the environment, health and safety.
We maintain a comprehensive environmental program which addresses, among other things, responsible business practices
and compliance with environmental laws and regulations, including the use and conservation of natural resources. Water samples
across our water system are analyzed on a regular basis in material compliance with regulatory requirements. We conducted more than
7,900 water quality tests in 2016 at subcontracted laboratory facilities in addition to providing continuous online instrumentations for
monitoring parameters such as turbidity and disinfectant residuals and allowing for adjustments to chemical treatment based on
changes in incoming water quality. For 2016, we achieved a compliance rate of 99.8% for meeting state and federal drinking water
standards and 99.1% for compliance with wastewater requirements, for an overall compliance rating of 99.4%. Compliance with
governmental regulations is of utmost importance to us, and considerable time and resources are spent ensuring compliance with all
applicable federal, state and local laws and regulations.
In addition to regulation by governmental entities, our operations may also be affected by civic or consumer advocacy
groups. These organizations provide a voice for customers at local and national levels to communicate their service priorities and
concerns. Although these organizations may lack regulatory or enforcement authority, they may be influential in achieving service
quality and rate improvements for customers.
Safe Drinking Water Act
The federal Safe Drinking Water Act and regulations promulgated thereunder establish minimum national quality standards
for drinking water. The EPA has issued rules governing the levels of numerous naturally occurring and man-made chemical and
microbial contaminants and radionuclides allowable in drinking water and continues to propose new rules. These rules also prescribe
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testing requirements for detecting contaminants, the treatment systems that may be used for removing contaminants and other
requirements. Federal and state water quality requirements have become increasingly more stringent, including increased water testing
requirements, to reflect public health concerns. In Arizona, the requirements of the Safe Drinking Water Act are incorporated by
reference into the Arizona Administrative Code.
In order to remove or inactivate microbial organisms, the EPA has promulgated various rules to improve the disinfection and
filtration of drinking water and to reduce consumers’ exposure to disinfectants and by-products of the disinfection process.
Significant attention has recently been focused on contaminants of emerging concern (chemicals and other substances that
have no regulatory standard, have been recently “discovered” in natural streams (often because of improved analytical chemistry
detection levels), and potentially cause deleterious effects in aquatic life at environmentally relevant concentrations), including
endocrine disrupting compounds and pharmaceuticals and personal care products, in drinking water supplies, municipal wastewater
effluents and recycled water. Endocrine disrupting compounds are substances that are not produced in the body but act by mimicking
or antagonizing natural hormones, and there is research associating exposure with endocrine disrupting compounds to various
reproductive problems in both women and men as well as for increases in the frequency of certain types of cancer. Pharmaceuticals
and personal care products, such as fragrances, cosmetics, prescription and over-the-counter therapeutic drugs, veterinary drugs, and
sunscreen products, enter the environment through excretion, bathing, and disposal of unwanted medications to sewers and trash. We
believe contaminants of emerging concern may form the basis for additional regulatory initiatives and requirements in the future.
Although it is difficult to project the ultimate costs of complying with the above or other pending or future requirements, we
do not expect current requirements under the Safe Drinking Water Act to have a material impact on our operations or financial
condition, although it is possible new methods of treating drinking water may be required if additional regulations become effective in
the future. In addition, capital expenditures and operating costs to comply with environmental mandates traditionally have been
recognized by state public utility commissions as appropriate for inclusion in establishing rates, although rate recovery may be
delayed by “regulatory lag”, that is, the delay between the utility’s test year and the issuance of a rate order approving new rates.
Clean Water Act
The federal Clean Water Act regulates discharges of liquid effluents from drinking water and wastewater treatment facilities
into waters of the United States, including lakes, rivers, streams and subsurface or sanitary sewers. In Arizona, with the exception of
Clean Water Act Section 208 Regional Water Quality Management Plans, capacity management and operations and maintenance
requirements, and source control requirements, wastewater operations are primarily regulated under the Aquifer Protection Permit
program and the Arizona Pollutant Discharge Elimination System program (see below).
The EPA certifies Clean Water Act Section 208 Regional Water Quality Management Plans and Amendments which govern
the location of water reclamation facilities and wastewater treatment plants. The EPA’s 40 C.F.R. Pt. 503 bio-solids requirements are
reported to the EPA through the Arizona Department of Environmental Quality. While we are not presently regulated to meet source
control requirements, we maintain source control through various Codes of Practice that have been accepted by the ACC as
enforceable limits on consumer discharges to sanitary sewer systems. We believe we maintain the necessary permits and approvals for
the discharges from our water and wastewater facilities.
Arizona Regulatory Agencies
In Arizona, the ACC is the regulatory authority with jurisdiction over water and wastewater utilities. The ACC has exclusive
authority to approve rates, mandate accounting treatments, authorize long-term financing programs, evaluate significant capital
expenditures and plant additions, examine and regulate transactions between a regulated subsidiary and its affiliated entities and
approve or disapprove reorganizations, mergers and acquisitions prior to their completion. Additionally, the ACC has statutory
authority to oversee service quality and consumer complaints, and approve or disapprove expansion of service areas. The ACC is
comprised of five elected members, each serving four year terms. Companies that wish to provide water or wastewater service are
granted a CC&N, which allows them to serve customers within a geographic area specified by a legal description of the property. In
considering an application for a CC&N, the ACC will determine if the applicant is fit and proper to provide service within a specified
area, whether the applicant has sufficient technical, managerial and financial capabilities to provide the service and if that service is
necessary and in the public interest. Once a CC&N is granted, the utility falls under the ACC’s jurisdiction and must abide by the rules
and laws by which a public service corporation operates.
In February 2014, the ACC issued Rate Decision No. 74364 for our rate cases filed in July 2012 for the following utilities:
Santa Cruz, Palo Verde, Valencia Water Company, Greater Buckeye, Greater Tonopah, Northern Scottsdale and Willow Valley. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Rate Case Activity” for
additional information.
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Arizona water and wastewater utilities must also comply with state environmental regulation regarding drinking water and
wastewater, including environmental regulations set by Councils of Government (such as the Central Arizona Association of
Governments and the Maricopa Association of Governments), the Arizona Department of Environmental Quality and the Arizona
Department of Water Resources. The Central Arizona Association of Governments is the designated management authority for
Section 208 of the Clean Water Act for Pinal and Gila Counties and administers the requirements of the Regional Water Quality
Management Plans and Amendments at the local level. The Maricopa Association of Governments is the designated management
authority for Section 208 of the Clean Water Act for Maricopa County and administers the requirements of the Regional Water
Quality Management Plans and Amendments at the local level. The Maricopa County Environmental Services Department has
delegated authority for overseeing Arizona Department of Environmental Quality requirements in Maricopa County. The Arizona
Department of Environmental Quality regulates water quality and permits water reclamation facilities, discharges of recycled water,
re-use of recycled water and recharge of recycled water. The Arizona Department of Environmental Quality also regulates the clean
closure requirements of facilities. In Arizona, the Arizona Department of Environmental Quality has received delegated authority from
the EPA for the administration of the Clean Water Act’s National Pollution Discharge Elimination System program. Permits issued by
the Arizona Department of Environmental Quality for discharges to waters of the U.S. in Arizona are termed “Arizona Pollutant
Discharge Elimination System,” or “AzPDES,” permits. The Arizona Department of Environmental Quality also administers the
drinking water quality requirements set by the federal Safe Drinking Water Act within Arizona. Finally, the Arizona Department of
Water Resources regulates surface water extraction, groundwater withdrawal, designations and certificates of assured water supply,
extinguishment of irrigation grandfathered water rights, groundwater savings facilities, recharge facilities, recharge permits, recovery
well permits, storage accounts and well construction, abandonment or replacement. We must file periodic reports with the ACC,
Arizona Department of Environmental Quality and Arizona Department of Water Resources.
Within each regulatory organization, we have invested in developing cooperative relationships at all levels, from staff to
executives to elected and appointed officials. These relationships, coupled with our proactive attitude toward regulatory compliance,
have resulted in a number of significantly positive regulatory determinations.
Assured and Adequate Water Supply Regulations
We intend to seek access to renewable water supplies as we grow our water resource portfolio. However, we currently rely
almost exclusively (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. Aside from some rights to water through the Central Arizona
Project, groundwater (and recycled water derived from groundwater) is the only water supply available to us.
Although we intend to rely on recycled water to help meet water demands in areas, the infrastructure, permits, and customer
base necessary to generate and deliver recycled water are not necessarily in place in most of our service areas. In addition, although
recycling can extend a limited supply, it does not actually generate a new supply of water. As such, although our proposed generation
and delivery of recycled water is likely to help reduce the amount of groundwater that will be required to serve future customers, our
ability to serve new customers will remain dependent on its ability to access groundwater. Groundwater is a limited resource in
Arizona, and access to new uses of groundwater is closely regulated in the areas served by us. See “Risk Factors—Inadequate water
and wastewater supplies could have a material adverse effect upon our ability to achieve the customer growth necessary to increase
our revenues.”
Nearly all of our service areas are located in “Active Management Areas,” areas within which the use of groundwater is
regulated by the Arizona Department of Water Resources in order to manage ongoing problems with groundwater overdraft. The
Phoenix, Prescott and Tucson Active Management Areas are legally mandated to achieve “safe yield” by 2025 or sooner. However,
we do not expect any of these Active Management Areas to achieve their safe yield goals. Safe yield requires groundwater pumping to
not draw down the groundwater aquifers, or “over-draft,” as all pumping is offset or replaced within the Active Management Area
from a renewable supply. The Pinal Active Management Area, which encompasses our major service areas near Maricopa, is managed
to allow development of non-irrigation uses and to preserve existing agricultural economies in the Active Management Area for as
long as feasible, consistent with the necessity to preserve future water supplies for non-irrigation uses.
Under Arizona’s assured water supply laws and regulations, a new subdivision inside an Active Management Area must
demonstrate that it has an “assured water supply” to the satisfaction of the Arizona Department of Water Resources before the
developer is permitted to sell lots. Demonstration of an assured water supply requires, among other things, that an applicant
demonstrate that water supplies will be physically, continuously, and legally available to satisfy the water needs of the proposed use
for at least 100 years. A developer may make an independent showing of an assured water supply (resulting in a Certificate of Assured
Water Supply for a subdivision) or may obtain a written commitment for service from a designated water supplier, such as a privately
owned water company or a municipal water supplier. Under the latter approach, the water supplier must demonstrate satisfaction of
assured water supply requirements for the developments within its service areas (resulting in a Designation of Assured Water Supply
for the provider). At present, we have obtained a Designation of Assured Water Supply in the Maricopa/Casa Grande service territory
(Santa Cruz) for approximately 22,900 acre-feet of groundwater use. A Designation of Assured Water Supply is subject to periodic
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review and renewal by the Arizona Department of Water Resources, and can be increased as demand grows within the service
territory, subject to the physical availability of water. A recent physical availability determination for Santa Cruz suggests that, over
time, its Designation of Assured Water Supply could potentially be increased to approximately 45,000 acre-feet once sufficient
increased demand is established in the area, assuming that water is still physically available by that time (i.e., the groundwater has not
been committed to users in surrounding areas). Under our high efficiency Total Water Management model, which is intended to
achieve much lower per-unit potable water use rates than would be expected for average developments, 45,000 acre-feet could be
sufficient water supply for approximately 180,000 homes per year.
In our West Valley service territory (Greater Tonopah), we expect to receive a Designation of Assured Water Supply when
development commences in that area for 10,428 acre-feet with the ability to access the reserved physical availability of an additional
38,100 acre-feet as population grows. Assuming implementation of our high-efficiency Total Water Management model throughout
the service area, this could be a sufficient water supply for approximately 250,000 homes.
In our other service areas, we rely upon a Certificate of Assured Water Supply obtained by developers to demonstrate an
assured water supply, or will apply for a Designation of Assured Water Supply in the future when required.
Outside of Arizona’s Active Management Areas, the “adequate water supply” program requires a determination of whether
there is an adequate water supply—similar to an assured water supply—but it does not necessarily foreclose development when the
showing cannot be made. Unless the county government has voted to make the requirement mandatory, a development (outside of
Active Management Areas) that cannot demonstrate access to an adequate water supply is generally required only to disclose this fact,
although as a practical matter few developments have proceeded on this basis. In addition, whether a water provider to such a
development has access to an adequate water supply is nevertheless relevant to its business.
Other Environmental, Health and Safety (including Water Quality) Matters
Our operations also involve the use, storage and disposal of hazardous substances and wastes. For example, our water and
wastewater treatment facilities store and use chlorine and other chemicals and generate wastes that require proper handling and
disposal under applicable environmental regulations. We could also incur remedial costs in connection with any environmental
contamination relating to our operations or facilities, releases or our off-site disposal of wastes. Although we are not aware of any
material cleanup or decontamination obligations, the discovery of contamination or the imposition of such obligations arising under
relevant federal, state and local laws and regulations in the future could result in additional costs. Our facilities and operations also are
subject to requirements under the U.S. Occupational Safety and Health Act and similar laws in Arizona.
Our compliance with all of the environmental, health and safety (including water quality) requirements described above may
be subject to inspections and enforcement measures by federal, state and local agencies.
Security
Due to security, vandalism, terrorism and other risks, we take precautions to protect our employees and the water delivered to
our customers. In 2002, federal legislation was enacted that resulted in new regulations concerning security of water facilities,
including submitting vulnerability assessment studies to the federal government. We have complied with EPA regulations concerning
vulnerability assessments and have made filings to the EPA as required. Vulnerability assessments are conducted regularly to evaluate
the effectiveness of existing security controls and serve as the basis for further capital investment in security for the facility.
Information security controls are deployed or integrated to prevent unauthorized access to company information systems, assure the
continuity of business processes dependent upon automation, ensure the integrity of our data and support regulatory and legislative
compliance requirements. In addition, communication plans have been developed as a component of our procedures. While we do not
make public comments on the details of our security programs, we have been in contact with federal, state, and local law enforcement
agencies to coordinate and improve the security of our water delivery systems and to safeguard our water supply.
Competition
As an owner and operator of regulated utilities, we do not face competition within our existing service areas because Arizona
law provides the holder of a CC&N for water and wastewater service with an exclusive right to provide that service within the
certificated area, as against other public service corporations. In addition, the high cost of constructing water and wastewater systems
in an existing market creates a barrier to entry. We do, however, face competition from other water and wastewater utilities for new
service areas and with respect to the acquisition of smaller utilities. We believe our principal competitors for new service areas and
acquisitions in Arizona are EPCOR Water Arizona Inc., Arizona Water Company, and Liberty Utilities. We believe competition for
new service areas and acquisitions is based on relationships with municipalities and developers, experience in making acquisitions, the
ability to finance and obtain regulatory approval, quality and breadth of products and services, the ability to integrate both water and
wastewater services, and emplace conservation practices throughout the service areas, price, speed, and ease of implementation.
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If we seek to extend our services outside Arizona, we will face competition from other regional or national water utilities for
these opportunities.
Although we believe we compete effectively in our regulated businesses, our competitors may have more resources and
experience than we have and may therefore have a competitive advantage.
Segment Reporting
We currently operate in one geographic region within the State of Arizona, wherein each operating utility operates within the
same regulatory environment, and is operated as one reportable segment. For additional information, see “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Segment Reporting” in Part II, Item 7 of this Form 10-K.
Seasonality
Customer demand for our water during the warmer months is generally greater than other times of the year due primarily to
additional consumption of water in connection with irrigation systems, swimming pools, cooling systems, and other outside water use.
Throughout the year, and particularly during typically warmer months, demand may vary with temperature, as well as the timing and
overall levels of rainfall. In the event that temperatures during the typically warmer months are cooler than normal, or if there is more
rainfall than normal, the customer demand for our water may decrease and therefore, adversely affect our revenues. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting our Results of
Operations—Weather and Seasonality,” included in Part II, Item 7 of this Form 10-K, for additional information.
Employees
As of December 31, 2016, we employed 43 full-time individuals and no part-time employees. Currently, none of our
employees participate in collective bargaining agreements, and we consider our employee relations to be good.
Available Information
We maintain an Internet website at www.gwresources.com. Our Annual Report on Form 10-K, quarterly reports on Form 10-
Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act are accessible through our website, free of charge, as soon as reasonably practicable after these reports are filed electronically with
the SEC. To access these reports, go to our website at www.gwresources.com. The foregoing information regarding our website is
provided for convenience and the content of our website is not deemed to be incorporated by reference in this report filed with the
SEC.
The public may read and copy any materials filed by the Company with the SEC at the SEC's Public Reference Room at 100
F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC at www.sec.gov.
ITEM 1A. RISK FACTORS
Risks Related to the Company and the Industry in Which It Operates
We have significant obligations under Infrastructure Coordination and Financing Agreements (“ICFAs”), yet funds from our
ICFAs are dependent on development activities by developers which we do not control and are also subject to certain regulatory
requirements.
In the past, we extended water and wastewater infrastructure financing to developers and builders through ICFAs. These
agreements are contracts with developers or builders in which we coordinate and fund the construction of water, wastewater, and
recycled water facilities that will be owned and operated by our regulated subsidiaries in advance of completion of developments
in the area. Our investment can be considerable, as we phase-in the construction of facilities in accordance with a regional master
plan, as opposed to a single development. Developers and builders pay us agreed-upon fees upon the occurrence of specified
development events for their development projects. The Arizona Corporation Commission (“ACC”) requires us to record a portion
of the funds we receive under ICFAs as contributions in aid of construction (“CIAC”), which are funds or property provided to a
utility under the terms of a collection main extension agreement and/or service connection tariff, the value of which are not
refundable. Amounts received as CIAC reduce our rate base once expended on utility plants.
The developer is not required to pay the bulk of the agreed-upon fees until a development receives platting approval.
Accordingly, we cannot always accurately predict or control the timing of the collection of our fees. If a developer encounters
difficulties, such as during a real estate market downturn, that result in a complete or partial abandonment of the development or a
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significant delay in its completion, we will have planned, built, and invested in infrastructure that will not be supported by
development and will not generate either payments under the applicable ICFA or cash flows from providing services. As a result, our
return on our investment and cash flow stream could be adversely affected.
In August 2013, we entered into a settlement agreement with ACC staff, the Residential Utility Consumers Office, the
City of Maricopa, and the other parties to a rate case, which established the policy by which ICFA fees will be treated going forward.
The settlement also prohibits us from entering into new ICFAs. In February 2014, the rate case proceedings were completed and the
ACC issued Rate Decision No. 74364, approving the settlement agreement. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Recent Rate Case Activity,” included in Part II, Item 7 of this Form 10-K, for additional
information.
Our operations of regulated utilities are currently located exclusively in the state of Arizona, and more specifically approximately
98.9% of our active service connections are within a single municipality, which increases the impact of local conditions on our
results of operations.
The customers of our regulated utilities are currently located exclusively in the state of Arizona and 98.9% of our active
service connections are located in the City of Maricopa, Arizona. As a result, we cannot diversify or mitigate the risks presented by
local regulatory, economic, demographic, and weather conditions in this area. An adverse change in any of these conditions would
therefore affect our profitability, results of operations, liquidity, and cash flows more significantly than if our utilities also operated in
other geographic areas.
New or stricter regulatory standards or other governmental actions could increase our regulatory compliance and operating costs,
which could cause our profitability to suffer, particularly if we are unable to increase our rates to offset such costs.
In Arizona, water and wastewater utilities are subject to regulation by water, environmental, public utility, and health and
safety regulators, and we are required to obtain environmental permits from governmental agencies in order to operate our
facilities. Regulations relate to, among other things, standards and criteria for drinking water quality and for wastewater discharges,
customer service and service delivery standards, waste disposal and raw groundwater abstraction limits, and rates and charges for our
regulated services. There may be instances in the future when we are not in or cannot achieve compliance with new and evolving
laws, regulations, and permits without incurring additional operating costs. For example, in 2006, the U.S. Environmental Protection
Agency (“EPA”) implemented a new arsenic maximum contaminant level, which effectively required the installation and operation of
costly arsenic treatment systems at many of our water production facilities.
Our costs of complying with current and future governmental laws and regulations could adversely affect our business or
results of operations. If we fail to comply with these laws, regulations, or permits, we could be fined or otherwise sanctioned by
regulators and our operations could be curtailed or shut down. We may also be exposed to product liability or breach of contract
claims by third parties resulting from our noncompliance. These laws and regulations are complex and change frequently, and these
changes may cause us to incur costs in connection with the remediation of actions that were lawful when they were taken.
We may incur higher compliance or remediation costs than expected in any particular period and may not be able to pass
those increased costs along to our customers immediately through rate increases, or at all. This is because we must obtain
regulatory approval to increase our rates, which can be time-consuming and costly and our requests for increases may not be approved
in part, or in full.
We are required to test our water quality for certain parameters and potential contaminants on a regular basis. If the
test results indicate that parameters or contaminants exceed allowable limits, we may be required either to commence treatment to
remedy the water quality or to develop an alternate water source. Either of these outcomes may be costly, and there can be no
assurance that the regulatory authorities would approve rate increases to recover these additional compliance costs. In addition, by
the time that test results are available, contaminated water may have been provided to customers, which may result in liability for us
and damage our reputation.
In addition, governments or government agencies that regulate our operations may enact legislation or adopt new
requirements that could have an adverse effect on our business, including:
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•
restricting ownership or investment;
providing for the expropriation of our assets by the government through condemnation or similar proceedings;
providing for changes to water and wastewater quality standards;
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•
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•
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•
•
•
•
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requiring cancellation or renegotiation of, or unilateral changes to, agreements relating to our provision of water and
wastewater services;
changing regulatory or legislative emphasis on water conservation in comparison to other goals and initiatives;
promoting an increase of competition among water companies within our designated service areas;
requiring the provision of water or wastewater services at no charge or at reduced prices;
restricting the ability to terminate services to customers whose accounts are in arrears;
restricting the ability to sell assets or issue securities;
adversely changing tax, legal, or regulatory requirements, including environmental requirements and the imposition of
additional requirements and costs on our operations, including but not limited to changes adopted in response to regulatory
measures to address global climate change;
changes in the charges applied to raw water abstraction;
changes in rate making policies; or
restrictions relating to water use and supply, including restrictions on use, increased offsetting groundwater replenishment
obligations, changes to the character of groundwater rights, and settlement of Native American claims.
Changes to environmental and other regulation may require us to alter our existing treatment facilities or build additional
facilities.
To comply with federal, state, and local environmental laws, our existing facilities may need to be altered or replaced.
Altered and new facilities and other capital improvements must be constructed and operated in accordance with multiple
requirements, including, in certain cases, an Aquifer Protection Permit issued by the Arizona Department of Environmental
Quality, Arizona Pollution Discharge Elimination System permits from the Arizona Department of Environmental Quality, and an
air quality permit from Maricopa or Pinal Counties. The provision of potable water is subject to, among others, the requirements of
the federal Safe Drinking Water Act, and effluent from wastewater treatment facilities must comply with other requirements.
Regulated contaminants and associated maximum contaminant levels may change over time, requiring us to alter or build additional
treatment facilities. We are also subject to regulation as an employer, property owner, and business operator in the State of Arizona.
Failure by us to observe the conditions and comply with the requirements of these permits and other applicable laws and
regulations could result in delays, additional costs, fines, and other adverse consequences up to and including inability to proceed with
development in our service areas.
We rely on information technology systems to assist with the management of our business and customer relationships. A
disruption of these systems could adversely affect our business and operations.
Our information technology systems and the information technology functions that are outsourced to the FATHOMTM
business, which we previously owned, are an integral part of our business. For example, FATHOMTM systems allow us to read
water meters remotely, identify high water usage, and identify water theft from disconnected meters. FATHOMTM systems also
provide contracted services and back-office technologies and systems to bill our customers, provide customer service, manage
certain financial records, and track assets and accounts receivable collections. A disruption of our information technology systems or
the FATHOMTM systems could significantly limit our ability to manage and operate our business efficiently, which in turn could
cause our business to suffer and cause our results of operations to be reduced.
Further, our information technology systems and the FATHOMTM systems are vulnerable to damage or interruption from:
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power loss, computer systems failures, and internet, telecommunications, or data network failures;
operator negligence or improper operation by, or supervision of, employees;
physical and electronic loss of customer data or security breaches, misappropriation, and similar events;
computer viruses;
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•
•
intentional acts of vandalism and similar events; and
fires, floods, earthquakes, and other natural disasters.
Damages or interruptions to our information technology systems or the FATHOMTM systems may result in physical and
electronic loss of customer or financial data, security breaches, misappropriation, and similar events. These issues could prevent us
from issuing billings timely, which could impact revenue, or could negatively impact the efficient operations of the business, resulting
in additional costs. The lack of redundancy for some of our IT systems or the FATHOMTM systems, including billing systems, could
exacerbate the impact of any of the foregoing events.
The nature of our business exposes us to various liability claims, which may exceed the level of our insurance coverage and
thereby not be reimbursed fully by insurance proceeds, or not be covered by our insurance at all, and may also make it difficult for
us to obtain insurance coverage at affordable rates.
In recent years, societal factors have resulted in increased litigation and escalating monetary claims against industries and
employers. Although the national insurance market currently provides insurance coverage at affordable premiums, there is no
guarantee this will continue or that we will continue to be able to obtain coverage against catastrophic claims and losses. While
we may self-insure for some risks in the future, should an uninsured or underinsured loss occur, we may be unable to meet our
obligations as they become due.
The operation of our utilities is subject to the normal risks of occupancy as well as the additional risks of receiving,
processing, treating, and disposing of water and waste materials. As a safeguard, we currently maintain general liability and workers’
compensation insurance coverage, subject to deductibles at levels we believe are sufficient to cover future claims made during the
respective policy periods. However, we may be exposed to multiple claims, including workers’ compensation claims, that do not
exceed our deductibles, and, as a result, we could incur significant out-of-pocket costs that could materially adversely affect our
business, financial condition, and results of operations. In addition, the cost of insurance policies may increase significantly upon
renewal of those policies as a result of general rate increases for the type of insurance we carry as well as our historical
experience and experience in our industry. Our future claims may exceed the coverage level of our insurance, and insurance may not
continue to be available on economically reasonable terms, or at all. If we are required to pay significantly higher premiums for
insurance, are not able to maintain insurance coverage at affordable rates, or if we must pay amounts in excess of claims covered by
our insurance, we could experience higher costs that could materially adversely affect our business, financial condition, and results of
operations.
We are exposed to various risks relating to legal proceedings or claims that could materially adversely affect our operating results.
We are a party to lawsuits in the normal course of our business. Litigation in general can be expensive, lengthy, and
disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Responding to
lawsuits brought against us, or legal actions that we may initiate, can often be expensive and time-consuming. Unfavorable outcomes
from these claims and/or lawsuits could materially adversely affect our business, results of operations, and financial condition, and we
could incur substantial monetary liability and/or be required to change our business practices.
If we do not manage our anticipated growth effectively, we may not be able to develop or implement the infrastructure necessary to
support our operations and could suffer a loss of profitability.
Since our formation in 2003, we have grown rapidly, with our total revenues increasing from $4.9 million in 2004 to $29.8
million in 2016 and total service connections increasing from 8,113 as of December 31, 2004 to 38,026 as of December 31, 2016.
We have also expanded geographically, from 18 square miles of service areas in 2004 to 328 square miles as of December 31, 2016.
Our growth has been driven principally by acquisitions and by organic growth resulting from increased development and service
connections within our existing service areas.
Although we may not be able to achieve similar growth, or grow at all, in future periods, we expect to continue to
significantly expand our facilities, infrastructure, research and development, marketing, testing, management, and administrative
operations, as well as our financial and accounting controls. This expansion has placed, and will continue to place, strain on our
management and administrative, operational, technical, and financial infrastructure. If management is unable to manage growth
effectively, the quality of our services, our ability to attract and retain key personnel, and our business or prospects could be harmed
significantly.
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To manage growth effectively, we must:
continue to expand our water management capacity;
retain key management and augment our management team;
continue to enhance our technology, operations, and financial and management systems;
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•
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• manage multiple relationships with our customers, regulators, suppliers, and other third parties; and
•
expand, train, and manage our employee base.
We may not be able to manage effectively any expansion in one or more of these areas, and our failure to do so could harm
our ability to maintain or increase revenues and operating results. The expenses incurred in pursuing growth could increase without a
corresponding increase in our revenue base, which could decrease operating results and profit margin. In addition, future growth may
require us to make significant capital expenditures or incur other significant expenses and may divert the attention of our personnel
from our core business operations, any of which could affect our financial performance adversely.
We do not control when and where a developer may request service within our service areas, and if this occurs outside the location
and capacity of existing infrastructure, it may require significantly more capital expenditures than currently anticipated.
If a developer has an ICFA, and/or once a developer has entered into a service agreement with our utility subsidiary and the
property being developed has been included within a service area, the utility has the obligation to serve under the terms of those
agreements and existing regulations. Although we have built substantial modern infrastructure within these utilities in areas where
development is currently occurring, there is the potential that a developer may request service in another location within the service
area. Extending/expanding the existing infrastructure to provide service may result in the need to make additional, currently
unplanned, capital improvements and there is no guarantee that we may recover our costs timely. As a result, our return on our
investment and cash flow stream could be adversely affected.
Our existing indebtedness could affect our business adversely and limit our ability to plan for or respond to growth opportunities,
and we may be unable to generate sufficient cash flow to satisfy our liquidity needs.
As of December 31, 2016, we had total indebtedness of $115.0 million. In addition, we may incur substantial additional
indebtedness in the future. Our indebtedness could have important consequences, including:
•
•
limiting our ability to obtain future additional financing we may need to fund future working capital, capital
expenditures, acquisitions, or other corporate requirements; and
limiting, by the financial and other restrictive covenants in our debt agreements, our ability to borrow additional funds
and to pay dividends.
Our ability to incur significant future indebtedness will depend in part on our ability to generate cash flow. This ability is
affected by general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. If our
business does not generate sufficient cash flow from operations or if we are unable to borrow money or otherwise generate funds
sufficient to enable us to fund our liquidity needs, we may be unable to plan for or respond to growth opportunities, which could
adversely affect our operating results and business prospects.
Foreclosure rates in our service areas, as well as other factors affecting real estate development, could affect the growth of our
regulated customer base or result in a decline in our revenue.
A slowdown or severe downturn in the housing market could have an adverse effect on our operating results and financial
condition. During periods of economic distress, there may be an increase in home foreclosures and vacancies. For example, during the
economic downturn beginning in 2008, our utilities experienced an increase in the number of vacant homes, reaching a peak of 4,020
vacant connections as of February 28, 2009, approximately 11.9% of our total connections at the time. Accordingly, in the event of an
economic downturn, we may experience a material reduction in revenues. Although the U.S. economy and housing market continue
to recover, we cannot predict the overall trajectory of the market. Our growth depends significantly on increased residential and
commercial development in our service areas, and if developers or builders are unable to complete additional residential and
commercial projects, our revenue may decline.
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We are subject to adverse publicity and reputational risks, which make us vulnerable to negative customer perception and could
lead to increased regulatory oversight or other sanctions.
Water and wastewater utilities, including Palo Verde and Santa Cruz, have large customer bases and as a result are exposed
to public criticism regarding, among other things, the reliability of their water and wastewater services, the quality of water provided,
the timeliness and accuracy of bills that are provided for such services, and the quality of customer service. Adverse publicity and
negative customer sentiment may render regulators and government officials less likely to view us in a favorable light, and may cause
us to be susceptible to less favorable regulatory outcomes, as well as increased regulatory oversight and more stringent regulatory
requirements. Unfavorable regulatory outcomes may include the enactment of more stringent laws and regulations governing our
operations, as well as fines, penalties or other sanctions or requirements. The imposition of any of the foregoing could have a material
adverse impact on our business, financial condition, results of operations and cash flows.
Our water and wastewater systems are subject to condemnation by governmental authorities, which may result in the receipt of less
than the fair market value of our assets and a loss of revenue from our operations.
Municipalities and other governmental subdivisions have historically been involved in the provision of water and wastewater
services, and efforts may arise from time to time to convert some or all of our assets to public ownership and operation. Arizona law
provides for the acquisition of public utility property by governmental agencies through their power of eminent domain, also known as
condemnation. Should a municipality or other governmental subdivision seek to acquire some or all of our assets through eminent
domain, we would likely resist the acquisition.
Contesting an exercise of condemnation through eminent domain may result in costly legal proceedings and may divert the
attention of our management from the operation of our business. Moreover, our efforts to resist any such condemnation may not be
successful.
If a municipality or other governmental subdivision succeeds in acquiring some or all of our assets through eminent domain,
there is a risk that we will not receive adequate compensation for such assets and that we will incur significant one-time charges.
Condemnation also results in a loss of revenue from the operations of the affected utility.
The assets of our former utility subsidiaries, Cave Creek Water Co. and Valencia Water Company, were acquired from us by
municipalities pursuant to condemnation proceedings, and our other utility subsidiaries could be subjects of such proceedings in the
future.
We may have difficulty accomplishing our growth strategy within and outside of our current service areas. This would cause us to
rely more heavily on regulatory rate increases to increase our revenues.
Our ability to expand our business, both within our current service areas and into new areas, involves significant risks,
including, but not limited to:
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not receiving or maintaining necessary regulatory permits, licenses, or approvals;
downturns in economic or population growth and development in our service areas;
risks related to planning and commencing new operations, including inaccurate assessment of the demand for water,
engineering and construction difficulties, and inability to begin operations as scheduled;
droughts or water shortages that could increase water conservation efforts to a point that materially reduces revenue;
regulatory restrictions or other factors that could adversely affect our access to sources of water supply;
our potential inability to identify suitable acquisition opportunities or to form the relationships with developers and
municipalities necessary to form strategic partnerships; and
barriers to entry presented by existing water utilities in prospective service areas.
If we are unable to execute our growth strategy effectively, we will need to rely more heavily on regulatory rate increases to
increase our revenue.
Operating costs, construction costs, and costs of providing services may rise faster than revenue.
The ability to increase rates over time is dependent upon approval of rate increases by utility regulators, which may be
inclined, for political or other reasons, to limit rate increases. However, our costs are subject to market conditions and other factors,
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and may increase significantly. The second largest component of our operating costs after water production is made up of salaries
and wages. These costs are affected by the local supply and demand for qualified labor. Other large components of our costs are
general insurance, workers’ compensation insurance, employee benefits, and health insurance costs. These costs may increase
disproportionately to rate increases authorized by utility regulators and may have a material adverse effect on our financial condition
and results of operations.
We may have difficulty recruiting and retaining qualified personnel, and due to the technical and specialized nature of our
business, our profitability may suffer if we do not have the necessary workforce.
Our plants require some of our employees to be certified operators of record, a designation requiring specialized training and
certification in water and wastewater systems. As workers with these qualifications retire in the industry, we may be unable to
replace them readily in view of the relatively low number of younger workers that we believe are entering the workforce to
pursue this line of work. Our operations require a variety of other technical skills and specialties in the areas of engineering, systems
analysis, laboratory work, and equipment repair, and we may have difficulty recruiting and retaining personnel with these skills. If we
cannot maintain an employee base with the skills necessary to conduct our operations, our efficiency, margins, and ability to expand
our business could be adversely affected.
Any disruption or problem at our facilities could increase our expenses.
A natural disaster (such as an earthquake, fire, or flood) or an act of terrorism could cause substantial delays in our
operations, damage or destroy our equipment or facilities, and cause us to incur additional expenses and lose revenue. The
insurance we maintain against natural disasters may not be adequate to cover our losses in any particular case, which would require us
to expend significant resources to replace any destroyed assets, thereby materially and adversely affecting our financial condition and
prospects.
Our growth depends significantly on increased residential and commercial development in our service areas, and if developers or
builders are unable to complete additional residential and commercial projects, our revenue may not increase.
The growth of our customer base depends almost entirely on the success of developers in developing residential and
commercial properties within our Certificate of Convenience and Necessity (“CC&N”) areas. A 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, which we refer to as “service areas.” Real estate development is a cyclical industry
and the growth rate of development, especially residential development, since 2006, both nationally and in Arizona has been below
historical rates. The sale of, for instance, single family residences is affected by a number of national and regional economic factors,
including:
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interest rates and general levels of economic output;
levels of activity in the local real estate market;
the state of domestic credit markets, mortgage standards, and availability of credit;
competition from other builders and other projects in the area and other states;
federal programs to assist home purchasers;
costs and availability of labor and materials;
government regulations affecting land development, homebuilding, and mortgage financing;
availability of financing for development and for home purchasers;
changes in the income tax treatment of real property ownership;
unexpected increases in development costs;
increased commute times and fuel costs that may adversely affect the desirability of outlying suburbs;
availability of, among other things, other utilities, adequate transportation, and school facilities; and
environmental problems with such land.
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While many developers presently hold necessary zoning approvals, land development within our service areas could also be
affected by changes in governmental policies, including, but not limited to, governmental policies to restrict or control development.
This may include, for example, actions by the local school districts to restrict admissions to local schools because of inadequate
classroom space or, because of other problems, such as failure by local municipalities to approve plats for the development. An
increase in current residential foreclosure rates or a deep or prolonged slowdown of the development process and the related
absorption rate within the various developments in our service areas because of any or all of the foregoing could materially and
adversely affect growth of our customer base and the generation of revenue.
Many national builders and developers in our service areas own or control substantial amounts of the developable land in
these areas. There can be no assurance that these builders and developers have the financial capability to continue and complete their
developments.
We are subject to environmental risks that may subject us to clean-up costs or litigation that could adversely affect our business,
operating results, financial condition, and prospects.
Under various federal and state environmental laws, regulations, ordinances, and other requirements, a current or
previous owner or operator of real property or a facility may be liable for the costs of removal, remediation, or containment of
hazardous or toxic substances on, under, in, or released from such property. These liabilities are not limited to a potential effect on our
water supply and include, but are not limited to, liabilities associated with air, soil, or groundwater contamination at any real estate
or facilities we own or operate, including liabilities assumed in an acquisition of another utility. Environmental laws often impose
liability regardless of whether the owner or operator knew of or was responsible for the presence of the hazardous or toxic substances.
Although we currently conduct environmental screening assessments on new properties that we propose to acquire or use to identify
significant sources of contaminants on surrounding properties, these assessments are not comprehensive, nor have they been
conducted for all of the property owned or used by us. As a result, hazardous or toxic substances may exist at properties owned or
used by us. If hazardous or toxic substances are discovered at real property or facilities owned or used by us (including a
landfill owned by another party that is used by us for disposal of hazardous substances), we could incur significant remediation
costs, liability exposure, or litigation expenses that could adversely affect our profitability, results of operations, liquidity, and cash
flows.
Any failure of our network of water and wastewater pipes and water reservoirs could result in losses and damages that may affect
our financial condition and reputation.
Our utilities distribute water and collect wastewater through an extensive network of pipes and store water in reservoirs
located across our service areas. A failure of major pipes or reservoirs could result in injuries and property damage for which we
may be liable. The failure of major pipes and reservoirs may also result in the need to shut down some facilities or parts of our
network in order to conduct repairs. Any failures and shutdowns may limit our ability to supply water in sufficient quantities to
customers and to meet the water and wastewater delivery requirements prescribed by applicable utility regulators, which would
adversely affect our financial condition, results of operations, cash flow, liquidity, and reputation.
Our utilities business is subject to seasonal fluctuations and other weather-related conditions, such as droughts, which could
adversely affect the supply of and demand for our services and our results of operations.
We depend on an adequate water supply to meet the present and future needs of our customers. Whether we have an
adequate water supply depends upon a variety of factors, including underground water supply from which groundwater is
pumped, the rate at which it is recharged by rainfall and snowpack, and changes in the amount of water used by our customers. In
particular, the arid western U.S. region, which includes our present and potential service areas, has been required to deal with
general conditions of water scarcity exacerbated by extended periods of drought.
Drought conditions could interfere with our sources of water supply and could adversely affect our ability to supply water in
sufficient quantities to our existing and future customers. For example, our utilities have acted in the past as interim operators for
several smaller troubled water systems, at the request of the ACC. In one such instance, the onsite well, which was the single source
of water, ran dry due to aquifer decline. As a result, we were forced to haul water to the system for several years at a
considerable cost. Any future interruption to our water supply or restrictions on water usage during drought conditions or other
legal limitations on water use could result in decreased customer billing and lower revenues or higher expenses that we would not be
able to recoup without prior regulatory approval for a rate increase, which may not be granted. These conditions could also lead to
increases in capital expenditures needed to build infrastructure to secure alternative water sources. Furthermore, customers may use
less water even after a drought has ended because of conservation patterns developed during the drought. Population growth could
also decline under drought conditions as individuals and businesses move out of the area or elect not to relocate there. Lower water
use for any reason could lead to lower revenue.
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Demand for water is seasonal and varies with temperature and rainfall levels. If temperatures during the typically warmer
months are cooler than normal, or if there is more rainfall than normal, the demand for our water may decrease, which would
adversely affect our profitability, results of operations, liquidity, and cash flows. Consequently, the results of operations for one
quarter are not necessarily indicative of results for future quarters or the full year.
Risks associated with the collection, treatment, and disposal of wastewater and the operation of water utilities may impose
significant costs that may not be covered by insurance, which could result in increased insurance premiums.
The wastewater collection, treatment, and disposal operations of our utilities are subject to substantial regulation and involve
significant environmental risks. If collection or sewage systems fail, overflow, or do not operate properly, untreated wastewater or
other contaminants could spill onto nearby properties or into nearby streams and rivers, potentially causing damage to persons or
property, injury to the environment including aquatic life, and economic damages, which may not be recoverable in rates. This risk
is most acute during periods of substantial rainfall or flooding, which are the main causes of sewer overflow and system failure.
Liabilities resulting from such damage could adversely and materially affect our business, results of operations, and financial
condition. Moreover, in the event that we are deemed liable for any damage caused by overflow, losses might not be covered by
insurance policies, and such losses may make it difficult to secure insurance in the future at acceptable insurance premium rates.
Similarly, any related business interruption or other losses might not be covered by insurance policies, which would also make it
difficult for us to secure insurance in the future at acceptable insurance premium rates.
We may also incur liabilities under environmental laws and regulations requiring investigations and cleanup of
environmental contamination at our properties or at off-site locations where there have been adverse environmental impacts. The
discovery of previously unknown conditions, or the imposition of cleanup obligations in the future, could result in significant costs,
and could adversely affect our financial condition, results of operations, cash flow, and liquidity. Such remediation losses may not be
covered by insurance policies and may make it difficult for us to secure insurance in the future at acceptable insurance premium rates.
Contamination of the water supplied by us may result in disruption in our services, loss of credibility, lower demand for our
services, and potential liability that could adversely affect our business and financial condition.
Our water supplies are subject to contamination, including contamination from compounds, chemicals in groundwater
systems, pollution resulting from man-made sources (such as perchlorate and methyl tertiary butyl ether), and possible biological
terrorist attacks. Contamination of water sources can lead to human death and illness, damage to natural resources and other parts of
the environment, and cause other harms. Among other things, if we are found to be liable for consequences of water contamination
arising out of human exposure to hazardous substances in our water supplies or other damage, we would be subject to civil or criminal
enforcement actions, litigation, and other proceedings or clean up obligations. Further, our insurance policies may not apply or be
sufficient to cover the costs of these claims, which could be significant.
Cleaning up water sources can be very expensive and if we are required to do so, it could have a material and adverse
effect on our business, operating results, and financial condition. In the event that our water supply is contaminated, we may have to
interrupt or stop the use of that water supply until we are able to treat the water or to substitute the supply of water from another water
source, including, in some cases, through the purchase of water from a supplier. We may incur significant costs in order to warn
consumers and to treat the contaminated source through expansion of current treatment facilities or development of new treatment
methods. Using a new water source is generally associated with increased costs compared to an existing water source and, as
indicated above, purchasing water is typically more expensive than obtaining the water from other means. If we are unable to treat or
substitute our water supply in a cost-effective manner, our financial condition, results of operations, cash flow, liquidity, and
reputation may be adversely affected. We may not be able to recover costs associated with treating contaminated water or
developing new sources of supply through the rate setting process or through insurance.
We depend on an adequate supply of electricity and chemicals for the delivery of our water, and an interruption in the supply of
these inputs or increases in their prices could adversely affect our results of operations.
We rely on purchased electrical power to operate the wells and pumps that are needed in order to supply potable and recycled
water to our customers. An extended interruption in power supply that we cannot remediate through the use of backup generators
could adversely affect our ability to continue these operations. Electrical power, which represented approximately 6.1% of our total
operating expenses in fiscal year 2016, is a significant and potentially volatile operating expense. Electrical power costs are beyond
our control and can increase unpredictably in substantial amounts. Under these circumstances, our cash flows between our general rate
case filings and our earnings may be adversely affected until the ACC has authorized a rate increase.
In addition, we require bulk supplies of chemicals for water and wastewater treatment, and if we were to suffer an
interruption of supply that we cannot replace quickly, we might not be able to perform these functions adequately. Some chemicals
are available from a single source or a limited number of sources. Chemical costs represented approximately 2.2% of our total
operating expenses in fiscal year 2016.
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If future acquisitions do not achieve sufficient profitability relative to expenses and investment, our business and ability to finance
our operations could be materially adversely affected.
A typical element of a utility growth strategy is the acquisition or development of other water and wastewater utilities. The
potential negotiation of future acquisitions and development of new projects could require us to incur significant costs and expose us
to significant risks, including:
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risks relating to the condition of assets acquired and exposure to residual liabilities of prior businesses;
operating risks, including equipment, technology and supply problems, regulatory requirements, and approvals necessary
for acquisitions;
risks that potential acquisitions may require the disproportionate attention of our senior management, which could distract
them from the management of our existing business;
risks related to our ability to retain experienced personnel of the acquired company; and
risks that certain acquisitions may require regulatory approvals, which could be refused or delayed and which could result
in unforeseen regulatory expenses or unfavorable regulatory conditions.
These issues could have a material adverse effect on our business and our ability to finance our operations. The businesses
and other assets we acquire in the future may not achieve sufficient revenue or profitability to justify our investment, and any
difficulties we may encounter in the integration process could interfere with our operations and reduce operating margins.
Acquisitions could also result in dilutive issuance of our equity securities, incurrence of debt and contingent liabilities, and
fluctuations in quarterly results and expenses.
We face risks associated with the design, construction, and operation of our systems that may adversely affect our business and
financial condition.
We are responsible for the design, construction, installation, and maintenance of our water treatment, reclamation, and
distribution systems. We could be adversely affected by a failure to complete our construction projects on time or on budget, and a
substantial delay in the progress of construction due to adverse weather, work stoppages, shortages of materials, non-issuances of
permits, nonperformance of suppliers or contractors, or other factors could result in a material increase in the overall cost of such
projects.
We cannot guarantee that our systems will operate as designed or be free from defects. The failure of our systems to operate
properly could cause significant public harm. Any defects in our systems or significant reliability, quality, or performance problems
with respect to our systems or services could have a number of negative effects on our profitability, results of operations, liquidity,
and cash flows, including:
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loss of revenues;
diversion of management and development resources and the attention of engineering personnel;
significant customer relations problems;
increased repair, support, and insurance expenses;
adverse regulatory actions; and
legal actions for damages by our customers, including but not limited to damages based on commercial losses and effects
on human health.
Our ability to expand into new service areas and to expand current water and wastewater service depends on approval from
regulatory agencies. Failure to obtain required regulatory approvals will adversely affect future growth.
In Arizona, the ACC is the regulatory authority that oversees the formation, expansion, and ongoing operations of water and
wastewater utilities. The ACC has authority, among other things, to determine service areas for utility providers. In order for our
owned utilities to provide water or wastewater service, they must obtain a CC&N for a service area before they can service that area.
In addition, our owned utilities and/or the developments that we serve must demonstrate to the Arizona Department of Water
Resources that there exists a 100-year water supply and obtain either a “Certificate of Assured Water Supply,” which is a certificate
issued by the Arizona Department of Water Resources evidencing sufficient groundwater, surface water, or effluent of adequate
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quality will be continuously available to satisfy the water needs of the proposed use for at least one hundred years and which
applies to a specific subdivision, or a Designation of Assured Water Supply, which applies to the utility’s entire service area. The
designation area is coterminous with the CC&N. Further, our wastewater facilities require Arizona Department of Environmental
Quality and/or EPA permits that regulate, among other things, the level of discharges from our facilities, the size of our facilities, and
the location of our facilities. Any inability to obtain the necessary regulatory approvals, assured water supplies, or environmental
permits would limit our ability to expand our water or wastewater service areas.
If we chose to expand to states other than Arizona, we may have difficulty acquiring the necessary approvals and permits or
complying with environmental, health and safety, or quality standards of such states. See “—Doing business in jurisdictions other
than Arizona may present unforeseen regulatory, legal, and operational challenges that could impede or delay our operations or
adversely affect our profitability.”
We will need additional capital to grow our business, and additional financing may not be available to us on favorable terms when
required, or at all.
Adequate funds to support our growth may not be available when needed or on terms acceptable to us. We may need to raise
additional funds to support more rapid expansion, improve our facilities and infrastructure, develop new and enhanced technologies,
or respond to evolving regulatory standards. We may experience difficulty in raising the necessary capital due to volatility in the
capital markets or increases in the cost of infrastructure finance. Increasingly stringent bond rating standards could make it more
difficult for us to finance our growth by issuing tax-exempt bonds as we have in the past. In addition, we require regulatory approval
from the ACC for some means of raising capital, such as issuance of debt by our regulated utilities, and approval may be denied or
delayed. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of
expansion opportunities, make the capital expenditures necessary to support our growth, or otherwise execute our strategic plan.
Increased operating expenses associated with the expansion of our business may negatively impact our operating income.
Increased operating expenses associated with any expansion of our business may negatively impact our income as we, among
other things:
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seek to acquire new service areas;
expand geographically in and outside of Arizona;
• make significant capital expenditures to support our ability to provide services in our existing service areas;
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fund development costs for our system and technology; and
incur increased general and administrative expenses as we grow.
As a result of these factors, we may not sustain or increase our profitability on an ongoing basis.
There is no guaranteed source of water.
Our ability to meet the existing and future water demands of our customers depends on an adequate supply of water.
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.
As stated above, our primary source of water is pumping of groundwater from aquifers within service areas. In the event that
our wells cannot meet customer demand, we can purchase water from surrounding municipalities, agencies, and other utilities.
However, the cost of purchasing water is typically more expensive than producing it. Furthermore, these alternative sources may
not always have an adequate supply to sell to us.
To date, we have been able to produce enough water to meet current customer requirements. However, no assurance can be
given that we will be able to produce or purchase enough water to fully satisfy future customer demand. We can make no guarantee
that we will always have access to an adequate supply of water that will meet all quality standards, or that the cost of water will
not adversely affect our operating results.
If we are unable to access adequate water supplies, we may be unable to satisfy all customer demand, which could result in
rationing. Rationing may have an adverse effect on cash flow from operations.
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Water shortages may affect us in a variety of ways. For example, water shortages could:
adversely affect water supply mix by causing us to rely on more expensive purchased water;
adversely affect operating costs;
increase the risk of contamination to water systems due to the inability to maintain sufficient pressure;
increase capital expenditures for building pipelines to connect to alternative sources of supply, new wells to replace those
that are no longer in service or are otherwise inadequate to meet the needs of customers, and reservoirs and other facilities
to conserve or reclaim water; and
result in regulatory authorities refusing to approve new service areas if an adequate water supply cannot be demonstrated
and restrictions on new customer connections may be imposed in existing service areas if there is not sufficient water.
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We may or may not be able to recover increased operating and construction costs as a result of water shortages on a timely
basis, or at all, for our regulated systems through the rate setting process.
Inadequate water and wastewater supplies could have a material adverse effect upon our ability to achieve the customer growth
necessary to increase our revenues.
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. As discussed above, 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.
We do not currently anticipate any short-term concerns with physical, legal, or continuous availability issues in our service
areas. Regardless, the supply of groundwater in Central Arizona, while considerable, is also ultimately finite, closely regulated, and
geographically limited. In areas where we have not applied for a “Designation of Assured Water Supply,” which is a decision and
order issued by the director of the Arizona Department of Water Resources designating a private water company provider as having
an adequate water supply, we have not performed hydrological studies or modeling to evaluate the amount of groundwater likely to be
available to meet present and expected future demands. Insofar as we intend to rely on the pumping of groundwater and the
generation and delivery of recycled water to meet future demands in our current service areas, our ability and/or the ability of
developers inside of our service areas to meet regulatory requirements and to demonstrate assured and adequate water supplies is
essential to the continued growth of our service connections and our capacity to supply water to our customers.
Insufficient availability of water or wastewater treatment capacity could materially and adversely affect our ability to provide
for expected customer growth necessary to increase revenues. We continuously look for new sources of water to augment our reserves
in our service areas, but have not yet obtained surface water rights. Our ability to obtain such rights may depend on factors beyond our
control, such as the future availability of Colorado River water supplies. We also plan to construct facilities and obtain the necessary
permits to recharge recycled water to stretch and augment our existing and planned future water supplies, but do not yet have this
capability in all of our service areas. As a result, it is possible that, in the future, we will not be able to obtain sufficient water or
water supplies to increase customer growth necessary to increase or even maintain our revenues.
We are subject to industrial risks that could adversely affect our results of operations.
The operations of our water and wastewater treatment plants involve physical, chemical, and biological processes and the use
of pumps, generators, and other industrial equipment. As a result, our operations are subject to various industrial risks, including
chemical spills, discharges or releases of toxic or hazardous substances or gases, effects resulting from confined operating spaces,
fires, explosions, mechanical failures, storage tank leaks, and electric shock. These risks can result in personal injury, loss of life,
catastrophic damage to or destruction of property and equipment or environmental damage, and related legal proceedings, including
those commenced by regulators, neighbors, or others. They may also result in an unanticipated interruption or suspension of our
operations and the imposition of liability. The loss or shutdown over an extended period of operations at any of our treatment facilities
or any losses relating to these risks could have a material adverse impact on our profitability, results of operations, liquidity, and cash
flows.
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Doing business in jurisdictions other than Arizona may present unforeseen regulatory, legal, and operational challenges that
could impede or delay our operations or adversely affect our profitability.
We may decide to pursue growth opportunities in states other than Arizona. Other states may present substantially different
regulatory frameworks, and we may have difficulty acquiring the necessary approvals and permits or complying with environmental,
health and safety, or quality standards. In addition, it may become more costly or difficult for us to comply with a multitude of
standards and requirements across multiple states.
Other states may also expose us to new legal precedents, condemnation risks, and liability concerns based on state legislation
or case law.
Our cost structure in other states may be significantly different than our current cost structure due to regional
differences. For example, our cost structure may be significantly impacted by differences in labor and energy costs in other markets
and the significant portion of overall production costs that they represent.
We face competition for new service areas and acquisition targets.
We face competition from other water and wastewater utilities for new service areas and with respect to acquisitions of
smaller utilities. These competitors consist primarily of municipalities and investor-owned utilities seeking expansion opportunities.
Some of our competitors are larger than we are and have more resources and access to capital than we do. If we are unable to compete
effectively for new service areas and acquisitions of existing utilities, our ability to increase our rate base and revenue could be
adversely affected.
If the general public perceives recycled water to be unsafe, we will have difficulty executing our business plan and could face a
loss of revenue.
Our Total Water Management model emphasizes the maximum use of recycled water for non-potable purposes. To
implement this model, we cultivate relationships with developers, municipalities, and members of the communities we serve and
focus on educating them regarding the benefits and safety of recycled water. If the recycled water supplied to customers is
contaminated, either as a result of terrorism, system failure, pipeline, or other causes, public perception regarding the safety of
recycled water would likely suffer, regardless of whether we are at fault and potentially even if the contaminated water was supplied
by another person. For example, if groundwater contamination occurs as a result of discharge of “gray water” (e.g., used sink or
laundry water) into the aquifer, the public could confuse that with recycled water and attribute environmental harm to our system.
Public perception of an unsafe water supply would harm our business, particularly with respect to our ability to implement water
recycling as a key element of our business strategy.
Risks Related to the Ownership of Our Common Stock
The concentration of our stock ownership with our officers, directors, certain stockholders, and their affiliates will limit your
ability to influence corporate matters.
Our directors, executive officers, and stockholders holding more than 5% of our capital stock and their affiliates beneficially
own, in the aggregate, approximately 53% of our outstanding common stock. As a result, these stockholders are able to exercise
significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant
corporate transactions, such as a merger or other sale of us or our assets. This concentration of ownership could limit your ability to
influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us. There can
be no assurance that their interests will not conflict with the interests of our other stockholders.
Our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your
shares at or above your purchase price.
The market price for our common stock is likely to be volatile, in part because our shares recently began trading publicly.
Many factors, which are outside our control, may cause the market price of our common stock to fluctuate significantly, including
those described elsewhere in this “Risk Factors” section, as well as the following:
our operating and financial performance and prospects;
our quarterly or annual earnings or those of other companies in our industry compared to market expectations;
conditions that impact demand for our services;
future announcements concerning our business or our competitors’ businesses;
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the public’s reaction to our press releases, other public announcements, and filings with the SEC;
the size of our public float;
coverage by or changes in financial estimates by investment analysts or failure to meet their expectations;
the market’s reaction to our reduced disclosure as a result of being an “emerging growth company” under the Jumpstart
Our Business Startups Act (the "JOBS Act");
market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
strategic actions by us or our competitors, such as acquisitions or restructurings;
changes in laws or regulations which adversely affect our industry or us;
changes in accounting standards, policies, guidance, interpretations, or principles;
changes in senior management or key personnel;
issuances, exchanges, or sales, or expected issuances, exchanges, or sales of our capital stock;
changes in our dividend policy;
adverse resolution of new or pending litigation against us; and
changes in general market, economic, and political conditions in the U.S., and global economies or financial markets,
including those resulting from natural disasters, terrorist attacks, acts of war, and responses to such events.
In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect
the market prices of equity securities of many companies in our industry. In the past, stockholders have instituted securities class
action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and
our resources and the attention of management could be diverted from our business.
We incur costs as a result of being a public company in the U.S.
As a public company in the U.S., we will incur significant legal, accounting, insurance, and other expenses, including costs
associated with U.S. public company reporting requirements. The expenses incurred by U.S. public companies generally for reporting
and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial
compliance costs and to make some activities more time-consuming and costly. These laws and regulations could also make it more
difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to
accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and
regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board
committees, or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be
subject to delisting of our common stock, fines, sanctions and other regulatory action, and potentially civil litigation.
Substantial future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our
stock price.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could
adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares.
We also intend to file a registration statement registering under the Securities Act of 1933, as amended (the “Securities Act”),
the shares of our common stock reserved for issuance in respect of stock options and other incentive awards granted to our officers
and certain of our employees. If these officers or employees cause a large number of securities to be sold in the public market, such
sales could also reduce the trading price of our common stock and impede our ability to raise future capital.
If our operating and financial performance in any given period does not meet the guidance that we provide to the public or the
expectations of investment analysts, our stock price may decline.
We may provide public guidance on our expected operating and financial results for future periods. Any such guidance will
be comprised of forward-looking statements subject to the risks and uncertainties described in this Form 10-K and in our other public
filings and public statements. Whether or not we provide guidance, investment analysts may publish their estimates of our future
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financial performance. Our actual results may not always be in line with or exceed any guidance we have provided or the expectations
of investment analysts, especially in times of economic uncertainty. If, in the future, our operating or financial results for a particular
period do not meet any guidance we provide or the expectations of investment analysts or if we or investment analysts reduce
estimates of our performance for future periods, the market price of our common stock may decline.
If investment analysts cease to publish research or reports about our business or if they publish negative evaluations of our
common stock, the price of our common stock could decline.
The trading market for our common stock will rely in part on the research and reports that investment analysts publish about
us or our business. However, if no or few analysts commence coverage of the Company, the trading price of our stock would likely
decrease. Even if we do obtain such analyst coverage, if one or more of the analysts covering our business downgrade their
evaluations of our stock, the price of our common stock could decline. If one or more of these analysts cease to cover our common
stock, we could lose visibility in the market for our stock, which in turn could cause our common stock price to decline.
Our failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act as a public company could have a material adverse effect on our business and share price.
Prior to the completion of the initial public offering, we did not have to independently comply with Section 404(a) of the
Sarbanes-Oxley Act. Section 404(a) of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our
internal control over financial reporting, starting with the second annual report that we would expect to file with the SEC.
Additionally, once we are no longer an emerging growth company, as defined by the JOBS Act, our independent registered public
accounting firm will be required pursuant to Section 404(b) of the Sarbanes-Oxley Act to attest to the effectiveness of our internal
control over financial reporting on an annual basis. The rules governing the standards that must be met for our management to assess
our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. We are
currently in the process of reviewing, documenting, and testing our internal control over financial reporting, but we are not currently
in compliance with, and we cannot be certain when we will be able to implement the requirements of Section 404(a). We may
encounter problems or delays in implementing any changes necessary to make a favorable assessment of our internal control over
financial reporting. In addition, we may encounter problems or delays in completing the implementation of any requested
improvements and receiving a favorable attestation in connection with the attestation to be provided by our independent registered
public accounting firm after we cease to be an emerging growth company. If we cannot favorably assess the effectiveness of our
internal control over financial reporting, or if our independent registered public accounting firm is unable to provide an unqualified
attestation report on our internal controls after we cease to be an emerging growth company, investors could lose confidence in our
financial information and the price of our common stock could decline.
Additionally, the existence of any material weakness or significant deficiency would require management to devote
significant time and incur significant expense to remediate any such material weakness or significant deficiency and management may
not be able to remediate any such material weakness or significant deficiency in a timely manner. The existence of any material
weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to
restate our financial statements, cause us to fail to meet our reporting obligations, and cause stockholders to lose confidence in our
reported financial information, all of which could materially and adversely affect our business and share price.
We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay
dividends on our common stock.
We intend to continue to pay a regular monthly dividend on our common stock of $0.0225 per share ($0.27 per share
annually), or an aggregate of approximately $5.3 million on an annual basis. However, our future dividend policy is subject to our
compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of
indebtedness, capital requirements, contractual restrictions, restrictions in our debt agreements and in any preferred stock we may
issue in the future, business prospects, and other factors that our board of directors may deem relevant. Dividend payments are not
mandatory or guaranteed; there can be no assurance that we will continue to pay a dividend in the future.
Taking advantage of the reduced disclosure requirements applicable to emerging growth companies may make our common stock
less attractive to investors.
We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. As
such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public
companies that are not emerging growth companies including, but not limited to, (i) not being required to comply with the auditor
attestation requirements of Section 404(b) of the Sarbanes-Oxley Act; (ii) reduced disclosure obligations regarding executive
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compensation in our periodic reports and proxy statements; and (iii) exemptions from the requirements of holding a non-binding
advisory vote on executive compensation and of shareholder approval of any golden parachute payments not previously approved. We
have elected to adopt these reduced disclosure requirements. We cannot predict if investors will find our common stock less attractive
as a result of our taking advantage of these exemptions and as a result, there may be a less active trading market for our common stock
and our stock price may be more volatile.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other
words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise
apply to private companies. We are choosing to take advantage of this extended transition provision. See “—Risks Related to the
Ownership of Our Common Stock—Our election to take advantage of the JOBS Act extended accounting transition period may make
our financial statements more difficult to compare to other public companies.”
We could remain an emerging growth company for up to five years or until the earliest of (i) the last day of the first fiscal
year in which our annual gross revenues exceed $1 billion; (ii) the date that we become a “large accelerated filer” as defined in Rule
12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds
$700 million as of the last business day of our most recently completed second fiscal quarter; and (iii) the date on which we have
issued more than $1 billion in non-convertible debt securities during the preceding three-year period.
Our election to take advantage of the JOBS Act extended accounting transition period may make our financial statements more
difficult to compare to other public companies.
Pursuant to the JOBS Act, as an “emerging growth company,” we must make an election to opt in or opt out of the extended
transition period for any new or revised accounting standards that may be issued by the Financial Accounting Standards Board
(“FASB”). We have elected to opt in and take advantage of this extended transition provision. This means that, when a standard is
issued or revised and it has different application dates for public or private companies, we can, for so long as we are an emerging
growth company, adopt the timeline applicable for private companies. This may make comparison of our financial statements with any
other public company that is not an emerging growth company (or an emerging growth company that has opted out of using the
extended transition provision) difficult or impossible as a result of our use of different accounting standards.
Delaware law, certain provisions in our certificate of incorporation and bylaws, and regulations of the ACC may prevent efforts by
our stockholders to change the direction or management of the Company.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability
of a third party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. In addition, our
amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition
of our company more difficult, including, but not limited to, the following:
only allowing our board of directors, Chairman of our board of directors, Chief Executive Officer, or President to call
special meetings of our stockholders;
setting forth specific procedures regarding how our stockholders may present proposals or nominate directors for election
at stockholder meetings;
requiring advance notice and duration of ownership requirements for stockholder proposals;
permitting our board of directors to issue preferred stock without stockholder approval; and
limiting the rights of stockholders to amend our bylaws.
These provisions could discourage, delay, or prevent a transaction involving a change in control of our company. These
provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your
choosing and cause us to take other corporate actions you desire. In addition, because our board of directors is responsible for
appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace
current members of our management team.
Additionally, the ACC must determine that certain types of transactions will not impair our financial status, prevent us from
attracting capital at fair and reasonable terms, or impair our ability to provide safe, reasonable, and adequate service. Pursuant to this
regulatory mandate, the ACC may impose conditions that could discourage, delay, or prevent a transaction involving a change in
control of our company.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The following table lists the properties that we own or lease:
Nature of Property
Corporate Offices
Wastewater Treatment Plant
Global Water Center - Regional Office
Wastewater Utility Plant
Water Utility Plant
Water Utility Plant
Water Utility Plant
Water Utility Plant
Location
Operated By
Owned or Leased
Phoenix, Arizona
Maricopa, Arizona
Maricopa, Arizona
8 Lift Stations - Maricopa, Arizona
15 Well Sites - Maricopa, Arizona
5 Water Distribution Sites - Maricopa, Arizona
9 sites - Western Maricopa County, Arizona
4 sites - Northern Maricopa County, Arizona
Global Water Resources, Inc.
Global Water - Palo Verde Utilities Company
Global Water - Palo Verde Utilities Company
Global Water - Palo Verde Utilities Company
Global Water - Santa Cruz Water Company
Global Water - Santa Cruz Water Company
Water Utility of Greater Tonopah, Inc.
Water Utility of Northern Scottsdale, Inc.
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
We believe that our existing properties are adequate to meet our current needs.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we may, from time to time, be subject to various pending and threatened lawsuits in which
claims for monetary damages are asserted. To our knowledge, we are not involved in any legal proceeding which is expected to have a
material effect on us.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
PART II
Market Information
Our common stock is listed on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “GWRS”. Our common
stock began trading on the NASDAQ on April 28, 2016. There was no public market for GWRS common stock prior to
April 28, 2016.
The following table sets forth, for the quarterly periods indicated, the high and low sales price of our common stock as
reported on NASDAQ from April 28, 2016 through December 31, 2016:
Fiscal Quarter
1st Quarter
2nd Quarter (from April 28, 2016)
3rd Quarter
4th Quarter
$
$
$
$
High
2016
— $
8.97 $
9.18 $
9.29 $
Low
—
6.23
7.36
7.56
Shareholders
As of March 3, 2017, there were approximately 8 shareholders of record of our common stock. Because many shares of our
common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of
stockholders represented by these holders of record.
Dividends
For the year ended December 31, 2016, we paid cash dividends to holders of our common stock totaling $5.0 million, which
included: from January 2016 through April 2016, a monthly dividend of CAD$0.0283 per share; from May 2016 through June 2016, a
monthly dividend of $0.02 per share; from July 2016 through November 2016, a monthly dividend of $0.022 per share; and a monthly
dividend of $0.0225 per share beginning in December 2016.
For the year ended December 31, 2015, we paid cash dividends to holders of our common stock totaling $27.6 million (which
included a special one-time dividend of $22.8 million paid in August 2015 to distribute to stockholders a portion of the proceeds of the
condemnation of the operations and assets of Valencia Water Company, Inc.), which included: from January 2015 through March
2015, a monthly dividend of CAD$0.024 per share; from April 2015 through July 2015, a monthly dividend of CAD$0.026 per share;
and from August 2015 through December 2015, a monthly dividend of CAD$0.0283 per share.
We currently intend to pay a regular monthly dividend of $0.0225 per share ($0.27 per share annually). However, our future
dividend policy is subject to our compliance with applicable law, and depending on, among other things, our results of operations,
financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in our debt agreements and in any
preferred stock we may issue in the future, business prospects, and other factors that our board of directors may deem relevant. See
“Management’s Discussion and Analysis of Results of Operations and Financial Condition – Liquidity and Capital Resources” in Part
II, Item 7 of this Form 10-K for a discussion of provisions of our senior secured notes that limit the payment of dividends.
-32-
Performance Graph
The following graph compares the relative performance of our common stock, the S&P 500 Index, and our Peer Group Index.
This graph covers the period from April 28, 2016 (the first day GWRS common stock began trading on the NASDAQ) through
December 31, 2016. The graph assumes that $100 was invested on April 28, 2016 in the common stock of GWRS, the S&P 500 Index,
and our Peer Group Index, and also assumes reinvestment of dividends. The stock price performance on the following graph is not
necessarily indicative of future stock price performance.
COMPARISON OF 8 MONTH CUMULATIVE TOTAL RETURN*
$160.00
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$—
4/28/2016
6/30/2016
9/30/2016
12/31/2016
Global Water Resources, Inc.
S&P 500 Index
Peer Group Index**
* $100 invested on April 28, 2016 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
** Peer group includes American States Water Company, American Water Works, Aqua America, Inc., Artesian Resources Corp.,
California Water, Connecticut Water Service, Inc., Middlesex Water Company, and York Water Co.
Global Water Resources, Inc.
S&P 500 Index
Peer Group Index**
4/28/2016
6/30/2016
9/30/2016
$
$
$
100.00 $
100.00 $
100.00 $
140.84 $
101.11 $
118.46 $
128.26 $
104.45 $
106.04 $
12/31/2016
145.78
107.85
117.88
Use of Proceeds
On April 27, 2016, our registration statement on Form S-1 (File No. 333-209025) was declared effective by the SEC for the
U.S. IPO pursuant to which we sold an aggregate of 1,339,520 shares of our common stock at a price to the public of $6.25 per share.
Roth Capital Partners, LLC acted as sole manager for the offering. The aggregate offering price for shares sold in the offering was
approximately $8.4 million. The offering commenced as of April 28, 2016 and did not terminate before all of the securities registered
in the registration statement were sold. We raised approximately $5.5 million in net proceeds after deducting underwriting discounts,
commissions and expenses of approximately $761,000 and other offering expenses of approximately $2.2 million. No payments were
made by us to directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates.
As described in our final prospectus filed with the SEC on April 28, 2016 pursuant to Rule 424(b), we intend to use the net proceeds
from the offering for working capital and other general corporate purposes. On June 24, 2016, we completed the refinancing of our
then existing long-term tax exempt bonds. Consistent with our disclosure in the final prospectus, we did not use any of the offering
proceeds to refinance the tax-exempt bonds and the proceeds will, as indicated, be allocated for general working capital and other
purposes.
Issuer Purchases of Equity Securities
None.
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ITEM 6.
SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data, which should be read in conjunction with our consolidated
financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Form 10-K. The table presents the consolidated statements of operations and cash flow data for the three years
ended December 31, 2016, and the consolidated balance sheet data at December 31, 2016 and 2015, which are derived from our audited
consolidated financial statements included elsewhere in this Form 10-K. The table also presents the consolidated balance sheet data at
December 31, 2014, which was derived from our audited consolidated financial statements that are not included in this Form 10-K.
As the condemnation of Valencia Water Company, Inc. (“Valencia”) was completed on July 14, 2015 and the sale of Willow
Valley Water Company, Inc. (“Willow Valley”) was completed on May 9, 2016, the Company’s consolidated balance sheet, consolidated
statements of operations, cash flow data, and operating metrics included Valencia and Willow Valley through the respective closing dates.
The following amounts are in thousands, except per share data and operating metrics:
Year Ended December 31,
2015
2016
2014
Consolidated Balance Sheet Data:
ASSETS:
Net property, plant, and equipment
Current assets
Other assets
Total Assets
LIABILITIES:
Current liabilities
Long-term debt and capital leases
Noncurrent liabilities
Total Liabilities
SHAREHOLDERS' EQUITY
Total Liabilities and Shareholders' Equity
Consolidated Statements of Operations and Cash Flow
Data:
Revenues
Operating expenses
Operating income
Total other income (expense)
Income (loss) before income taxes
Income tax benefit (expense)
Net income (loss)
Earnings (loss) per common share:
Basic
Diluted
Net cash provided by operating activities
Cash dividends paid
Dividends declared per common share
Capital expenditures
Operating Metrics:
Active water connections
Active wastewater connections
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
200,489 $
24,740 $
13,590 $
238,819 $
194,152 $
18,715 $
22,875 $
235,742 $
240,424
12,293
52,162
304,879
10,901 $
114,317 $
98,410 $
223,628 $
15,191 $
238,819 $
10,663 $
102,417 $
102,599 $
215,679 $
20,063 $
235,742 $
13,630
124,769
138,800
277,199
27,680
304,879
29,799 $
24,529 $
5,270 $
(9,611) $
(4,341) $
1,489 $
(2,852) $
(0.15) $
(0.15) $
1,895 $
5,036 $
0.26 $
8,588 $
31,956 $
25,429 $
6,527 $
35,459 $
41,986 $
(20,623) $
21,363 $
1.17 $
1.17 $
4,245 $
27,607 $
1.43 $
3,355 $
32,559
(22,232)
54,791
(6,855)
47,936
16,995
64,931
3.54
3.54
11,646
3,454
0.20
1,655
19,013
18,374
19,964
17,820
26,188
17,380
The balance sheets as of December 31, 2015 and 2014 have been adjusted to reflect the impact of ASU 2015-03, Interest—Imputation
of Interest: Simplifying the Presentation of Debt Issuance Costs, which required debt issuance costs be presented as a direct deduction
from the carrying amount of the associated debt liability. As such, debt issuance costs of $2.2 million and $2.7 million have been
reclassified from other assets to noncurrent liabilities, for the years ended December 31, 2015 and December 31, 2014, respectively.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be
read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Form 10-K.
Basis of Presentation
The financial statements of Global Water Resources, Inc. have been prepared in accordance with United States (“U.S.”)
generally accepted accounting principles (“U.S. GAAP”) and, except where otherwise indicated, are presented in U.S. dollars and
references to “$”, “US$”, and “dollars” are to U.S. dollars.
Overview
We are a water resource management company that owns, operates, and manages water, wastewater, and recycled water
utilities in strategically located communities, principally in metropolitan Phoenix, Arizona. We seek to deploy our integrated
approach, which we refer to as "Total Water Management," a term we use to mean managing the entire water cycle by owning and
operating the water, wastewater, and recycled water utilities within the same geographic areas in order to both conserve water and
maximize its total economic and social value. We use Total Water Management to promote sustainable communities in areas where
we expect growth to outpace the existing potable water supply. Our model focuses on the broad issues of water supply and scarcity
and applies principles of water conservation through water reclamation and reuse. Our basic premise is that the world's water supply is
limited and yet can be stretched significantly through effective planning, the use of recycled water, and by providing individuals and
communities resources that promote wise water usage practices.
Business Outlook
2015 and 2016 continued the trend of positive growth in new connections and re-establishing service on existing previously
vacant homes. According to the 2010 U.S. Census Data, the Phoenix metropolitan statistical area (“MSA”) had a population of 4.2
million in 2010 and is the 14th largest MSA in the U.S., an increase of 29% over the 3.3 million people reported in the 2000 Census.
Metropolitan Phoenix’s growth data continues to improve due to its low-cost housing, 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 Phoenix Metro will have a population of 4.9 million by 2020 and 6.8 million by 2040. The Arizona Office of Economic
Opportunity indicates that Arizona’s employment rate improved 1.2% for the year ended December 31, 2016.
According to the W.P. Carey School of Business Greater Phoenix Blue Chip Real Estate Consensus panel, most sectors of
real estate are expected to experience improved occupancy and growth. For Maricopa County and Pinal County combined, the W.P.
Carey School of Business, using U.S. Census data, reported that single family housing permits were approximately 16,768 permits for
2015. However, for 2016, permits were estimated to be up approximately 10% to 18,456 permits in Maricopa and Pinal Counties
combined, and the forecasts for 2017 and 2018 remain positive at approximately 22,000 permits and 25,000 permits, respectively.
From there, we believe growth in the region could steadily return towards its normal historical rate of greater than 30,000 single
family dwelling permits. Additionally, multifamily, office, retail, and industrial market occupancy rates continued to increase in 2016
compared to 2015 and are expected to continue to increase through 2017.
We believe that our utilities and service areas are directly in the anticipated path of growth primarily in the metropolitan
Phoenix area. Market data indicates that our service areas currently incorporate a large portion of the final platted lots, partially
finished lots, and finished lots in metropolitan Phoenix. Management believes that we are well-positioned to benefit from the near-
term growth in metropolitan Phoenix due to the availability of lots and existing infrastructure in place within our services areas.
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;
-35-
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 Arizona Corporation Commission (“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. Our total service connections, including both active service connections and connections to vacant homes, decreased 718
connections, or 1.9%, from a total of 38,744 as of December 31, 2015 to 38,026 as of December 31, 2016. This decrease is due to the
sale of Willow Valley Water Company, Inc. (“Willow Valley”). Adjusting for the sale of Willow Valley, total service connections
increased to 38,026 as of December 31, 2016 from 37,118 as of December 31, 2015, which represents an increase of 908 connections,
or an increase of approximately 2.4%.
As of December 31, 2016, we have 37,387 active service connections compared to 37,784 active service connections as of
December 31, 2015, a decrease of 397 or 1.1%. As with the decrease in total service connections, the decrease is due to the sale of
Willow Valley. Adjusting for the sale of Willow Valley, active service connections increased 1,115 connections, or 3.1%, to 37,387 as
of December 31, 2016 compared to 36,272 as of December 31, 2015. Approximately 98.9% of the 37,387 active service connections
are serviced by our Global Water - Santa Cruz Water Company, LLC (“Santa Cruz”) and Global Water - Palo Verde Utilities
Company, LLC (“Palo Verde”) utilities.
The graph below presents the historical change in active and total connections for our ongoing operations, adjusting for the
condemnation of the assets and operations of Valencia Water Company, Inc. (“Valencia”) and the sale of Willow Valley.
Total Active vs. Total Connections
39,000
38,000
37,000
36,000
35,000
34,000
33,000
32,000
31,000
30,000
Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16
Total Connections
Total Active
During the economic downturn beginning in 2008, our utilities experienced an increase in the number of vacant homes,
reaching a peak of 4,020 vacant connections as of February 28, 2009, approximately 11.2% of our total connections at the time;
however, the negative trend began to reverse thereafter with the number of vacant homes decreasing to 639 or 1.7% of total
connections as of December 31, 2016.
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
-36-
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 “prudently” incurred operating expenses for the test year,
depreciation, and any applicable pro forma adjustments.
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 50% of total 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 requires 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 utility services are 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. In normal conditions, it
would not be uncommon to see us file for a rate increase every three years based on year one being the test year, year two being the
rate case filing year, and year three being the rate case award year. However, based on our recent settlement with the ACC and
extended new rate phase-in period, we will not be initiating the next rate case on this timeline. Moving forward, we will continue to
analyze all factors that drive the requirement for increased revenue, including our rate of investment and recurring expenses, and
determine the appropriate test year for a future rate case. Refer to “ – Recent Rate Case Activity” for additional information.
Our water and wastewater operations are also subject to extensive U.S. federal, state, and local laws and regulations
governing the protection of the environment, health and safety, the quality of the water we deliver to our customers, water allocation
rights, and the manner in which we collect, treat, and discharge wastewater. We are also required to obtain various environmental
permits from regulatory agencies for our operations. The ACC also sets conditions and standards for the water and wastewater
services we deliver. We incur substantial costs associated with compliance with environmental, health and safety, and water quality
regulation.
Environmental, health and safety, and water quality regulations are complex and change frequently, and they have tended to
become more stringent over time. As newer or stricter standards are introduced, they could increase our operating expenses. We would
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.
Economic Environment
The growth of our customer base depends almost entirely on the success of developers in developing residential and
commercial properties within our service areas. Real estate development is a cyclical industry and the growth rate of development,
especially residential development, since 2006, both nationally and in Arizona has been and continues to be below historical rates. In
addition, development in our service areas is contingent upon construction or acquisition of major public improvements, such as
arterial streets, drainage facilities, telephone and electrical facilities, recreational facilities, street lighting, and local in-tract
improvements (e.g., site grading). Many of these improvements are built by municipalities with public financing, and municipal
resources and access to capital may not be sufficient to support development in areas of rapid population growth. For additional
information and risks associated with the economic environment, see “Risk Factors” in Part I, Item 1A of this Form 10-K.
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 return. Capital expenditures for infrastructure provide a basis for earnings growth by expanding our
“used and useful” rate base, which is a component of its 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.
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We have made significant capital investments in our territories within the last thirteen years, and because the infrastructure is
new, we do not expect comparable capital investments to be required in the near term, either for growth or to maintain the existing
infrastructure. Nevertheless, we have an established capital improvement plan to make targeted capital investments to repair and
replace existing infrastructure as needed, address operating redundancy requirements, and improve our overall financial performance,
by lowering expenses and increasing revenue. Additionally, to reduce our deferred tax liability of approximately $19.4 million
resulting from the gain on the condemnation of the operations and assets of Valencia, we have identified certain currently planned
investments within our capital improvement plan that, we determined through a favorable Private Letter Ruling with the Internal
Revenue Service, will qualify under the Internal Revenue Code Section 1033 re-investment criteria; however, the timeline to make
such investments is limited through the end of 2017. Accordingly, we have accelerated the identified capital expenditures within our
capital improvement plan. As a result, we expect capital expenditures to increase in 2017 as compared to recent years, with
corresponding reductions to occur in 2018, 2019, and beyond. As of December 31, 2016 our deferred tax liability relating to the
Valencia condemnation was approximately $17.1 million.
Production and Treatment Costs
Our water and wastewater services require significant production resources and therefore result 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. Additionally, with our Total Water Management approach, whereby we
maximize the direct beneficial reuse of recycled water, we can realize significant treatment costs and power savings because smaller
volumes of water are required for potable use. Many utilities require that all water be treated to potable standards irrespective of use.
Total Water Management focuses on the right water for the right use. Potable water is needed for consumption and recycled water is
acceptable for non-potable uses such as irrigation and toilet flushing. Non-potable water does not need to be treated for commonly
occurring and regulated constituents such as arsenic, or for other current or future human consumption health-based contaminants.
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. For additional information and risks
associated with weather and seasonality, see “Risk Factors,” included in Item 1A of this Form 10-K. The limited geographic diversity
of our service areas makes the results of our operations more sensitive to the effect of local weather extremes. The second and third
quarters of the year are generally those in which water services revenue and wastewater services revenue are highest. Accordingly,
interim results should not be considered representative of the results of a full year.
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. For additional information and risks associated with the access to and
quality of water supply, see “Risk Factors,” included in Item 1A of this Form 10-K.
Recent Rate Case Activity
On July 9, 2012, we filed rate applications with the ACC to adjust the revenue requirements for seven utilities. In August
2013, we entered into a settlement agreement with the ACC staff, the Residential Utility Consumers Office, the City of Maricopa, and
other parties to the rate case. The settlement required approval by the ACC’s commissioners before it could take effect. In February
2014, the rate case proceedings were completed and the ACC issued Rate Decision No. 74364, approving the settlement agreement.
The collective rate increase included a 9.5% return on common equity which contributed to a 15% increase over revenue in 2011.
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For our utilities, adjusting for the condemnation of the operations and assets of Valencia and the sale of Willow Valley, the
settlement provided for a collective aggregate revenue requirement increase of $3.6 million based on 2011 test year service
connections, phased-in over time, with the first increase in January 2015 as follows (in thousands):
2015
2016
2017
2018
2019
2020
2021
Incremental
Cumulative
$
1,083 $
887
335
335
335
335
335
1,083
1,970
2,305
2,640
2,975
3,310
3,645
Whereas this phase-in of additional revenues was determined using a 2011 test year, to the extent that the number of active
service connections has increased and continues to increase from 2011 levels, the additional revenues may be greater than the amounts
set forth above. On the other hand, if active connections decrease or we experience declining usage per customer, we may not realize
all of the anticipated revenues.
From 2003 to 2008, we entered into approximately 183 infrastructure coordination and financing agreements (“ICFAs”) with
developers and landowners covering approximately 275 square miles. Under these agreements, we have a contractual obligation to the
developers and landowners to ensure that amongst other things, physical capacity exists through our regulated utilities for water and
wastewater to the landowner/developer when needed. We receive fees from the landowner/developer for undertaking these obligations
that typically are a negotiated amount per planned equivalent dwelling unit for the specified development or parcel of land. Payments
are generally due to us from the landowner/developer based on progress of the development, 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. Our investment can be considerable, as we may phase-in the construction of facilities
in accordance with a regional master plan, as opposed to a single development.
Prior to January 1, 2010, we accounted for funds received under ICFAs as revenue once the obligations specified in the ICFA
were met. As these arrangements are with developers and not with the end water or wastewater customer, the timing of revenue
recognition coincided with the completion of our performance obligations under the agreement with the developer and with our ability
to provide fitted capacity for water and wastewater service to the applicable development or parcel through our regulated subsidiaries.
The 2010 Regulatory Rate Decision No. 71878 established new rates for the recovery of reasonable costs incurred by the
utilities and a return on invested capital. In determining the new annual revenue requirement, the ACC imputed a reduction to rate
base for all amounts related to ICFA funds collected by us that the ACC deemed to be CIAC for rate making purposes. As a result of
the decision by the ACC, we changed our accounting policy for the accounting of ICFA funds. Effective January 1, 2010, we recorded
ICFA funds received as CIAC. Thereafter, the ICFA-related CIAC was amortized as a reduction of depreciation expense over the
estimated depreciable life of the utility plant at the related utilities.
With the issuance of Rate Decision No. 74364, in February 2014, the ACC again changed how ICFA funds would be
characterized and accounted for going forward. Most notably, the ACC changed the rate treatment of ICFA funds, and ICFA funds
already received would no longer be deemed CIAC for rate making purposes. In conjunction with Rate Decision No. 74364, we
eliminated the CIAC liability and reversed the associated regulatory liability brought about by the 2010 ruling. ICFA funds already
received or which had become due prior to the date of Rate Decision No. 74364 were accounted for in accordance with our ICFA
revenue recognition policy that had been in place prior to the 2010 Regulatory Rate Decision, wherein the funds received are
recognized as revenue once the obligations specified in the ICFA were met. Rate Decision No. 74364 prescribes that of the ICFA
funds which come due and are paid subsequent to December 31, 2013, 70% of the ICFA funds will be recorded in the associated
utility subsidiary as a hook-up fee (“HUF”) liability, with the remaining 30% to be recorded as deferred revenue, until such time that
the HUF tariff is fully funded, after which the remaining funds will be recorded as deferred revenue in accordance with our ICFA
revenue recognition policy. A HUF tariff, specifying the dollar value of a HUF for each utility, was approved by the ACC as part of
Rate Decision No. 74364. We are responsible for assuring the full HUF value is paid from ICFA proceeds, and recorded in its full
amount by predetermined milestones in Rate Decision No. 74364, even if it results in recording more or less than 30% of the ICFA fee
as deferred revenue.
We now account for the portion of future payments received under these agreements allocated to HUF liability as CIAC.
However, from the regulator’s perspective, HUFs do not impact rate base until the related funds are expended. These funds are
segregated in a separate bank account and are used to construct plant assets. The HUF liability is to be relieved once the funds are
used for the construction of plant. For facilities required under a HUF or ICFA, we must first use the HUF funds received, after which
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we may use debt or equity financing for the remainder of construction. The deferred revenue portion of these fees is recognized as
revenue once the obligations specified within the applicable ICFA are met.
We have agreed not to enter into any new ICFAs, and instead will utilize HUF tariffs, which have become an acceptable
industry practice in Arizona. As part of the settlement, a HUF tariff was established for each utility. Existing ICFAs will remain in
place, with 70% of future ICFA payments to be recorded as HUFs until the HUF liability is fully funded. The HUF liability is relieved
as funds are expended to construct plant, at which time a corresponding amount is recorded to CIAC. The portion of ICFA proceeds
not recorded as HUF will be recorded as revenue or deferred revenue, in accordance with our ICFA revenue recognition policy.
In addition to ICFAs, we have various line extension agreements with developers and builders, whereby funds, water line
extensions, or wastewater line extensions are provided to us by the developers and are considered refundable advances for
construction. These AIACs are subject to refund by us to the developers through annual payments that are computed as a percentage
of the total annual gross revenue earned from customers connected to utility services constructed under the agreement over a specified
period. Upon the expiration of the agreements’ refunding period, the remaining balance of the AIAC becomes nonrefundable and at
that time is considered CIAC. CIAC is amortized as a reduction of depreciation expense over the estimated remaining life of the
related utility plant. For rate-making purposes, a utility plant funded by AIAC and CIAC is excluded from rate base.
Recent Events
Reorganization Transaction
On January 19, 2016, GWR Global Water Resources Corp. (“GWRC”) announced that it agreed to pursue a reorganization
transaction with the Company that resulted in GWRC merging with and into the Company (the “Reorganization Transaction”). The
Reorganization Transaction closed on May 3, 2016. GWRC was organized in 2010 to acquire shares of the Company, and held an
approximate 47.8% interest prior to the merger. The Reorganization Transaction was part of the Company’s overall plan to simplify
its corporate structure by eliminating one level of holding company ownership, refinance its outstanding tax-exempt bonds on more
favorable terms (as described below), improve liquidity for shareholders over the medium- to long-term, and have a single governing
jurisdiction in the U.S., where all of the assets, operations, and employees of the business are located. As a result of the merger,
GWRC ceased to exist as a British Columbia corporation and the Company, governed by the corporate laws of the State of Delaware,
is the surviving entity.
Debt Refinancing
With the completion of the initial public offering of shares of common stock of the Company in the U.S. (the “U.S. IPO”),
the Company had the right to redeem all of its outstanding tax-exempt bonds at a price of 103% of the principal amount, plus interest
accrued at the redemption date. Following completion of the IPO, the Company entered into a note purchase agreement (the “Note
Purchase Agreement”) to issue two series of senior secured notes with total principal balance of $115.0 million. On June 24, 2016, the
Company closed the Note Purchase Agreement, which proceeds were primarily used to pay down the outstanding $106.7 million in
tax-exempt bonds at 103%.
Stipulated Condemnation of the Operations and Assets of Valencia
On July 14, 2015, the Company closed the stipulated condemnation to transfer the operations and assets of Valencia to the
City of Buckeye. Terms of the condemnation were agreed upon through a settlement agreement and stipulated final judgement 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 paid the Company $55.0 million at close, plus an additional $108,000 in working capital
adjustments. 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.
Sale of Willow Valley
On March 23, 2015, the Company reached an agreement to sell the operations and assets of Willow Valley to EPCOR Water
Arizona Inc. (“EPCOR”). Pursuant to the terms of the agreement, EPCOR purchased all the operations, assets, and rights used by
Willow Valley to operate the utility system for $2.3 million. The transaction was approved by the ACC on March 10, 2016, and closed
on May 9, 2016.
Sale of Loop 303 Contracts
In September 2013, we entered into an agreement to sell certain wastewater facilities main extension agreements and offsite
water management agreements for the contemplated Loop 303 service area, along with their related rights and obligations (which we
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refer to collectively as the “Loop 303 Contracts”), relating to the 7,000-acre territory within a portion of the western planning area of
the City of Glendale, Arizona known as the “Loop 303 Corridor.” Pursuant to the agreement, we sold the Loop 303 Contracts to
EPCOR for total proceeds of approximately $4.1 million ($3.1 million of which has been received as of December 31, 2016), which
will be paid to us over a multi-year period. Receipt of the remaining proceeds will occur and be recorded as additional income over
time as certain milestones are met between EPCOR and the developers/landowners of the Loop 303 Corridor. As part of the
consideration, we agreed to complete certain engineering work required in the offsite water management agreements, which we
completed in 2013, thereby satisfying our remaining obligations relating to the Loop 303 Contracts. In April 2015, we received
proceeds of approximately $296,000 related to the sale of the Loop 303 Contracts. As of December 31, 2016, proceeds of $1.0 million
remain outstanding, and when received will be recorded as additional income over time as certain milestones are met between EPCOR
and the developers/landowners.
Sonoran Acquisition Liability
On March 17, 2016, the Company entered into an agreement with Sonoran Utility Services, LLC (“Sonoran”) to amend
certain provisions of the purchase and sale agreement related to the acquisition of Sonoran’s assets on June 15, 2005. The amended
agreement allowed the Company to reduce its original $3.8 million acquisition liability due to Sonoran in 2018 to $2.8 million,
through a settlement agreement executed subsequent to the Note Purchase Agreement in June 2016. Upon settlement of the Sonoran
acquisition liability, the Company recorded a gain of $954,000 in other income for the year ended December 31, 2016.
Private Letter Ruling
On June 2, 2016, the Company received a Private Letter Ruling from the Internal Revenue Service that, for purposes of
deferring the approximately $19.4 million gain realized from the condemnation of the operations and assets of Valencia, determined
that the assets converted upon the condemnation of such assets could be replaced through certain reclamation facility improvements
contemplated by the Company under Internal Revenue Code §1033 as property similar or related in service or use. In June 2016, the
Company converted all operating subsidiaries from corporations to limited liability companies to take full advantage of the benefits of
such ruling. As of December 31, 2016 our deferred tax liability relating to the Valencia condemnation was approximately $17.1
million.
Pursuant to Internal Revenue Code §1033, the Company may defer the gain on condemnation through the end of the year
2017. As such, the Company has identified certain currently planned investments within our capital improvement plan, which we have
accelerated. As a result, we expect capital expenditures to increase in 2017 as compared to recent years, with corresponding reductions
to occur in 2018, 2019, and beyond.
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 (“FASB”) Accounting Standards Codification (“ASC”)
280, Segment Reporting, we are not organized around specific products and services, geographic regions, or regulatory environments.
We currently operate in one geographic region within the State of Arizona, wherein each operating utility operates within the same
regulatory environment.
While we report revenue, disaggregated by service type, on the face of our statement of operations, we do not manage the
business based on any performance measure at the individual revenue stream level. We do not have any customers that contribute
more than 10% to our revenues or revenue streams. Additionally, the chief operating decision maker uses consolidated financial
information to evaluate our performance, which is the same basis on which he communicates our results and performance to our board
of directors. It is upon this consolidated basis from which he bases all significant decisions regarding the allocation of our resources on
a consolidated level. Based on the information described above and in accordance with the applicable literature, management has
concluded that we are currently organized and operated as one operating and reportable segment.
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Comparison of Results of Operations for the Years Ended December 31, 2016, 2015, and 2014
The following table summarizes our results of operations for the years ended December 31, 2016, 2015, and 2014 (in
thousands):
Revenues
Operating expenses
Operating income
Total other income (expense)
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
$
$
$
$
2016
For the Year Ended December 31,
2015
2014
29,799 $
24,529
5,270
(9,611)
(4,341)
1,489
(2,852) $
(0.15) $
(0.15) $
31,956
25,429
6,527
35,459
41,986
(20,623)
21,363
1.17
1.17
$
$
$
$
32,559
(22,232)
54,791
(6,855)
47,936
16,995
64,931
3.54
3.54
Revenues – The following table summarizes our revenues for the years ended December 31, 2016, 2015, and 2014 (in thousands).
Water services
Wastewater and recycled water services
Unregulated revenues
Total revenues
$
$
13,978 $
15,740
81
29,799 $
16,320
15,020
616
31,956
$
$
18,076
14,112
371
32,559
2016
For the Year Ended December 31,
2015
2014
Total revenues decreased $2.2 million, or 6.7%, for the year ended December 31, 2016 compared with the year ended
December 31, 2015. The decrease in revenues was primarily related to the condemnation of the operations and assets of Valencia
which occurred in July 2015 and the sale of Willow Valley in May of 2016, which together contributed revenue of $4.0 million for the
year ended December 31, 2015 and $306,000 for the year ended December 31, 2016. The decrease related to the condemnation of
Valencia and the sale of Willow Valley was partially offset by an increase in revenue for the remaining operating utilities, which
increased $1.6 million, or 5.7%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase
in revenue for the remaining operating utilities reflects the increase in rates related to Rate Decision No. 74364 in February 2014
combined with a 3.1% increase in active service connections (adjusted for the condemnation of the operations and assets of Valencia
and the sale of Willow Valley) combined with an increase in consumption during the year ended December 31, 2016 compared to year
ended December 31, 2015. This increase was partially offset by a $535,000 reduction in unregulated revenue.
Total revenues decreased $603,000, or 1.9%, for the year ended December 31, 2015 compared with the year ended December
31, 2014. The decrease in revenues was primarily due to the condemnation of the operations and assets of Valencia, which occurred in
July 2015, which contributed $5.9 million for the year ended December 31, 2014, and $3.3 million for the year ended December 31,
2015. The remaining operating utilities’ revenue increased $2.0 million, or 7.5%, reflecting a decrease in precipitation resulting in
higher usage of water, for the year ended December 31, 2015 compared to the year ended December 31, 2014 combined with the
increase in rates due to Rate Decision No. 74364 and an increase in active connections.
Water Services – Water services revenues decreased $2.3 million, or 14.4%, to $14.0 million for the year ended December 31, 2016
compared to $16.3 million for the year ended December 31, 2015. The decrease is primarily due to the condemnation of the operations
and assets of Valencia and the sale of Willow Valley, which contributed $4.0 million for the year ended December 31, 2015 and
$306,000 for the year ended December 31, 2016. The decrease in water service revenue was partially offset by an increase in water
service revenue for the remaining operating utilities of $1.4 million, or 11.4%, for the year ended December 31, 2016 compared to the
year ended December 31, 2015.
Water services revenues decreased $1.8 million, or 9.7%, to $16.3 million for the year ended December 31, 2015 compared
with $18.1 million for the year ended December 31, 2014. The condemnation of the operations and assets of Valencia contributed $5.9
million for the year ended December 31, 2014 and $3.3 million for the year ended December 31, 2015. The remaining operating
utilities’ water services revenue for the year ended December 31, 2015 increased $839,000, or 6.9%, compared to the year ended
December 31, 2014.
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Water services revenue based on consumption decreased $452,000, or 6.8%, to $6.2 million for the year ended December 31,
2016 compared to $6.7 million for the year ended December 31, 2015. The decrease in revenue was primarily driven by the
condemnation of the assets and operations of Valencia and the sale of Willow Valley, which contributed $1.7 million for the year
ended December 31, 2015 and $67,000 for the year ended December 31, 2016. The decrease in water service revenue related to the
condemnation of Valencia and sale of Willow Valley was partially offset by an increase water service revenue for the remaining
operating utilities, which increased $1.2 million, or 23.0%, to $6.2 million for the year ended December 31, 2016 compared to $5.0
million for the year ended December 31, 2015. The increase in water service revenue for the remaining operating utilities is related to
the onset of new rates in 2016 combined with an increase in active water connections and an increase in consumption compared to
2015.
Water services revenue based on consumption decreased $1.1 million, or 13.9%, to $6.7 million for the year ended December
31, 2015 from $7.8 million for the year ended December 31, 2014. The decrease in revenue was primarily driven by a decrease in
active water connections related to the condemnation of the operations and assets of Valencia, which contributed $2.8 million for the
year ended December 31, 2014 and $1.7 million for the year ended December 31, 2015. The remaining operating utilities’
consumption revenue increased $234,000, or 4.7%, to $5.2 million for the year ended December 31, 2015 compared to $5.0 million
for the year ended December 31, 2014. The remaining operating utilities’ consumption revenue increased due to the onset of new rates
in 2015 combined with an increase in active water connections and am increase in consumption compared to 2014.
Active water connections decreased 4.8% to 19,013 as of December 31, 2016 from 19,964 as of December 31, 2015
primarily as the result of the sale of Willow Valley. However, after adjusting to remove the active water service connections of
Willow Valley, active connections increased 3.0% to 19,013 as of December 31, 2016 from 18,452 as of December 31, 2015.
Active water connections decreased 23.8% to 19,964 as of December 31, 2015 from 26,188 as of December 31, 2014 as a
result of the condemnation of the operations and assets of Valencia. However, after adjusting to remove the active water service
connections of Valencia, active connections increased 2.3% to 19,964 as of December 31, 2015 from 19,515 as of December 31, 2014.
Water consumption decreased 7.8% to 2.2 billion gallons for the year ended December 31, 2016 from 2.4 billion gallons for
the year ended December 31, 2015. The decrease in water consumption was primarily driven by the condemnation of the operations
and assets of Valencia and the sale of Willow Valley, which consumed 467 million gallons for the year ended December 31, 2015 and
17 million gallons for the year ended December 31, 2016. The water consumption for the remaining operating utilities increased
13.9% to 2.2 billion gallons for the year ended December 31, 2016 compared to 1.9 billion gallons for the year ended December 31,
2015. The increase in consumption can be attributed to the increase in active connections (in each case adjusting for the condemnation
of the operations and assets of Valencia and the sale of Willow Valley) combined with an increase in average temperature and a
decrease in precipitation for the year ended December 31, 2016 compared to the year ended December 31, 2015.
Water consumption decreased 17.2% to 2.4 billion gallons for the year ended December 31, 2015 from 2.9 billion gallons for
the year ended December 31, 2014. The decrease in consumption was primarily driven by the condemnation of the operations and
assets of Valencia in July 2015, which consumed 410 million gallons for the year ended December 31, 2015 compared to 807 million
gallons consumed for the year ended December 31, 2014. The water consumption of the remaining operating utilities decreased 4.6%
to 2.0 billion gallons for the year ended December 31, 2015 compared to 2.1 billion gallons for the year ended December 31, 2014.
Water services revenue associated with the basic service charge decreased $1.8 million, or 19.0%, to $7.5 million for the year
ended December 31, 2016 compared to $9.2 million for the year ended December 31, 2015. The decrease in basic water service
revenue is primarily driven by the condemnation of the operations and assets of Valencia and the sale of Willow Valley, which
contributed $2.2 million for the year ended December 31, 2015 and $235,000 for the year ended December 31, 2016. The decrease
was partially offset by an increase in basic revenues for the remaining operating utilities, which increased $203,000, or 2.9%, to $7.2
million for the year ended December 31, 2016 compared to $7.0 million for the year ended December 31, 2015, reflecting growth in
total active connections as well as an increase in rates due to Rate Decision No. 74364.
Water services revenue associated with the basic service charge decreased $650,000, or 6.6%, to $9.2 million for the year
ended December 31, 2015 compared to $9.9 million for the year ended December 31, 2014 due to the condemnation of the operations
and assets of Valencia. The basic service charge revenue for the remaining operating utilities increased $641,000, or 9.3%, to $7.6
million for the year ended December 31, 2015 compared to $7.0 million for the year ended December 31, 2014, reflecting growth in
total active connections as well as an increase in rates due to Rate Decision No. 74364.
Wastewater and Recycled Water Services – Wastewater and recycled water services revenues increased $720,000, or 4.8%, for the
year ended December 31, 2016 compared to the year ended December 31, 2015. The increase reflects the increase in rates related to
Rate Decision No. 74364 as well as the increase of active wastewater connections, which increased 3.1% to 18,374 as of
December 31, 2016 from 17,820 as of December 31, 2015.
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Wastewater and recycled water services revenues increased $908,000, or 6.4%, to $15.0 million for the year ended
December 31, 2015 compared to $14.1 million for the year ended December 31, 2014. The increase was primarily due to the onset of
new rates in 2015 due to Rate Decision No. 74364 combined with an increase in the number of active wastewater connections.
Recycled water revenue, which is based on the number of gallons delivered, increased $183,000, or 35.9%, to $693,000 for
the year ended December 31, 2016 compared to $510,000 for the year ended December 31, 2015. The recycled water revenue increase
is a function of an increase in rates and volume delivered. Recycled water rates increased 30% per Rate Decision No. 74364 compared
to 2015. The volume of recycled water delivered decreased approximately 3 million gallons, or 0.5%, to 635 million gallons for the
year ended December 31, 2016 from 639 million gallons for the year ended December 31, 2015.
Recycled water revenue increased $181,000, or 54.8%, to $510,000 for the year ended December 31, 2015 compared to
$330,000 for the year ended December 31, 2014. The volume of recycled water delivered increased 63 million gallons, or 11.0%, to
639 million gallons for the year ended December 31, 2015 compared to 576 million gallons for the year ended December 31, 2014.
Unregulated Revenues – Unregulated revenues, which are primarily rental fees derived from leases of space on a utility-owned
communications tower and the imputed revenue resulting from our public-private partnership with the City of Maricopa, decreased
$535,000, or 86.9%, to $81,000 for the year ended December 31, 2016 compared to $616,000 for the year ended December 31, 2015.
The decrease in revenue was driven by the expiration of the temporary arrangement within the public-private partnership
memorandum of understanding with the City of Maricopa, wherein we agreed to offset the cash payment of our license fee through
December 31, 2015 for certain utility related services we provide to the City of Maricopa. These commitments were satisfied, and the
associated license fees were being accounted for as unregulated revenue until the expiration of the temporary arrangement on
December 31, 2015.
Unregulated revenues increased $245,000, or 66.0%, to $616,000 for the year ended December 31, 2015 compared to
$371,000 for the year ended December 31, 2014. The increase in revenue was driven by an increase in infrastructure coordination and
financing agreement-related imputed revenue resulting from our public-private partnership memorandum of understanding with the
City of Maricopa starting in April 2014, wherein we agreed to offset the cash payment of our license fee through December 31, 2015
for certain utility related services the City of Maricopa required from the Company. These commitments were previously finalized,
and the associated license fees were accounted for as unregulated revenue until the expiration of the agreement on December 31, 2015.
Operating Expenses – The following table summarizes our operating expenses for the years ended December 31, 2016, 2015, and
2014 (in thousands):
Operations and maintenance
Operations and maintenance - related party
General and administrative
Gain on regulatory order
Depreciation
Total operating expenses
$
$
2016
For the Year Ended December 31,
2015
2014
6,188 $
1,853
10,209
—
6,279
24,529 $
7,080
2,179
7,957
—
8,213
25,429
$
$
8,020
2,398
8,809
(50,664)
9,205
(22,232)
Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily
chemicals and purchased power), maintenance costs, contract services, and property tax, decreased $892,000, or 12.6%, for the year
ended December 31, 2016 compared to the year ended December 31, 2015. The decrease in operations and maintenance costs was
primarily driven by the condemnation of the assets and operations of Valencia and the sale of Willow Valley.
Operations and maintenance costs decreased $940,000, or 11.7%, for the year ended December 31, 2015 compared to the
year ended December 31, 2014. The decrease in operations and maintenance costs was primarily driven by the condemnation of the
assets and operations of Valencia.
Total personnel costs decreased $386,000, or 18.4%, for the year ended December 31, 2016 compared to the year ended
December 31, 2015, primarily due to a decrease in personnel related to the condemnation of the operations and assets of Valencia and
the sale of Willow Valley, which contributed $534,000 for the year ended December 31, 2015 and $60,000 for the year ended
December 31, 2016. This decrease in personnel expenses was partially offset by an increase of $88,000, or 5.7%, in personnel
expenses of the remaining operating utilities for the year ended December 31, 2016 compared to the year ended December 31, 2015.
Personnel expense for the remaining operating utilities increased due to an increase in salary and wages related to certain
organizational changes for the year ended December 31, 2016 compared to the year ended December 31, 2015.
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Total personnel costs decreased $349,000, or 14.3%, for the year ended December 31, 2015 compared to the year ended
December 31, 2014 primarily due to a decrease in personnel related to the condemnation of the operations and assets of Valencia,
which contributed $759,000 for the year ended December 31, 2014 and $357,000 for the year ended December 31, 2015. The
remaining operating utilities’ personnel costs increased $52,000 for the year ended December 31, 2015 compared to the year ended
December 31, 2014.
Utilities and power expense decreased $92,000, or 5.8%, for the year ended December 31, 2016 compared to the year ended
December 31, 2015. Utilities and power expense decreased as a result of the condemnation of the operations and assets of Valencia
and sale of Willow Valley, which contributed $222,000 for the year ended December 31, 2015 and $12,000 for the year ended
December 31, 2016. The decrease in utilities expense was partially offset by an increase in the utility expense of the remaining
operating utilities, which increased $117,000, or 8.6%, for the year ended December 31, 2016 compared to the year ended
December 31, 2015. The increase in utilities expense is primarily related to an increase in consumption.
Utilities and power expense decreased $358,000, or 18.4%, for the year ended December 31, 2015 compared to the year
ended December 31, 2014. Utilities and power expense decreased as a result of the condemnation of operations and assets of Valencia,
which contributed $484,000 for the year ended December 31, 2014 and $193,000 for the year ended December 31, 2015. Utilities and
power expense for the remaining operating utilities decreased $72,000 for the year ended December 31, 2015 compared to the year
ended December 31, 2014.
Property taxes decreased $272,000, or 13.0%, for the year ended December 31, 2016 compared to the year ended
December 31, 2015. Property taxes primarily decreased due to the condemnation of the operations and assets of Valencia and the sale
of Willow Valley, which contributed $210,000 for the year ended December 31, 2015 and zero for the year ended December 31, 2016.
Property tax expense decreased for the remaining operating utilities by $61,000, or 3.3%, for the year ended December 31, 2016
compared to the year ended December 31, 2015. Property taxes for the remaining utilities decreased as a result of a change in property
tax assessment in 2016 compared to 2015. Property taxes for the year ended December 31, 2015 did not change significantly when
compared to the year ended December 31, 2014.
Contract services expense decreased $116,000, or 35.4%, during the year ended December 31, 2015 compared to the year
ended December 31, 2014. Contract services decreased as a result of a reduction in disposal fees. Disposal fees decreased $88,000, or
77.4%, during the year ended December 31, 2015 compared to the year ended December 31, 2014. Residual disposal declined due to
the elimination of third party transportation expenses related to the transfer of certain disposal activities in-house combined with the
elimination of bio-solid disposal fees, as we initiated direct land application of bio-solids in July 2014. Bio-solids are a by-product of
our water reclamation process and were previously disposed of within a landfill. Currently, bio-solids are beneficially reused as
fertilizer by an agricultural farmer who accepts the bio-solids at no cost. Contract services for the year ended December 31, 2016 did
not change significantly when compared to the year ended December 31, 2015.
Operations and Maintenance – Related Party – Operations and maintenance related party expenses are for service fees paid to
FATHOM™ with respect to billing, customer service and other support provided to our regulated utilities. Service fees paid to
FATHOM™ decreased $326,000, or 15.0%, to $1.9 million for the year ended December 31, 2016 compared to $2.2 million for the
year ended December 31, 2015. FATHOM™ service fees primarily decreased as a result of the condemnation of the operations and
assets of Valencia and the sale of Willow Valley, which contributed $475,000 in expenses for the year ended December 31, 2015 and
$60,000 for the year ended December 31, 2016. This decrease was partially offset by an increase in service fees for the remaining
operating utilities, which increased $89,000, or 5.2%, for the year ended December 31, 2016 compared to the year ended
December 31, 2015. FATHOM™ service fees for the remaining operating utilities increased in relation to an increase in their active
water connections combined with a consumer price index increase in the monthly charge pursuant to the services contract.
Operations and maintenance related party expenses totaled $2.2 million for the year ended December 31, 2015 compared to
$2.4 million for the year ended December 31, 2014. Fathom services fees decreased as a result of the condemnation of the operations
and assets of Valencia.
General and Administrative – General and administrative costs include the day-to-day expenses of office operation, personnel costs,
legal and other professional fees, insurance, rent, and regulatory fees. These costs increased $2.3 million, or 28.3%, to $10.2 million
for the year ended December 31, 2016 compared to $8.0 million for the year ended December 31, 2015. General and administrative
costs decreased $852,000, or 9.7%, during the year ended December 31, 2015 compared to the year ended December 31, 2014.
Personnel related costs decreased $670,000, or 19.6%, for the year ended December 31, 2016 compared to the year ended
December 31, 2015. The 2016 decrease was driven by a non-recurring bonus of $591,000 paid in relation to closing of the
condemnation of the operations and assets of Valencia in 2015. Excluding the non-recurring bonus, personnel related costs decreased
$79,000, or 2.3%, primarily due to a decrease in medical expenses for the year ended December 31, 2016 compared to the year ended
December 31, 2015.
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For the year ended December 31, 2015, personnel costs decreased $1.0 million, or 19.9%, compared to the year ended
December 31, 2014. Personnel costs decreased as a result of a decline in wage and bonus expense combined with a decrease in
deferred compensation. Salary, bonus, and benefit expense decreased $514,000 for the year ended December 31, 2015 as compared to
the year ended December 31, 2014. The decrease in salary, bonus, and benefit expense is primarily due to a decrease of approximately
$821,000 related to the completion of our executive transition plan, wherein we no longer accrue and pay a salary and bonus to Mr.
Hill and Ms. Bowers, each of who transitioned to directors of the Company in 2015. The decrease related to our executive transition
plan is inclusive of $300,000 of cash bonus payments made in lieu of phantom stock units (“PSUs”) in 2014 that did not occur in
2015, which were made to reduce the potential exposure to an increase in deferred compensation expense resulting from PSU re-
measurement corresponding to an increase in share price. This decrease is partially offset by a one-time bonus of $591,000 for
members of management holding stock appreciation rights at the time of the special dividend paid out in August 2015, combined with
a $65,000 increase in labor capitalized to ongoing projects.
Deferred compensation costs increased $1.1 million, or 158.7% for the year ended December 31, 2016 compared to the year
ended December 31, 2015. Deferred compensation increased as a result of the change in our stock price, which increased $3.60 for the
year ended December 31, 2016 compared to a U.S. Dollar adjusted stock price increase of $0.97 for the year ended December 31,
2015, combined with the continued vesting of outstanding PSUs and SARs. PSUs and SARs derive their value from the value of one
outstanding share of stock. Deferred compensation is recorded upon the vesting of these awards. Outstanding vested units are revalued
periodically based upon the change in unit price as derived from the change in stock price.
Deferred compensation decreased $587,000 for the year ended December 31, 2015 compared to the year ended December 31,
2014. Deferred compensation decreased primarily as a result of the reduction in the total number of PSUs outstanding for the year
ended December 31, 2015 compared to the year ended December 31, 2014. The U.S. Dollar adjusted share price increased $0.97 for
both the years ended December 31, 2015 and 2014.
City of Maricopa memorandum of understanding fees increased $316,000 or 57.8%, to $863,000 for the year ended
December 31, 2016 compared to $547,000 for the year ended December 31, 2015. Previously, we agreed to offset the cash payments
associated with the license fees through December 31, 2015 with miscellaneous utility related services provided by us to the City of
Maricopa. Beginning in January 2016, we began paying the City of Maricopa for the license fees calculated at 3% of revenues of Palo
Verde Utility Company and Santa Cruz Water Company. City of Maricopa memorandum of understanding fees for the year ended
December 31, 2015 did not change significantly when compared to the year ended December 31, 2014.
Regulatory expenses increased $154,000, or 205.3%, for the year ended December 31, 2015 compared to the year ended
December 31, 2014. The increase in regulatory expense was due to amortization of deferred rate case costs incurred during the latest
rate case that resulted in Rate Decision No. 74364. Amortization of the deferred rate case costs began in January 2015 in conjunction
with the onset of new rates. Regulatory expenses for the year ended December 31, 2016 did not change significantly when compared
to the year ended December 31, 2015.
Professional fees, which include legal and accounting costs, increased $49,000, or 3.6%, for the year ended December 31,
2016 compared to the year ended December 31, 2015. Professional fees increased primarily as a result of a $214,000 increase in legal
expenses associated with being a U.S. publicly traded company, which expenses were historically recorded at GWRC, combined with
an increase associated with the Private Letter Ruling. These increases were partially offset by a $165,000 decrease in accounting and
other services, which decreased as part of a reduction in expenses related to audit and tax services combined with a reduction in
certain other consulting arrangements.
Professional fees decreased $76,000, or 5.3%, for the year ended December 31, 2015 compared to the year ended December
31, 2014, as certain accounting and legal fees related to Rate Decision No. 74364 were incurred during the year ended December 31,
2014 that did not occur in 2015.
Board compensation costs increased $1.0 million, or 259.2% for the year ended December 31, 2016 compared to the year
ended December 31, 2015. The increase in board compensation is primarily related to $649,000 in stock option expense associated
with the 2016 option grant for the year ended December 31, 2016 compared to zero for the year ended December 31, 2015.
Additionally, board compensation expense increased as a result of the change in stock price, which increased $3.60 for the year ended
December 31, 2016 compared to the U.S. Dollar adjusted increase of $0.97 for the year ended December 31, 2015, combined with an
increase in the number of deferred phantom units (“DPUs”) outstanding as of December 31, 2016 compared to December 31, 2015.
Board compensation increased $238,000, or 154.3%, to $392,000 for the year ended December 31, 2015 compared to the
year ended December 31, 2014. Board compensation increased due to the completion of the executive transition plan in 2015, wherein
Mr. Hill and Ms. Bowers began being compensated as board members rather than employees. In addition to the transition plan, board
compensation was also affected by an approximately $44,000 in DPUs awarded to certain board members in conjunction with the one-
time dividend paid out in August 2015 in relation to the condemnation of the operations and assets of Valencia.
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Miscellaneous expenses increased $210,000 or 85.4% for the year ended December 31, 2016 compared to the year ended
December 31, 2015. This increase is primarily related to an increase in the taxes and fees associated with the completion of the U.S.
IPO and our status as a U.S. publicly traded company, of which a portion of these expenses were historically recorded at GWRC.
Gain on Regulatory Order – The $50.7 million gain on regulatory order recorded during the year ended December 31, 2014 represents
the benefit to the Company’s periodic earnings as a result of Rate Decision No. 74364, which concluded that infrastructure
coordination and financing agreement funds received historically would no longer be recorded as contributions in aid of construction.
Depreciation – Depreciation expense decreased by $1.9 million, or 23.5%, to $6.3 million for the year ended December 31, 2016. This
decrease is primarily related to the condemnation of the operations and assets of Valencia and the sale of Willow Valley, which
recorded depreciation of approximately $63,000 for the year ended December 31, 2016 and $1.4 million for the year ended
December 31, 2015 in addition to certain assets reaching the end of their useful lives and, therefore, having been fully depreciated.
Depreciation expense decreased by $992,000, or 10.8%, to $8.2 million for the year ended December 31, 2015 compared to
$9.2 million the year ended December 31, 2014. The decrease of depreciation expense is primarily due to the condemnation of the
operations and assets of Valencia combined with some of our assets reaching their full useful life and, therefore, having been fully
depreciated.
Other Income (Expense) – Other expense totaled a net $9.6 million for the year ended December 31, 2016 compared to net other
income of $35.5 million for the year ended December 31, 2015. The change in other expense is primarily driven by the $43.0 million
gain associated with the condemnation of the operations and assets of Valencia recorded in 2015 combined with a $3.6 million
increase in interest expense in 2016. The increase in net expense in 2016 was partially offset by a $1.5 million increase in other
income.
Interest expense increased 43.0% to $11.9 million for the year ended December 31, 2016 compared to $8.3 million for the
year ended December 31, 2015. Interest expense increased due to the refinancing of debt that was completed in June of 2016. As part
of the refinancing, we paid $3.2 million in prepayment penalties and wrote off the remaining $2.2 million in capitalized loan fees
related to the retired bonds. These increases were partially offset by lower interest rate expense in the second half of 2016 related to
the refinancing of our bonds in June 2016.
Other income increased to $2.2 million for the year ended December 31, 2016 compared to income of $767,000 for the year
ended December 31, 2015. The increase in other income was primarily attributed to a $954,000 gain on the settlement of the Sonoran
purchase liability. The Sonoran liability was originally due in June 2018, however, by accelerating the payoff of the liability, we were
able to reduce the original liability of $3.8 million to $2.8 million. Additionally, other income includes approximately $1.2 million
related to the Valencia earn out for the year ended December 31, 2016 compared to $624,000 for the year ended December 31, 2015,
wherein we receive $3,000 for each new meter installed in the Valencia service area. These gains were partially offset by a $54,000
loss on sale of Willow Valley Water Company in May of 2016 combined with a reduction in other income related to the 2015 gain of
$296,000 on proceeds received in relation to the sale of Loop 303 Contracts.
Other income totaled a net $35.5 million for the year ended December 31, 2015 compared to net other expense of $6.9
million for the year ended December 31, 2014. Other income (expense) primarily consisted of the gain on the condemnation of the
operations and assets of Valencia, interest expense, loss on equity method investment and other income. The $42.3 million change in
other income is primarily attributed to the $43.0 million gain recorded in 2015 with the condemnation of the operations and assets of
Valencia combined with $624,000 of income attributed to the Valencia earn out, wherein we receive $3,000 for each new meter
installed within our prior service area over a 20-year period, beginning January 1, 2015. The gain on the condemnation of the
operations and assets of Valencia was partially offset by $2.0 million of interest income related to the Sierra Negra Ranch, LLC
litigation recorded during the year ended December 31, 2014, which was not recorded in 2015.
Loss on equity method investment, recorded to other income (expense)—related party on the consolidated statements of
operations, decreased $473,000 for the year ended December 31, 2015 compared to the year ended December 31, 2014 due to the
reduction in the Company’s share of ongoing losses, which declined as a result of the recapitalization of Fathom Water Management
Holdings, LLP in November 2014. Equity method losses for the year ended December 31, 2016 did not change significantly when
compared to the year ended December 31, 2015.
Income Tax Benefit – An income tax benefit of $1.5 million was recorded for the year ended December 31, 2016 compared to
income tax expense of $20.6 million for the year ended December 31, 2015. The income tax benefit is related to our current period
losses.
Income tax expense increased to $20.6 million for the year ended December 31, 2015 compared to a benefit of $17.0 million
for the year ended December 31, 2014. The change in income tax expense is driven by the $20.2 million tax expense related to the
condemnation of the operations and assets of Valencia for the year ended December 31, 2015 compared to a $16.1 million tax benefit
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related to the reversal of substantially all the deferred tax asset valuation allowance for the year ended December 31, 2014 as a result
of Rate Decision No. 74364.
Effective June 2012 and through December 31, 2013, the Company maintained a full income tax valuation allowance against
its net deferred tax assets. During the year ended December 31, 2014, as a result of the additional revenues expected to be provided by
Rate Decision No. 74364, as well as other factors, the Company performed an evaluation of its deferred tax assets and determined that
sufficient evidence existed such that the majority of the Company’s deferred tax assets would be utilized in the future. Accordingly,
the Company reversed substantially all of the deferred tax asset valuation allowance previously recorded, resulting in a $16.1 million
income tax benefit. For the year ended December 31, 2014, the Company recorded an $868,000 income tax benefit related to current
year losses.
Net Loss – Our net loss totaled $2.9 million for the year ended December 31, 2016 compared to a net income of $21.4 million for the
year ended December 31, 2015. The $24.2 million decrease for the year ended December 31, 2016 compared to the year ended
December 31, 2015 is primarily attributed to the $43.0 million gain on the condemnation of operations and assets of Valencia, net of a
$20.2 million tax liability for the year ended December 31, 2015. Additionally, interest expense increased $3.6 million and deferred
compensation and board compensation increased $2.1 million. Interest expense increased due to the expenses associated with our debt
refinancing. Deferred compensation increased primarily due to an increases in stock price, combined with option grants to members of
the board. The amounts were partially offset by an income tax benefit of $1.5 million related to our current period losses.
Net income totaled $21.4 million for the year ended December 31, 2015 compared to $64.9 million for the year ended
December 31, 2014. The change in net income for the year ended December 31, 2015 is primarily attributed to the $43.0 million gain
on the condemnation of the operations and assets of Valencia, net of a $20.2 million tax liability for the year ended December 31,
2015 compared to the $50.7 million gain on regulatory order, $16.1 million release of income tax asset valuation allowance and
interest income of $2.0 million related to the resolution of certain litigation recorded for the year ended December 31, 2014 that did
not occur in 2015. Additionally, the Company recognized approximately $296,000 of income from proceeds related to the sale of
Loop 303 Contracts along with a $176,000 loss in conjunction with the classification of Willow Valley's assets as held for sale, which
did not occur in 2014.
Outstanding Share Data
As of March 10, 2017, there were 19,581,266 shares of our common stock outstanding and options to acquire an additional
368,395 shares of our common stock outstanding.
Liquidity and Capital Resources
Our capital resources are provided by internally generated cash flows from operations as well as debt and equity financing.
Additionally, our 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. We use our capital resources to:
fund operating costs;
fund capital requirements, including construction expenditures;
pay dividends;
make debt and interest payments; and
invest in new and existing ventures.
Our 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 December 31, 2016, we have one notable near-term cash expenditure obligation related to an estimated $178,000 tax
liability associated with the GWRC merger. We have no notable near-term debt obligations. While specific facts and circumstances could
change, we believe that we have sufficient cash on hand and will be able to generate sufficient cash flows to meet our operating cash flow
requirements and capital expenditure plan as well as remain in compliance with our debt covenants for at least the next twelve months.
In March 2014, we initiated a dividend program to declare and pay a monthly dividend. On November 14, 2016 we
announced a monthly dividend increase from $0.022 per share ($0.264 per share annually) to $0.0225 per share ($0.27 per share
annually). Although we expect monthly dividends will be declared and paid for the foreseeable future, the declaration of any
dividends is at the discretion of our board of directors and is subject to legal requirements.
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The senior secured notes contain a provision limiting the payment of dividends if we fall below a debt service ratio of
consolidated EBITDA to consolidated debt service of 1.25, or 1.20 for the quarters ending June 30, 2021 through the quarter ending
March 31, 2024. Consolidated EBITDA is calculated as net income plus depreciation, taxes, interest, and other non-cash charges net
of non-cash income. Consolidated debt service is calculated as interest expense, principal payments, dividend declarations and stock
repurchases. As of December 31, 2016, we were in compliance with our dividend covenant, and we believe we will remain in
compliance for at least the next twelve months.
Cash from Operating Activities
Cash flows provided by operating activities are used for operating needs and to meet capital expenditure requirements. Our
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, and weather and
seasonality.
For the year ended December 31, 2016, our net cash provided by operating activities totaled $1.9 million compared to $4.2
million for the year ended December 31, 2015. The $2.4 million change in cash from operating activities is primarily driven by an
increase in net losses for the year ended December 31, 2016 compared to the year ended December 31, 2015. This loss was primarily
driven by the $3.2 million prepayment penalty on the retirement of our tax exempt bonds.
For the years ended December 31, 2015 and December 31, 2014, the Company’s net cash provided by operating activities
totaled $4.2 million and $11.6 million, respectively. The $7.4 million change in cash from operating activities was primarily driven by
$2.8 million of infrastructure coordination and financing agreement funds and $2.0 million of interest in connection with the
settlement of the Sierra Negra Ranch, LLC litigation, received for the year ended December 31, 2014 and not for 2015. Additionally,
cash from operations was affected by a $1.4 million payout of accrued PSU expense for the year ended December 31, 2015.
Further, operating cash flows are affected by the timing of the recording and settlement of accounts payable and other accrued
liabilities.
Cash Used In Investing Activities
Our net cash used in investing activities totaled $6.2 million for the year ended December 31, 2016 compared to $52.0
million cash provided by investing activities for the year ended December 31, 2015. The $58.1 million change was primarily driven by
$55.1 million in proceeds received in relation to the condemnation of the operations and assets of Valencia in 2015. In addition,
capital expenditures increased $5.2 million to $8.6 million for the year ended December 31, 2016 compared to $3.4 million for the
year ended December 31, 2015. These capital expenditures for the year ended December 31, 2016 were partially offset by the $2.3
million in cash proceeds from the sale of Willow Valley.
For the year ended December 31, 2015, the Company’s net cash provided by investing activities totaled $52.0 million
compared to $1.4 million in net cash used in investing activities for the year ended December 31, 2014. The $53.4 million change was
primarily driven by the $55.2 million in proceeds received in relation to the condemnation of the operations and assets of Valencia and
$296,000 in proceeds from the sale of Loop 303 Contracts received during the year ended December 31, 2015. These increases were
partially offset by a $1.7 million increase in capital expenditures for the year ended December 31, 2015 compared to the year ended
December 31, 2014.
We continue to invest capital prudently in our existing, core service areas where we are able to deploy our Total Water
Management model and as service connections grow. This includes any required maintenance capital expenditures and the
construction of new water and wastewater treatment and delivery facilities. We expect capital expenditures to increase in 2017 as
compared to recent years as a result of our decision to accelerate certain capital expenditures within our capital improvement plan
related to the recently obtained Private Letter Ruling (see “–Recent Events–Private Letter Ruling”), which provides that water
reclamation facility improvements are similar or related in service or use, which capital improvements would defer a portion of the tax
gain realized from the condemnation of the operations and assets of Valencia. Our projected capital expenditures and other
investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.
Cash Used In Financing Activities
Our net cash provided by financing activities totaled $13.3 million for the year ended December 31, 2016, a $64.5 million
change as compared to the $51.3 million in cash used in financing activities for the year ended December 31, 2015. This change was
primarily driven by the refinancing of tax exempt bonds, wherein we repaid $106.7 million in tax exempt bonds with $115.0 million in
proceeds from our two series of senior secured notes, combined with the release of $8.8 million in bond reserves associated with the
refinancing. Additionally, we generated $5.5 million in net proceeds from our recently completed U.S. IPO. Proceeds received for the
year ended December 31, 2016 were partially offset by the $2.8 million payment to settle our Sonoran acquisition liability, combined
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with $5.0 million in dividends paid. Cash used in financing activities for the year ended December 31, 2015 was primarily driven by
$27.6 million in dividends paid and $21.7 million in loan repayments of which $21.3 million was associated with the retirement of the
MidFirst loan.
For the years ended December 31, 2015 and December 31, 2014, the Company’s net cash used in financing activities totaled
$51.3 million and $5.6 million, respectively. The $45.7 million increase in cash used in financing activities was principally driven by
$21.3 million in cash used to retire our term loan with MidFirst Bank in July 2015 combined with an increase of $24.2 million in the
amount of dividends paid during the year ended December 31, 2015 compared to the year ended December 31, 2014, of which $22.8
million of the increase is related to a special one-time cash dividend paid on August 12, 2015.
Senior Secured Notes
On June 24, 2016, we closed the Note Purchase Agreement entered into on May 20, 2016 and 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. Series
B carries a principal balance of $86.3 million and bears an interest rate of 4.58% over a 20-year term. Series B is interest only for the
first five years, with $1.9 million principal payments paid semiannually thereafter. The proceeds of the Senior Secured Notes were
primarily used to refinance the existing long-term tax exempt bonds, pursuant to an early redemption option at 103%, plus accrued
interest, as a result of the U.S. IPO.
Insurance Coverage
We carry 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. We are
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 our short-term and long-term financial condition and the results of operations and cash flows.
Critical Accounting Policies, Judgments, and Estimates
The application of critical accounting policies is particularly important to our financial condition and results of operations
and provides a framework for management to make significant estimates, assumptions, and other judgments. Additionally, our
financial condition, results of operations, and cash flow are impacted by the methods, assumptions, and estimates used in the
application of critical accounting policies. Although our management believes that these estimates, assumptions, and other judgments
are appropriate, they relate to matters that are inherently uncertain and that may change in subsequent periods. Accordingly, changes
in the estimates, assumptions, and other judgments applied to these accounting policies could have a significant impact on our
financial condition and results of operations as reflected in our financial statements.
Income Taxes
Estimation of income taxes includes an evaluation of the recoverability of deferred tax assets based on an assessment of the
Company’s ability to utilize the underlying future tax deductions against future taxable income before they expire. The Company’s
assessment is based upon existing tax laws and estimates of future taxable income. If the assessment of the Company’s ability to
utilize the underlying future tax deductions changes, the Company would be required to recognize fewer of the tax deductions as
assets, which would increase the income tax expense in the period in which the determination is made.
Recent Accounting Pronouncements
A discussion of recently adopted accounting pronouncements is included footnote 1 to the consolidated financial statements
contained in Part II, Item 8 of this annual report on Form 10-K and is incorporated herein by reference.
Jumpstart Our Business Startups Act (the "JOBS Act") Accounting Election and Other Matters
We are an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can
elect to delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as
those standards apply to private companies. We chose to take advantage of this extended transition provision. See “Risk Factors—
Risks Related to Ownership of Our Common Stock—Our election to take advantage of the JOBS Act extended accounting transition
period may make our financial statements more difficult to compare to other public companies” and “Risk Factors—Risks Related to
the Ownership of Our Common Stock—Taking advantage of the reduced disclosure requirements applicable to emerging growth
companies may make our common stock less attractive to investors” included in Part I, Item 1A of this Form 10-K, for additional
information.
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The Company historically accounted for stock appreciation rights (“SARs”) as liability compensatory awards under ASC
710, Compensation – General, valued using the intrinsic value method, as permitted by ASC 718, Compensation – Stock
Compensation (“ASC 718”), for nonpublic entities. Upon becoming a public company, as defined in ASC 718, in the first quarter of
2016, the Company was required to change its methodology for valuing the SARs. While the SARs will continue to be remeasured at
each quarterly reporting date, the SARs are required to be accounted for prospectively at fair value using a fair value pricing model,
such as Black-Scholes. The Company recorded the impact of the change in valuation methods as a cumulative effect of a change in
accounting principle, as permitted by ASC 250, Accounting Changes and Error Corrections. The effect of the change increased the
SAR liability by $103,000 which was the difference in compensation cost measured using the intrinsic value method and the fair
value method. An offsetting change to accumulated deficit in the consolidated balance sheet was recorded with the revaluation, net of
$38,000 in taxes. Any future changes in fair value will be recorded as compensation expense in the consolidated statement of
operations.
Off Balance Sheet Arrangements
As of December 31, 2016 and December 31, 2015, we did not have any off-balance sheet arrangements.
Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
For the year ended December 31, 2016, the Company was exposed to market risk associated with changes in commodity
prices, equity prices, and interest rates. With the closing of the Note Purchase Agreement entered into on May 20, 2016, the Company
no longer carries debt at a variable rate.
Other than interest-related risks, the Company believes the risks associated with price increases for chemicals, electricity, and
other commodities are mitigated by the Company’s ability over the long-term to recover its costs through rate increases to its
customers, though such recovery is subject to regulatory lag.
-51-
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the Years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Cash Flows for the Years ended December 31, 2016, 2015, and 2014
Notes to Consolidated Financial Statements
54
55
56
57
58
-52-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Global Water Resources, Inc.
Phoenix, AZ
We have audited the accompanying consolidated balance sheets of Global Water Resources, Inc. and subsidiaries (the "Company") as
of December 31, 2016 and 2015, and the related consolidated statements of operations, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Global Water
Resources, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United
States of America.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 10, 2017
-53-
ASSETS
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment
Less accumulated depreciation
Net property, plant and equipment
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable — net
Due from affiliates
Accrued revenue
Prepaid expenses and other current assets
Assets held for sale
Total current assets
OTHER ASSETS:
Intangible assets — net
Regulatory asset
Deposits
Bond service fund and other restricted cash
Equity method investment
Total other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued expenses
Deferred revenue
Customer and meter deposits
Long-term debt and capital leases — current portion
Liabilities relating to assets held for sale
Total current liabilities
NONCURRENT LIABILITIES:
Long-term debt and capital leases
Deferred regulatory gain - ICFA
Regulatory liability
Advances in aid of construction
Contributions in aid of construction — net
Deferred income tax liabilities, net
Acquisition liability
Other noncurrent liabilities
Total noncurrent liabilities
Total liabilities
Commitments and contingencies (see Note 13)
SHAREHOLDERS' EQUITY:
GLOBAL WATER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31, 2016
December 31, 2015
$
273,366 $
(72,877)
200,489
$
$
258,244
(64,092)
194,152
11,513
1,132
306
1,745
1,179
2,840
18,715
12,772
227
13
9,042
821
22,875
235,742
1,322
5,137
11
1,706
1,994
493
10,663
102,417
19,730
7,859
61,480
4,426
4,164
4,688
252
205,016
215,679
2
21,659
(1,598)
20,063
235,742
20,498
1,471
333
1,619
819
—
24,740
12,772
110
—
228
480
13,590
238,819 $
1,791 $
7,602
1
1,482
25
—
10,901
114,317
19,740
7,859
61,996
4,585
2,383
934
913
212,727
223,628
196
19,510
(4,515)
15,191
238,819 $
Common stock, $0.01 par value, 60,000,000 shares authorized; 19,581,266 and 18,241,746 shares
issued as of December 31, 2016 and December 31, 2015, respectively
Paid in capital
Accumulated deficit
Total shareholders' equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
See accompanying notes to the consolidated financial statements
-54-
GLOBAL WATER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
REVENUES:
Water services
Wastewater and recycled water services
Unregulated revenues
Total revenues
OPERATING EXPENSES:
Operations and maintenance
Operations and maintenance - related party
General and administrative
Gain on regulatory order
Depreciation
Total operating expenses
OPERATING INCOME
OTHER INCOME (EXPENSE):
Interest income
Interest expense
Gain on condemnation of Valencia
Other
Other - related party
Total other income (expense)
INCOME (LOSS) BEFORE INCOME TAXES
INCOME TAX (EXPENSE) BENEFIT
NET INCOME (LOSS)
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Dividends declared per common share
2016
For the Year Ended December 31,
2015
2014
$
13,978
15,740
81
29,799
$
16,320
15,020
616
31,956
6,188
1,853
10,209
—
6,279
24,529
5,270
18
(11,866)
—
2,222
15
(9,611)
(4,341)
1,489
(2,852)
(0.15)
(0.15)
0.26
$
$
$
$
7,080
2,179
7,957
—
8,213
25,429
6,527
11
(8,299)
42,983
767
(3)
35,459
41,986
(20,623)
21,363
1.17
1.17
1.43
$
$
$
$
18,076
14,112
371
32,559
8,020
2,398
8,809
(50,664)
9,205
(22,232)
54,791
79
(9,512)
—
2,162
416
(6,855)
47,936
16,995
64,931
3.54
3.54
0.20
$
$
$
$
$
Weighted average number of common shares used in the
determination of:
Basic
Diluted
19,146,534
19,146,534
18,297,504
18,297,504
18,329,441
18,329,441
See accompanying notes to the consolidated financial statements
-55-
GLOBAL WATER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share and per share amounts)
BALANCE – December 31, 2013
Dividend declared $0.20 per share
Stock-based compensation
Deemed distribution to related party
Net income
BALANCE – December 31, 2014
Dividend declared $1.43 per share
Deemed distribution to related party
Share repurchase
Net income
BALANCE – December 31, 2015
Net proceeds from sale of stock
Dividend declared $0.26 per share
Merger of GWRC
Retirement of treasury shares
Deemed distribution to related party
Stock compensation
Cumulative effect of change in accounting
principle
Net loss
BALANCE – December 31, 2016
Shares
18,239,441 $
—
—
—
—
18,239,441 $
—
90,007
(87,702)
—
18,241,746 $
1,339,520
—
—
—
—
—
Common
Stock
Treasury
Stock
Paid-in
Capital
$
$
2
—
—
—
—
2
—
—
—
—
2
281
—
—
(87)
—
—
$
— $
—
—
—
—
— $
—
—
—
—
— $
—
—
(87)
87
—
—
Accumulated
Deficit
(87,892) $
—
—
—
64,931
(22,961) $
—
—
—
21,363
(1,598) $
—
—
—
—
—
—
Total Equity
(32,842)
(3,904)
(8)
(497)
64,931
27,680
(27,607)
(909)
(464)
21,363
20,063
5,539
(5,042)
(2,452)
—
(648)
648
55,048 $
(3,904)
(8)
(497)
—
50,639 $
(27,607)
(909)
(464)
—
21,659 $
5,258
(5,042)
(2,365)
—
(648)
648
—
—
19,581,266 $
—
—
196
$
—
—
— $
—
—
19,510 $
(65)
(2,852)
(4,515) $
(65)
(2,852)
15,191
See accompanying notes to the consolidated financial statements
-56-
GLOBAL WATER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
2016
For the Year Ended December 31,
2015
2014
$
(2,852) $
21,363
$
64,931
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Deferred compensation
Depreciation
Write-off of debt issuance costs
Amortization of deferred debt issuance costs and discounts
Gain on condemnation of Valencia
Gain on sale of Loop 303 contracts
Loss on sale of Willow Valley
(Gain) loss on equity investment
Gains on regulatory order
Other (gains) and losses
Provision for doubtful accounts receivable
Deferred income tax benefit (expense)
Changes in assets and liabilities:
Accounts receivables
Other current assets
Accounts payable and other current liabilities
Other noncurrent assets
Other noncurrent liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Proceeds from the condemnation of Valencia
Proceeds from the sale of Willow Valley
Withdrawals (deposits) of restricted cash, net
Cash received from the sale of Loop 303 Contracts
Cash advance to related party
Repayment of related party cash advance
Other cash flows from investing activities
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan borrowings
Repayments of bond debt
Deposits in bond service fund
Proceeds withdrawn from bond service fund
Proceeds from sale of stock
Payments of offering costs for sale of stock
Payment of Sonoran acquisition liability
Loan repayments
Principal payments under capital lease
Debt issuance costs paid
Advances in aid of construction
Dividends paid
Share repurchase
Refunds of advances for construction
2,776
6,279
2,165
428
—
—
54
340
—
(978)
70
(1,610)
(409)
(415)
(4,087)
117
17
1,895
(8,588)
—
2,254
154
—
—
—
13
(6,167)
115,000
(106,695)
—
8,825
8,372
(2,823)
(2,800)
—
(378)
(760)
346
(5,036)
—
(794)
13,257
8,985
11,513
20,498 $
798
8,213
282
204
(42,983)
(296)
176
329
—
—
69
20,561
125
(2,241)
(2,502)
147
—
4,245
(3,355)
55,107
—
(70)
296
(12,745)
12,745
(6)
51,972
—
(1,775)
—
1,001
—
—
—
(21,719)
(99)
—
357
(27,607)
(464)
(975)
(51,281)
4,936
6,577
11,513
$
1,361
9,205
696
334
—
—
—
(144)
(50,664)
(50)
83
(16,995)
26
0
(227)
34
3,056
11,646
(1,655)
—
—
198
—
—
—
26
(1,431)
21,800
(12,347)
(1,000)
626
—
—
—
(10,390)
(105)
(346)
365
(3,454)
—
(747)
(5,598)
4,617
1,960
6,577
Net cash provided by (used in) financing activities
INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS — Beginning of period
CASH AND CASH EQUIVALENTS – End of period
$
See accompanying notes to the consolidated financial statements
-57-
GLOBAL WATER RESOURCES, INC.
Notes to the Consolidated Financial Statements
1.
DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, CORPORATE TRANSACTIONS, SIGNIFICANT
ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS
Description of Business
Global Water Resources, Inc. (the “Company” or “GWRI”) is a water resource management company that owns, operates,
and manages water, wastewater, and recycled water utilities in strategically located communities, principally in metropolitan Phoenix,
Arizona. GWRI seeks to deploy an integrated approach, which the Company refers to as “Total Water Management,” a term used to
mean managing the entire water cycle by owning and operating the water, wastewater, and recycled water utilities within the same
geographic areas in order to both conserve water and maximize its total economic and social value. GWRI uses Total Water
Management to promote sustainable communities in areas where the expectation is for growth to outpace the existing potable water
supply. The Company’s model focuses on the broad issues of water supply and scarcity and applies principles of water conservation
through water reclamation and reuse. The basic premise is that the world’s water supply is limited and yet can be stretched
significantly through effective planning, the use of recycled water, and by providing individuals and communities resources that
promote wise water usage practices.
GWRI currently owns eight water and wastewater utilities in strategically targeted communities in metropolitan Phoenix.
GWRI currently serves more than 50,000 people in approximately 19,000 homes within our 328 square miles of certificated service
areas, which are serviced by four wholly-owned regulated operating subsidiaries as of December 31, 2016. Approximately 98.9% of
the Company’s active service connections are customers of our Santa Cruz and Palo Verde utilities, which are located within a single
service area. GWRI has grown significantly since its formation in 2003, with total revenues increasing from $4.9 million in 2004 to
$29.8 million in 2016, and total service connections increasing from 8,113 as of December 31, 2004 to 38,026 as of December 31,
2016, with regionally planned service areas large enough to serve approximately two million service connections.
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) and include the accounts of GWRI and its subsidiaries. All significant
intercompany account balances and transactions have been eliminated in consolidation.
The preparation of financial statements in accordance with the rules and regulations of the 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. The U.S.
dollar is the Company’s reporting currency and functional currency.
As a company with less than $1.0 billion in revenue during our last fiscal year, GWRI qualifies as an “emerging growth
company”, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), under the rules and regulations of the
SEC. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise
applicable generally to public companies. GWRI has elected to take advantage of these provisions for up to five years or such earlier
time that the Company is no longer an emerging growth company. The Company has elected to take advantage of some of the reduced
disclosure obligations regarding financial statements. Also, as an emerging growth company, the Company can elect to delay adopting
new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to
private companies. GWRI has chosen to take advantage of this extended accounting transition provision.
Certain prior period information has been adjusted to conform to the current year presentation to reflect a 100.68 to 1.00
stock split effectuated on April 28, 2016. All share and per share amounts presented in these financial statements have been
retrospectively adjusted to reflect the impact of the stock split.
Corporate Transactions
Sale of certain MXA and WMA contracts
In September 2013, the Company sold its Wastewater Facilities Main Extension Agreements (“MXA”) and Offsite Water
Management Agreements (“WMA") for the contemplated Loop 303 service area along with their related rights and obligations to
EPCOR Water Arizona Inc. (“EPCOR”) (collectively the “Transfer of Project Agreement”, or “Loop 303 Contracts”). Pursuant to the
Transfer of Project Agreement, EPCOR agreed to pay GWRI approximately $4.1 million over a multi-year period. As part of the
consideration, GWRI agreed to complete certain engineering work required in the WMAs, which work had been completed prior to
-58-
January 1, 2015. As the engineering work has been completed, the Company effectively has no further obligations under the WMAs,
the MXAs, or the Transfer of Project Agreement. Prior to January 1, 2015, the Company had received $2.8 million of proceeds and
recognized income of approximately $3.3 million within other income (expense) in the statement of operations related to the gain on
sale of these agreements and the proceeds received prior to January 1, 2015 for engineering work required in the WMAs. The
Company received additional proceeds of approximately $296,000 in April 2015 and recognized those amounts as income at that time.
Receipt of the remaining $1.0 million of proceeds will be recorded as additional income over time as certain milestones are met
between EPCOR and the developers/landowners.
Stipulated condemnation of Valencia
On March 17, 2015, the Company reached a settlement agreement for a stipulated condemnation to sell the utility operating
as Valencia Water Company, Inc. (“Valencia”) to the City of Buckeye (“Buckeye”), which was approved by Buckeye's City Council
on March 19, 2015 and by the Maricopa County Superior Court on June 9, 2015. On July 14, 2015, the Company closed the stipulated
condemnation of the operations and assets of Valencia with Buckeye. Terms of the condemnation were agreed upon through a
settlement agreement in March 2015, pursuant to which Buckeye acquired the operations and assets of Valencia and assumed
operations of the utility upon close. Buckeye paid the Company $55.0 million at close, plus an additional $108,000 in working capital
adjustments. As a result of the transaction, the Company recorded a gain of $43.0 million before tax liability of $20.2 million during
the third quarter of 2015. Buckeye will also pay the Company a growth premium equal to $3,000 for each new water meter installed
within Valencia's prior service areas for a 20-year period ending December 31, 2034, subject to a maximum payout of $45.0 million
over the term of the agreement. For the year ended December 31, 2016, the Company recognized $1.2 million in other income within
the consolidated financial statements related to the growth premium.
In consideration of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 205-
20-45-1, Presentation of Financial Statements – Discontinued Operations, the condemnation of Valencia transaction did not meet the
criteria of discontinued operations. As the transaction did not change the services provided or the manner in which the Company
operates, it was determined the transaction did not represent a strategic shift and therefore did not qualify for presentation as a
discontinued operation.
Sale of Willow Valley Water Company, Inc.
On March 23, 2015, the Company reached an agreement to sell the operations and assets of Willow Valley Water Company,
Inc. (“Willow Valley”) to EPCOR. EPCOR purchased the operations, assets, and rights used by Willow Valley to operate the utility
system for $2.3 million. The transaction was approved by the Arizona Corporation Commission (“ACC”) on March 10, 2016, and the
transaction closed on May 9, 2016.
Per ASC 360-10-45-9, Impairment and Disposal of Long-Lived Assets, the assets and liabilities in the sale of Willow Valley
were determined to meet the criteria to be classified as held for sale beginning with our March 31, 2015 consolidated financial
statements. The criteria utilized to make this determination were: (i) management had the authority and had entered into an agreement
to sell the assets of Willow Valley; (ii) the assets and liabilities were available for immediate sale in their present condition; (iii) the
approval from the ACC was probable within the next year; (iv) a reasonable price had been agreed upon; and (v) it was unlikely that
significant changes to the agreement would occur prior to approval. In consideration of ASC 205-20-45-1, the Willow Valley
transaction did not meet the criteria for discontinued operations. As the transaction did not change the services provided nor the
manner in which the Company operates, it was determined the transaction did not represent a strategic shift and therefore did not
qualify for presentation as a discontinued operation.
-59-
Additionally, as the carrying value of the assets and liabilities of Willow Valley were greater than the agreed upon sales
price, a loss of $176,000 was recorded in other expense during the first quarter of 2015, when the assets and liabilities were classified
as held for sale, to adjust the carrying value of the assets to the agreed upon fair value less cost to sell. An additional loss of $54,000
was recognized upon close of the sale of Willow Valley in the second quarter of 2016. The assets and liabilities classified as held for
sale as of December 31, 2015 were as follows:
Property, plant and equipment
Less Accumulated Depreciation
Net property, plant and equipment
Goodwill
Total assets
Advances in aid of construction
Contributions in aid of construction — net
Total liabilities
December 31, 2015
Willow Valley
(in thousands)
5,223
(2,606)
2,617
223
2,840
70
423
493
$
$
$
$
Merger of GWR Global Water Resources Corp. (“GWRC”)
On May 3, 2016, the Company completed the merger of GWRC into GWRI. At the time of the merger, GWRC ceased to
exist as a British Columbia corporation and the Company continued as the surviving entity of the merger. See Note 7 – “Transactions
with Related Parties”. In conjunction with the merger of GWRC into GWRI, the Company recorded $731,000 in accounts payable and
$353,000 in deferred compensation on the books of GWRI that were previously recorded at GWRC. In addition to these liabilities, the
Company also recorded an approximate $1.4 million tax liability associated with the transfer of GWRC from Canada to the United
States. A corresponding reduction in paid-in capital was recorded with the merging of these liabilities into GWRI.
Initial Public Offering
On April 27, 2016, the SEC declared effective the registration statement relating to the public offering of our common stock.
On May 3, 2016, the Company completed the initial public offering of 1,164,800 shares of common stock at $6.25 per share for gross
proceeds of approximately $7.3 million (the “U.S. IPO”). The Company granted the underwriter the option to purchase up to an
additional 174,720 shares of common stock at the same price, which was exercised by the underwriter on May 11, 2016, for additional
gross proceeds of $1.1 million. Our shares of common stock are listed on the NASDAQ Global Market and the Toronto Stock
Exchange under the symbols “GWRS” and “GWR”, respectively.
Share Retirement
In December 2016 the Company retired all outstanding treasury shares obtained as part of the merger of GWRC into the
Company.
Sonoran Acquisition Liability
On March 17, 2016, the Company entered into an agreement with Sonoran Utility Services, LLC (“Sonoran”) to amend
certain provisions of the purchase and sale agreement related to the acquisition of Sonoran’s assets on June 15, 2005. The amended
agreement allowed the Company to reduce its $3.8 million acquisition liability due to Sonoran by approximately $1.0 million to $2.8
million, if the Company settled the amount due within ten days of the closing of the Note Purchase Agreement. The Note Purchase
Agreement closed on June 24, 2016 and the Sonoran liability was subsequently settled in June 2016. Upon settlement of the Sonoran
acquisition liability, the Company recorded a gain of $954,000 in other income for the year ended December 31, 2016.
Private Letter Ruling
On June 2, 2016, the Company received a Private Letter Ruling from the Internal Revenue Service that, for purposes of
deferring the approximately $19.4 million gain realized from the condemnation of the operations and assets of Valencia, determined
that the assets converted upon the condemnation of such assets could be replaced through certain reclamation facility improvements
contemplated by the Company under Internal Revenue Code §1033 as property similar or related in service or use. In June 2016, the
Company converted all operating subsidiaries from corporations to limited liability companies to take full advantage of the benefits of
such ruling.
-60-
Pursuant to Internal Revenue Code §1033, the Company may defer the gain on condemnation through the end of the year
2017. As such, the Company has identified certain currently planned investments within our capital improvement plan, which we plan
to accelerate. As a result, we expect capital expenditures to increase in 2016 and 2017 as compared to recent years, with corresponding
reductions to occur in 2018, 2019, and beyond. In addition to the utilization of capital improvements to defer the gain on the
condemnation of the operations and assets of Valencia, the Company may also acquire other like-kind property such as water and
wastewater utilities under Internal Revenue Code §1033 to similarly defer the gain. The acquisition of like-kind property is allowable
for the three years subsequent to the year in which the gain was realized, with the ability to apply to the IRS for one-year extensions.
Significant Accounting Policies
Regulation
Our regulated utilities and certain other balances are subject to regulation by the ACC and are therefore subject to Accounting
Standards Codification Topic 980, Regulated Operations (“ASC Topic 980”) (See Note 2 – “Regulatory Decision and Related
Accounting and Policy Changes”).
Property, plant, and equipment
Property, plant, and equipment is stated at cost less accumulated depreciation provided on a straight-line basis (See Note 3 –
“Property, Plant, and Equipment”).
Depreciation rates for asset classes of utility property, plant, and equipment are established by the ACC. The cost of
additions, including betterments and replacements of units of utility fixed assets are charged to utility property, plant, and equipment.
When units of utility property are replaced, renewed, or retired, their cost plus removal or disposal costs, less salvage proceeds, is
charged to accumulated depreciation.
For non-utility property, plant, and equipment, depreciation is calculated by the straight-line method over the estimated
useful lives of depreciable assets. Cost and accumulated depreciation for non-utility property, plant, and equipment retired or disposed
of are removed from the accounts and any resulting gain or loss is included in earnings.
In addition to third party costs, direct personnel costs and indirect construction overhead costs may be capitalized. Interest
incurred during the construction period is also capitalized as a component of the cost of the constructed assets, which represents the
cost of debt associated with construction activity. Expenditures for maintenance and repairs are charged to expense.
Revenue Recognition—Water Services
Water services revenues are recorded when service is rendered or water is delivered to customers. However, in addition to the
monthly basic service charge, the determination and billing of water sales to individual customers is based on the reading of their
meters, which occurs on a systematic basis throughout the month. At the end of each reporting period, amounts of water delivered to
customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is recorded as accrued
revenue.
Water connection fees are the fees associated with the application process to set up a customer to receive utility service on an
existing water meter. These fees are approved by the ACC through the regulatory process and are set based on the costs incurred to
establish services including the application process, billing setup, initial meter reading, and service transfer. Because the amounts
charged for water connection fees are set by our regulator and not negotiated in conjunction with the pricing of ongoing water service,
the connection fees represent the culmination of a separate earnings process and are recognized when the service is provided. For the
years ended December 31, 2016, December 31, 2015, and December 31, 2014, the Company recognized $236,000, $276,000, and
$366,000 in connection fees, respectively.
Meter installation fees are the fees charged to developers or builders associated with installing new water meters. Certain fees
for meters are regulated by the ACC, and are refundable to the end customer over a period of time. Refundable meter installation fees
are recorded as a liability upon receipt. Other certain meter fees are negotiated directly with developers or builders and are not subject
to ACC regulation and represent the culmination of a separate earnings process. These fees are recognized as revenue when the
service is rendered, or when a water meter is installed.
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Revenue Recognition—Wastewater and Recycled Water Services
Wastewater service revenues are generally recognized when service is rendered. Wastewater services are billed at a fixed
monthly amount per connection, and recycled water services are billed monthly based on volumetric fees.
Revenue Recognition—Unregulated Revenues
Unregulated Revenues represent those revenues that are not subject to the ratemaking process of the ACC. Unregulated
revenues are limited to rental revenue and imputed revenues resulting from certain infrastructure coordination and financing
agreement arrangements.
Allowance for Doubtful Accounts
Provisions are made for doubtful accounts due to the inherent uncertainty around the collectability of accounts receivable.
The allowance for doubtful accounts is recorded as bad debt expense, and is classified as general and administrative expense. The
allowance for doubtful accounts is determined considering the age of the receivable balance, type of customer (e.g., residential or
commercial), payment history, as well as specific identification of any known or expected collectability issues (see Note 4 –
“Accounts Receivable”).
Infrastructure coordination and financing fees
Infrastructure coordination and financing agreements (“ICFAs”) are agreements with developers and homebuilders whereby
GWRI, which owns the operating utilities, 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.
ICFA revenue is recognized when the following conditions are met:
the fee is fixed and determinable;
the cash received is nonrefundable;
capacity currently exists to serve the specific lots; and
there are no additional significant performance obligations.
As these arrangements are with developers and not with the end water or wastewater customer, revenue recognition coincides
with the completion of our performance obligations under the agreement with the developer and our ability to provide fitted capacity
for water and wastewater service. Payments received under the agreements are recorded as deferred revenue until the point at which
all of the conditions described above are met. Historically ICFAs have been accounted for as revenue pursuant to the obligations being
met as outlined above, or as contributions in aid of construction (“CIAC”) when funds were received. Pursuant to Rate Decision No.
74364, as funding is received 70% of ICFAs are now recorded as a hook-up fee (“HUF”) liability until the HUF liability is fully
funded, with the remaining amount recorded as revenue once all components of revenue recognition are met (See Note 2 –
“Regulatory Decision and Related Accounting and Policy Changes”).
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments in debt instruments with an original maturity of three months
or less.
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Restricted Cash
Restricted cash represents cash deposited as a debt service reserve for certain loans and bonds. The following table
summarizes the restricted cash balance as of December 31, 2016 and December 31, 2015 (in thousands):
Bond reserve
HUF funds
Certificate of deposits
Income Taxes
December 31,
2016
December 31,
2015
$
$
— $
10
218
228 $
8,824
38
180
9,042
The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The Company’s valuation allowance totaled
$8,500 as of December 31, 2016 and December 31, 2015 (see Note 10 – “Income Taxes”).
We evaluate uncertain tax positions using a two-step approach. Recognition (step one) occurs when we conclude that a tax
position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two)
determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was
previously recognized would occur when we subsequently determine that a tax position no longer meets the more-likely-than-not
threshold of being sustained. The use of a valuation allowance as a substitute for derecognition of tax positions is prohibited, and to
the extent that uncertain tax positions exist, we provide expanded disclosures.
Basic and Diluted Earnings per Common Share
As of December 31, 2016, the Company had 368,395 options outstanding to acquire an equivalent number of shares of
GWRI common stock. As of December 31, 2016, all options were in the money, and had common share equivalents of 19,467, which
were not included within the calculation of diluted earnings per share as to do so would be antidilutive in periods of net loss. As of
December 31, 2015 and December 31, 2014, the Company had 43,395 options outstanding, which options were out of the money in
each respective period, and therefore the Company did not have any common share equivalents to be considered for purposes of
calculating earnings per share. See Note 11 – “Deferred Compensation Awards”. The changes in weighted average common shares for
the year ended December 31, 2015 relate to a share repurchase program initiated in May 2015 and completed in December 2015.
Intangible Assets
Intangible assets not subject to amortization consist of certain permits expected to be renewable indefinitely, water rights and
certain service areas acquired in transactions which did not meet the definition of business combinations for accounting purposes, and
are considered to have indefinite lives. Intangible assets with indefinite lives are not amortized but are tested for impairment annually,
or more often if certain circumstances indicate a possible impairment may exist. Amortized intangible assets consist primarily of
acquired ICFA contract rights.
Pursuant to Rate Decision No. 71878 issued by the ACC on September 15, 2010 for the February 2009 filed rate cases for
Santa Cruz, Palo Verde, Valencia, Greater Buckeye, Greater Tonopah, and Willow Valley (the “2010 Regulatory Rate Decision”),
ICFA funds received were accounted for as CIAC. The Company established a regulatory liability against the Company’s intangible
assets balance to offset the value of the intangible assets related to the expected receipt of ICFA fees in the future. As of January 1,
2014 the Company had a regulatory liability balance of $11.4 million. However, in 2014, in conjunction with Rate Decision No.
74364, the ACC determined that ICFA funds were no longer to be recorded as CIAC, but rather 70% of funds received should be
recorded as HUF until the HUF liability is fully funded, with the remaining amount to be deferred and recognized according to the
Company’s ICFA revenue recognition policy (see ‘Note 2 – Regulatory Decision and Related Accounting and Policy
Changes”). Accordingly, in 2014 30%, or $3.4 million, of the regulatory liability was reversed in connection with the recognition of
the rate decision.
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Debt Issuance Costs
In connection with the issuance of some of our long-term debt, we have incurred legal and other costs that we believe are
directly attributable to realizing the proceeds of the debt issued. These costs are netted against long-term debt and amortized as interest
expense using the effective interest method over the term of the respective debt. Amortization of debt issuance costs and discounts
totaled $2.6 million for the year ended December 31, 2016, of which $2.2 million was for the write off of debt issuance costs and
$428,000 was for the amortization for the year ended December 31, 2016. Amortization of debt issuance costs and discounts totaled
$486,000 for the year ended December 31, 2015, of which $282,000 was for the write off of debt issuance costs related to the MidFirst
loan which was retired in July 2015, and $204,000 was for the amortization for the year ended December 31, 2015. Amortization of
debt issuance costs and discounts totaled $1.0 million for the year ended December 31, 2014, of which $696,000 was for the write off
of debt issuance costs and $327,000 was for the amortization for the year ended December 31, 2014. The 2014 write off of debt
issuance costs was related to the Series 2012A and 2012B bonds and the Regions Term loan, which were retired in 2014.
Impairment of Long-Lived Assets
Management evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. If an indicator of possible impairment exists, an undiscounted
cash flow analysis would be prepared to determine whether there is an actual impairment. Measurement of the impairment loss is
based on the fair value of the asset. Generally, fair value will be determined using appraisals or valuation techniques such as the
present value of expected future cash flows.
Advances and Contributions in Aid of Construction
The Company has various agreements with developers and builders, whereby funds, water line extensions, or wastewater line
extensions are provided to us by the developers and are considered refundable advances for construction. These advances in aid of
construction (“AIAC”) are non-interest-bearing and are subject to refund to the developers through annual payments that are
computed as a percentage of the total annual gross revenue earned from customers connected to utility services constructed under the
agreement over a specified period. Upon the expiration of the agreements’ refunding period, the remaining balance of the advance
becomes nonrefundable and at that time is considered CIAC. CIAC are amortized as a reduction of depreciation expense over the
estimated remaining life of the related utility plant. For rate-making purposes, utility plant funded by advances or contributions in aid
of construction are excluded from rate base. AIAC balances of $311,000 and zero were transferred to CIAC for the years ended
December 31, 2016 and 2015, respectively.
Fair Value of Financial Instruments
The carrying values of cash equivalents, trade receivables, and accounts payable approximate fair value due to the short-term
maturities of these instruments. See Note 9 – “Debt” for information as to the fair value of our long-term debt. Our refundable AIAC
have a carrying value of $62.0 million and $61.5 million as of December 31, 2016 and December 31, 2015, respectively. Portions of
these non-interest-bearing instruments are payable annually through 2032 and amounts not paid by the contract expiration dates
become nonrefundable. Their relative fair values cannot be accurately estimated because future refund payments depend on several
variables, including new customer connections, customer consumption levels, and future rate increases. However, the fair value of
these amounts would be less than their carrying value due to the non-interest-bearing feature.
Asset Retirement Obligations
Liabilities for asset retirement obligations are typically recorded at fair value in the period in which they are incurred. When
the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon
settlement. Our legal obligations for retirement reflect principally the retirement of wastewater treatment facilities, which are required
to be closed in accordance with the Clean Closure Requirements of the Arizona Department of Environmental Quality (ADEQ). The
Clean Closure Requirements of ADEQ for wastewater facilities are driven by a need to protect the environment from inadvertent
contamination associated with the decommissioning of these systems. As such, our regulated subsidiaries incur asset retirement
obligations. As of December 31, 2016 and December 31, 2015, the Company held $218,000 and $180,000 in certificates of deposit,
respectively, or letters of credit to benefit ADEQ for such anticipated closure costs. Water systems, unlike wastewater systems, do not
require Aquifer Protection Permits or the associated Clean Closure Requirement obligation.
Amounts recorded for asset retirement obligations are subject to various assumptions and determinations, such as
determining whether a legal obligation exists to remove assets; estimating the fair value of the costs of removal; estimating when final
removal will occur; and determining the credit-adjusted, risk-free interest rates to be utilized on discounting future liabilities. Changes
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that may arise over time with regard to these assumptions will change amounts recorded in the future. Estimating the fair value of the
costs of removal were determined based on third-party costs.
Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing operating
performance. In consideration of ASC 280—Segment Reporting the Company notes it is not organized around specific products and
services, geographic regions or regulatory environments. The Company currently operates in one geographic region within the State of
Arizona, wherein each operating utility operates within the same regulatory environment.
While the Company reports its revenue, disaggregated by service type, on the face of its Statements of Operations, 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 we note that the
CODM uses consolidated financial information to evaluate the Company’s performance, which is the same basis on which he
communicates the Company’s results and performance to the Board of Directors. It is upon this consolidated basis from which he
bases all significant decisions regarding the allocation of the Company’s resources on a consolidated level. Based on the information
described above and in accordance with the applicable literature, management has concluded that the Company is currently organized
and operated as one operating and reportable segment.
Change in Accounting Principle
The Company historically accounted for stock appreciation rights (“SARs”) as liability compensatory awards under ASC
710, Compensation – General, valued using the intrinsic value method, as permitted by ASC 718, Compensation – Stock
Compensation (“ASC 718”), for nonpublic entities. Upon becoming a public company, as defined in ASC 718, in the first quarter of
2016, the Company was required to change its methodology for valuing the SARs. While the SARs will continue to be remeasured at
each quarterly reporting date, the SARs are required to be accounted for prospectively at fair value using a fair value pricing model,
such as Black-Scholes. The Company recorded the impact of the change in valuation methods as a cumulative effect of a change in
accounting principle, as permitted by ASC 250, Accounting Changes and Error Corrections. The effect of the change increased the
SAR liability by $103,000 which was the difference in compensation cost measured using the intrinsic value method and the fair value
method. An offsetting change to accumulated deficit in the consolidated balance sheet was recorded with the revaluation, net of
$38,000 in taxes. Any future changes in fair value will be recorded as compensation expense in the consolidated statement of
operations.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers
(“ASU 2014-09”), which completes the joint effort between the FASB and International Accounting Standards Board to converge the
recognition of revenue between the two boards. The new standard affects any entity using U.S. GAAP that either enters into contracts
with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets not included within other
FASB standards. The guiding principal of the new standard is that an entity should recognize revenue in an amount that reflects the
consideration to which an entity expects to be entitled for the delivery of goods and services. ASU 2014-09 may be adopted using
either of two acceptable methods: (i) retrospective adoption to each prior period presented with the option to elect certain practical
expedients; or (ii) adoption with the cumulative effect recognized at the date of initial application and providing certain disclosures.
To assess at which time revenue should be recognized, an entity should use the following steps: (i) identify the contract(s) with a
customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction
price to the performance obligations in the contract; and (v) recognize revenue when, or as, the entity satisfies a performance
obligation. For public business entities, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017,
including interim periods within the reporting period. For private companies, ASU 2014-09 is effective for annual reporting periods
beginning after December 15, 2018 and interim reporting periods beginning after December 15, 2019. Earlier application is allowed in
certain circumstances. The Company does not believe this update will have an effect on the Company’s regulated revenue. However,
the Company is evaluating the effect of the new standard on the accounting for CIAC, which may change if CIAC is determined to be
revenue from customers.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients (“ASU 2016-12”), to address narrow-scope improvements to the guidance on collectability,
noncash consideration, and completed contracts at transition. The amendment also provides a practical expedient for contract
modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected
from customers and are expected to reduce the judgment necessary to comply with Topic 606. For public business entities, ASU 2016-
12 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within the reporting period.
For private companies, ASU 2016-12 is effective for annual reporting periods beginning after December 15, 2018 and interim
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reporting periods beginning after December 15, 2019. Earlier application is allowed in certain circumstances. The Company is
currently assessing the impact that this guidance may have on its consolidated financial statements, but does not believe it will have a
material impact on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest: Simplifying the Presentation of Debt
Issuance Costs (“ASU 2015-03”), which requires debt issuance costs be presented in the balance sheet as a direct deduction from the
carrying amount of the associated debt liability, consistent with the accounting of debt discounts. The Company’s adoption of this
guidance on January 1, 2016 resulted in the reclassification of the unamortized debt issuance costs of $737,000 and $2.2 million from
debt issuance costs to a reduction in long-term debt as of December 31, 2016 and December 31, 2015, respectively.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees
record a right-of-use asset and corresponding lease obligation for lease arrangements with a term of greater than twelve months. ASU
2016-02 requires additional disclosures about leasing arrangements and requires the use of the modified retrospective method, which
will require adjustment to all comparative periods presented in the consolidated financial statements. This guidance will be effective
for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with
early adoption permitted. For all other entities, the guidance is effective for annual periods beginning after December 31, 2019, and
interim periods within fiscal years beginning after December 15, 2020. The Company does not expect this update to have a material
impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) Improvements to
Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 identifies areas for simplification involving several
aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well
as certain classifications on the statement of cash flows. This guidance is effective for public companies for annual periods beginning
after December 15, 2016 and interim periods within those annual periods. For all other entities, the guidance is effective for annual
periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early
adoption is permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its
consolidated financial statements and footnote disclosures.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing (“ASU 2016-10”), to clarify two aspects of Topic 606: (i) identifying performance
obligations; and (ii) the licensing implementation guidance. The amendments do not change the core principle of the guidance in
Topic 606. For public business entities, ASU 2016-10 is effective for annual reporting periods beginning after December 15, 2017,
including interim periods within the reporting period. For private companies, ASU 2016-10 is effective for annual reporting periods
beginning after December 15, 2018 and interim reporting periods beginning after December 15, 2019. Earlier application is allowed in
certain circumstances. The Company is currently assessing the impact that this guidance may have on its consolidated financial
statements, but does not believe it will have a material impact on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 clarifies and provides specific guidance on eight cash flow
classification issues that are not currently addressed by current GAAP and thereby reduce the current diversity practice. This guidance
is effective for public companies for annual periods beginning after December 15, 2017 and interim periods within those annual
periods. For all other entities, the guidance is effective for annual periods beginning after December 15, 2018, and interim periods
within annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact
that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than
Inventory (“ASU 2016-16). ASU 2016-16 instructs entities to recognize the income tax consequences of an intra-entity transfer of an
asset other than inventory when the transfer occurs and (compared to current GAAP which prohibits the recognition of current and
deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party). The guidance is effective for
public companies for annual periods beginning after December 15, 2017 and interim periods within those annual periods. For all other
entities, the guidance is effective for annual periods beginning after December 15, 2018 and interim periods within annual periods
beginning after December 15, 2019. Early adoption is permitted. The guidance is required to be applied on a modified retrospective
basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company
is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-17, Consolidated (Topic 810): Interests Held through Related Parties That Are
under Common Control (“ASU 2016-17”). ASU 2016-17 amends how an entity that is a single decision-maker of a variable-interest
entity (“VIE”) treats certain indirect interests in the VIE when determining whether the entity is the primary beneficiary of that VIE.
Under the amended guidance, an entity is no longer required to consider indirect interests held through related parties that are under
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common control with the entity as the equivalent of direct interests in their entirety, but should instead include these interests on a
proportionate basis, consistent with indirect interests held through other related parties. This guidance is effective for public
companies for annual periods beginning after December 15, 2016, including interim periods within those annual periods. For all other
entities, the amendments are effective for annual periods beginning after December 15, 2016 and for interim periods in annual periods
beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the impact that adopting this
new accounting standard will have on its consolidated financial statements and footnote disclosures.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of
the FASB Emerging Issues Task Force) (“ASU2016-18”). ASU 2016-18 requires amounts generally described as restricted cash and
restricted cash equivalents to be included with cash and cash equivalents when reconciling the total beginning and ending amounts for
the periods shown on the statement of cash flows. The guidance is effective for public companies for annual periods beginning after
December 15, 2017, and interim periods within those annual periods. For all other entities, the guidance is effective for annual periods
beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019. Early adoption is
permitted, including adoption in an interim period. The guidance should be applied using a retrospective transition method for each
period presented. The Company is currently assessing the impact that adopting this new accounting standard will have on its
consolidated financial statements.
In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from
Contracts with Customers (“ASU 2016-20”). The ASU 2016-20 amendments allow entities not to make quantitative disclosures about
remaining performance obligations in certain cases and require entities that use any of the new or previously existing optional
exemptions to expand their qualitative disclosures. The amendment also clarifies narrow aspects of ASC 606 or corrects unintended
application of the guidance. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and
transition requirements for ASU 2014-09. The Company is currently assessing the impact that adopting this new accounting standard
will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”). ASU 2017-01 provides a more robust framework to use in determining when a set of assets and activities is a
business. Also the amendments provide more consistency in applying the guidance, reducing the costs of application, and make the
definition of a business more operable. The guidance is effective for public companies for annual periods beginning after December
15, 2017, including interim periods within those periods. For all other entities, the guidance is effective for annual periods beginning
after December 15, 2018, and interim periods with annual periods beginning after December 15, 2019. The Company is currently
assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.
2.
REGULATORY DECISION AND RELATED ACCOUNTING AND POLICY CHANGES
Our regulated utilities and certain other balances are subject to regulation by the ACC and meet the requirements for
regulatory accounting found within ASC Topic 980, Regulated Operations.
In accordance with ASC Topic 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 we have done for all of our operating utilities and which are described below.
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On July 9, 2012, we filed formal rate applications with the ACC to adjust the revenue requirements for seven utilities
representing a collective rate increase of approximately 28% over 2011 revenue levels. In August 2013, the Company entered into a
settlement agreement with ACC Staff, the Residential Utility Consumers Office, the City of Maricopa, and other parties to the rate
case. The settlement required approval by the ACC’s Commissioners before it could take effect. In February 2014, the rate case
proceedings were completed and the ACC issued Rate Decision No. 74364, effectively approving the settlement agreement. The
rulings of the decision include, but are not limited to, the following:
For the Company’s utilities, adjusting for the condemnation of the operations and assets of Valencia and sale of Willow
Valley, a collective revenue requirement increase of $3.6 million based on 2011 test year service connections, phased-in
over time, with the first increase in January 2015 as follows (in thousands):
2015
2016
2017
2018
2019
2020
2021
$
Incremental
Cumulative
1,083 $
887
335
335
335
335
335
1,083
1,970
2,305
2,640
2,975
3,310
3,645
Whereas this phase-in of additional revenues was determined using a 2011 test year, to the extent that the number of active
service connections increases from 2011 levels, the additional revenues may be greater than the amounts set forth above. On the other
hand, if active connections decrease or we experience declining usage per customer, we may not realize all of the anticipated
revenues.
Full reversal of the imputation of CIAC balances associated with funds previously received under ICFAs, as required in
the Company’s last rate case. The reversal restored rate base or future rate base and had a significant impact of restoring
shareholder equity on the balance sheet.
The Company has agreed to not enter into any new ICFAs. Existing ICFAs will remain in place, but a portion of future
payments to be received under the ICFAs will be considered as hook-up fees, which are accounted for as CIAC once
expended on plant.
A 9.5% return on common equity was adopted.
None of the Company’s utilities will file another rate application before May 31, 2016. GWRI’s subsidiaries, Global
Water - Santa Cruz Water Company (“Santa Cruz”) and Global Water - Palo Verde Utilities Company (“Palo Verde”),
may not file for another rate increase before May 31, 2017.
The following provides additional discussion on accounting and policy changes resulting from Rate Decision No. 74364.
Infrastructure Coordination and Financing Agreements
ICFAs are agreements with developers and homebuilders whereby GWRI, the indirect parent of the operating utilities,
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.
Under the ICFAs, GWRI has a contractual obligation to ensure physical capacity exists through its regulated utilities for
water and wastewater to the landowner/developer when needed. This obligation persists regardless of connection growth. Fees for
these services are typically a negotiated amount per equivalent dwelling unit for the specified development or portion of land.
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 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 GWRI’s business model.
Prior to January 1, 2010, GWRI accounted for funds received under ICFAs as revenue once the obligations specified in the
ICFA were met. As these arrangements are with developers and not with the end water or wastewater customer, the timing of revenue
recognition coincided with the completion of GWRI’s performance obligations under the agreement with the developer and with
GWRI’s ability to provide fitted capacity for water and wastewater service through its regulated subsidiaries.
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The 2010 Regulatory Rate Decision No. 71878 established new rates for the recovery of reasonable costs incurred by the
utilities and a return on invested capital. In determining the new annual revenue requirement, the ACC imputed a reduction to rate
base for all amounts related to ICFA funds collected by the Company that the ACC deemed to be CIAC for rate making purposes. As
a result of the decision by the ACC, GWRI changed its accounting policy for the accounting of ICFA funds. Effective January 1,
2010, GWRI recorded ICFA funds received as CIAC. Thereafter, the ICFA-related CIAC was amortized as a reduction of
depreciation expense over the estimated depreciable life of the utility plant at the related utilities.
With the issuance of Rate Decision No. 74364, in February 2014, the ACC again changed how ICFA funds would be
characterized and accounted for going forward. Most notably, the ACC changed the rate treatment of ICFA funds, and ICFA funds
already received would no longer be deemed CIAC for rate making purposes. In conjunction with Rate Decision No. 74364, we
eliminated the CIAC liability and reversed the associated regulatory liability brought about by the 2010 ruling. ICFA funds already
received or which had become due prior to the date of Rate Decision No. 74364 were accounted for in accordance with the
Company’s ICFA revenue recognition policy that had been in place prior to the 2010 Regulatory Rate Decision, wherein the funds
received are recognized as revenue once the obligations specified in the ICFA were met. Rate Decision No. 74364 prescribes that of
the ICFA funds which come due and are paid subsequent to December 31, 2013, 70% of the ICFA funds will be recorded in the
associated utility subsidiary as a hook-up fee (“HUF”) liability, with the remaining 30% to be recorded as deferred revenue, which the
Company accounts for in accordance with the Company's ICFA revenue recognition policy. A HUF tariff, specifying the dollar value
of a HUF for each utility, was approved by the ACC as part of Rate Decision No. 74364. The Company is responsible for assuring the
full HUF value is paid from ICFA proceeds, and recorded in its full amount, even if it results in recording less than 30% of the ICFA
fee as deferred revenue.
The Company will account for the portion allocated to the HUF as a CIAC contribution. 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 will be
segregated in a separate bank account and used for plant. A HUF liability will be established and will be 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. The Company will record 30% of funding received, up until the HUF liability is fully
funded, as deferred revenue, which is to be recognized as revenue once the obligations specified within the ICFA are met. As of
December 31, 2016 and December 31, 2015, ICFA deferred revenue recorded on the consolidated balance sheet totaled $19.7 million,
which represents deferred revenue recorded for ICFA funds received on contracts that had become due prior to Rate Decision No.
74364. For ICFA contracts coming due after December 31, 2013, as funding is received 30% will be added to this balance with the
remaining 70% recorded to a HUF liability, until the HUF liability is fully funded, at which time any funding greater than the HUF
liability will be recorded as deferred revenue.
Regulatory asset
Under ASC Topic 980, rate regulated entities defer costs and credits on the balance sheet as regulatory assets and liabilities
when it is probable that these costs and credits will be recognized in the rate making process in a period different from the period in
which they would have been reflected in income by an unregulated company. Certain costs associated with our rate cases have been
deferred on our balance sheet as regulatory assets as approved by the ACC. At December 31, 2016 and December 31, 2015, the
Company had one regulatory asset in the amount of $110,000 and $227,000, respectively, related to costs incurred in connection with
our most recent rate case. This amount began to amortize in January 2015, and will amortize over a three-year period.
Intangible assets / Regulatory liability
The Company previously recorded certain intangible assets related to ICFA contracts obtained in connection with our Santa
Cruz, Palo Verde, and Sonoran acquisitions. The intangible assets represented the benefits to be received over time by virtue of having
those contracts. Prior to January 1, 2010, the ICFA-related intangibles were amortized when ICFA funds were recognized as revenue.
Effective January 1, 2010, in connection with the 2010 Regulatory Rate Decision, these assets became fully offset by a regulatory
liability of $11.2 million since the imputation of ICFA funds as CIAC effectively resulted in the Company not being able to benefit
(through rates) from the acquired ICFA contracts.
Effective January 1, 2010, the gross ICFAs intangibles began to be amortized when cash was received in proportion to the
amount of total cash expected to be received under the underlying agreements. However, such amortization expense was offset by a
corresponding reduction of the regulatory liability in the same amount.
As a result of Rate Decision No. 74364, the Company changed its policy around the ICFA related intangible assets. As
discussed above, pursuant to Rate Decision No. 74364, approximately 70% of ICFA funds to be received in the future will be recorded
as a HUF, until the HUF is fully funded, at the Company’s applicable utility subsidiary. The remaining approximate 30% of future
ICFA funds will be recorded at the parent company level and will be subject to the Company’s ICFA revenue recognition accounting
policy. As the Company now expects to experience an economic benefit from the approximately 30% portion of future ICFA funds,
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30% of the regulatory liability, or $3.4 million, was reversed in 2014. The remaining 70% of the regulatory liability, or $7.9 million,
will continue to be recorded on the balance sheet. At December 31, 2016 and December 31, 2015, this was the Company's sole
regulatory liability.
Subsequent to Rate Decision No. 74364, the intangible assets will continue to amortize when the corresponding ICFA funds
are received in proportion to the amount of total cash expected to be received under the underlying agreements. The recognition of
amortization expense will be partially offset by a corresponding reduction of the regulatory liability.
3.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 2016 and December 31, 2015 consist of the following (in thousands):
Mains/lines/sewers
Plant
Equipment
Meters
Furniture, fixture and leasehold improvements
Computer and office equipment
Software
Land and land rights
Other
Construction work-in-process
Total property, plant and equipment
Less accumulated depreciation
Net property, plant and equipment
December 31,
2016
115,790 $
67,744
29,100
4,637
383
1,056
240
764
226
53,426
273,366
(72,877)
200,489 $
$
$
Average
Depreciation
Life (in years)
47
25
10
12
8
5
3
December 31,
2015
113,318
64,983
27,961
4,253
386
1,022
177
752
148
45,244
258,244
(64,092)
194,152
4.
ACCOUNTS RECEIVABLE
Accounts receivable as of December 31, 2016 and December 31, 2015 consist of the following (in thousands):
Billed receivables
Less allowance for doubtful accounts
Accounts receivable - net
December 31, 2016
$
December 31, 2015
1,326
(194)
1,132
1,547 $
(76)
1,471 $
$
The following table summarizes the allowance for doubtful accounts activity as of and for the years ended December 31, 2016,
December 31, 2015 and December 31, 2014 (in thousands).
Allowance for doubtful accounts:
Year Ended December 31, 2016
Year Ended December 31, 2015
Year Ended December 31, 2014
Balance at
Beginning
of Period
Additions
Charged to
Expense
Charged to
Other
Accounts Write-offs
Balance at
End of
Period
$
$
$
(194) $
(158) $
(102) $
(52) $
(36) $
(92) $
- $
(12) $
(21) $
170 $
12 $
57 $
(76)
(194)
(158)
5.
EQUITY METHOD INVESTMENT AND CONVERTIBLE NOTE
On June 5, 2013, the Company sold Global Water Management, LLC (“GWM”) to an investor group led by a private equity
firm that specializes in the water industry. GWM was a wholly-owned subsidiary of GWRI that owned and operated the FATHOM™
business. In connection with the sale of GWM, the Company made an investment in the FATHOM™ Partnership (“FATHOM™”).
This limited partnership investment is accounted for under the equity method due to the investment being considered more than minor.
The original investment in FATHOM™ consisted of an investment of $750,000 in the Series A preferred units and $98,000
of common units. Additionally, the Company invested $750,000 in a 10% convertible promissory note of GWM with an original
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maturity of December 31, 2014. We accounted for this investment in accordance with relevant accounting guidance for debt and
equity securities which requires the fair value measurement of the investment pursuant to ASC Topic 820, Fair Value Measurement.
The fair value of the investment in the convertible notes at initial recognition was determined using the transaction price, of which the
price paid by the Company was consistent with the price paid by third party investors for comparable convertible notes.
In November 2014, FATHOM™ experienced a qualified financing event (qualified financing was defined as an equity
financing by FATHOM™ in which FATHOM™ sells its units for at least $1.75 per unit and the aggregate proceeds from such
financing was at least $15 million, exclusive of convertible note amounts converted). At the time of the qualified financing, the
convertible promissory note was converted into Series B Preferred Units, and accounted for under the equity method. The Company's
resulting ownership of common and preferred units represented an approximate 8.0% ownership (on a fully diluted basis).
In conjunction with the qualified financing, our equity interest in the Series A and Series B preferred shares was adjusted in
accordance with ASC 323, Investment-Equity Method & Joint Ventures, wherein we recorded a gain of $1.0 million in the fourth
quarter of 2014. The adjustment to the carrying value of our investments was calculated using our proportionate share of
FATHOM™'s adjusted net equity. The gain was recorded within other income and expense in our consolidated statement of
operations. The carrying value of our investment consisted of a balance of $480,000 as of December 31, 2016 and $821,000 as of
December 31, 2015, and reflects our initial investment, the adjustment related to the qualified financing and our proportionate share of
FATHOM™'s losses. The Company recorded equity method losses to other income of $340,000 and $330,000, for the years ended
December 31, 2016 and December 31, 2015, respectively and recorded equity method income of $144,000 for the year ended
December 31, 2014.
We evaluate our investment in FATHOM™ for impairment whenever events or changes in circumstances indicate that the
carrying value of our investment may have experienced an “other-than-temporary” decline in value. Since the sale of GWM, the losses
incurred on the investment were greater than anticipated; however, based upon our evaluation of various relevant factors, including the
2014 equity event and the ability of FATHOM™ to achieve and sustain an earnings capacity that would justify the carrying amount of
our investment, we do not believe the investment to be impaired as of December 31, 2016.
We have evaluated whether GWM qualifies as a variable interest entity (“VIE”) pursuant to the accounting guidance of ASC
810, Consolidations. Considering the potential that the total equity investment in FATHOM™ Partnership/GWM may not be
sufficient to absorb the losses of FATHOM™, the Company currently views GWM as a VIE. However, considering the Company’s
minority interest and limited involvement with the FATHOM™ business, the Company is not required to consolidate GWM. Rather,
the Company has accounted for its investment under the equity method.
6.
INTANGIBLE ASSETS
Intangible assets as of December 31, 2016 and December 31, 2015 consisted of the following (in thousands):
INDEFINITE LIVED INTANGIBLE
ASSETS:
CP Water Certificate of Convenience &
Necessity service area
Intangible trademark
AMORTIZED INTANGIBLE ASSETS:
Acquired ICFAs
Sonoran contract rights
Total intangible assets
Gross
Amount
December 31, 2016
Accumulated
Amortization Amount
Net
Gross
Amount
December 31, 2015
Accumulated
Amortization Amount
Net
$
1,532 $
13
1,545
— $
—
—
1,532 $
13
1,545
1,532 $
13
1,545
— $
—
—
1,532
13
1,545
17,978
7,406
25,384
(12,154)
(2,003)
(14,157)
5,824
5,403
11,227
17,978
7,406
25,384
(12,154)
(2,003)
(14,157)
5,824
5,403
11,227
$ 26,929 $ (14,157) $ 12,772 $ 26,929 $ (14,157) $ 12,772
Acquired ICFAs and Sonoran contract rights 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
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ICFA agreements and contract rights, we cannot reliably estimate when the remaining intangible assets' amortization will be recorded.
No amortization was recorded for these balances for the years ended December 31, 2016, 2015, and 2014.
The carrying value of goodwill was zero as of December 31, 2016 and December 31, 2015. During the year ended December
31, 2015, the remaining $12.7 million of goodwill associated with Valencia was written off as a result of the condemnation of
Valencia. In addition, an impairment of $176,000 was recorded against the goodwill associated with Willow Valley during the year
ended December 31, 2015.
7.
TRANSACTIONS WITH RELATED PARTIES
On January 19, 2016, GWRC announced that it agreed to pursue a reorganization transaction with the Company that resulted
in GWRC merging with and into the Company (the “Reorganization Transaction”). GWRC was organized in 2010 to acquire shares of
the Company, and held an approximate 47.8% interest in the Company prior to the merger. The Reorganization Transaction closed on
May 3, 2016. As a result of the Reorganization Transaction, GWRC ceased to exist as a British Columbia corporation and the
Company, governed by the corporate laws of the State of Delaware, is the surviving entity.
GWRC was not part of the consolidated Company prior to the completion of the Reorganization Transaction. GWRC had no
employees. GWRI provided for the ongoing management and general administration of GWRC’s business affairs pursuant to a
management agreement between GWRC and GWRI to provide such services. Accordingly, GWRC was economically dependent on
the Company. Services provided by the Company under the management agreement were provided at no charge to GWRC, and were
not monetarily significant. However, GWRC incurred certain costs not covered by the management agreement. These included
GWRC’s accounting fees, legal fees, listing fees, and other costs directly associated with its former status as a publicly traded
company. Whereas GWRC did not expect to generate cash flows from operating activities, the operating costs incurred by GWRC and
other cash requirements were paid by the Company. Amounts paid by the Company on GWRC’s behalf during the years ended
December 31, 2016, 2015, and 2014 totaled $650,000, $1.4 million, and $505,000, respectively. The Company accounted for such
payments as equity distributions to GWRC. In conjunction with the merger of GWRC into GWRI, the Company recorded $731,000 in
accounts payable and $353,000 in deferred compensation on the books of GWRI that were previously recorded at GWRC. In addition
to these liabilities, the Company also recorded an approximate $1.4 million tax liability associated with the transfer of GWRC from
Canada to the United States. A corresponding reduction in additional paid in capital was recorded with the merging of these liabilities
into GWRI. As of December 31, 2016, $178,000 is the remaining outstanding tax liability associated with the transfer of GWRC from
Canada to the United States.
For the year ended December 31, 2016, no cash advance was provided to GWRC. For the year ended December 31, 2015, the
Company provided cash advances of approximately $12.7 million to satisfy GWRC's short term cash obligations. The amount
advanced was utilized to fund GWRC's monthly dividend, special one-time dividend paid in August 2015, and other cash
requirements, as needed. The related party balance was reduced upon dividend declaration, when the amount declared is presented as a
reduction in the Company’s equity. As of the closing of the Reorganization Transaction and December 31, 2015, the balance of the
advance was zero.
We provide medical benefits to our employees through our participation in a pooled plan sponsored by an affiliate of a
shareholder and director of the Company. Medical claims paid to the plan were approximately $533,000, $493,000, and $532,000 for
the years ended December 31, 2016, 2015, and 2014, respectively.
GWM has historically provided billing, customer service, and other support services for the Company’s regulated utilities.
Amounts collected by GWM from the Company’s customers that GWM has not yet remitted to the Company are included within the
“Due from affiliates” caption on the Company’s consolidated balance sheet. As of December 31, 2016 and December 31, 2015, the
unremitted balance totaled $333,000 and $306,000, respectively. Notwithstanding the sale of GWM on June 5, 2013, FATHOM™
continues to provide these services to the Company’s regulated utilities under a long-term service agreement. Based on current service
connections, we estimate that fees to be paid to GWM for FATHOM™ services will be $6.24 per water account/month, which is an
annual rate of approximately $1.4 million. For the years ended December 31, 2016, 2015, and 2014, the Company incurred
FATHOM™ service fees of approximately $1.9 million, $2.2 million, and $2.4 million, respectively.
Pursuant to the purchase agreement for the sale of GWM, the Company is entitled to quarterly royalty payments based on a
percentage of certain of GWM’s recurring revenues for a 10-year period, up to a maximum of $15.0 million. In addition, the Company
entered into a services agreement with GWM whereby the Company has agreed to use the FATHOM™ platform for all of its
regulated utility services for an initial term of 10 years. The services agreement was amended on November 17, 2016, which extended
the term of the contract through December 31, 2026. As part of the amended agreement, the Company reduced the monthly rate per
connection from $7.79 per water account/month to $6.24 per water account/month. Additionally, the scope of services was expanded
to include a meter replacement program, wherein the Company intends to replace a majority of its meter infrastructure within the
upcoming year.
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The services agreement is automatically renewable for successive 10-year periods, unless notice of termination is given prior
to any renewal period. The services agreement may be terminated by either party for default only and the termination of the services
agreement will also result in the termination of the royalty payments payable to the Company. The Company made the election to
record these quarterly royalty payments prospectively in income as the amounts are earned. Royalties recorded within other income
totaled approximately $355,000, $326,000, and $272,000 for the years ended December 31, 2016, 2015, and 2014, respectively.
8.
ACCRUED EXPENSES
Accrued expenses at December 31, 2016 and December 31, 2015 consist of the following (in thousands):
Deferred compensation
Meter replacement - related party
Property taxes
Interest
Dividend payable
Tax obligation related to GWRC merger
Other accrued liabilities
Total accrued liabilities
9.
DEBT
December 31, 2016 December 31, 2015
598
$
—
958
877
452
—
2,252
5,137
1,920 $
1,255
910
483
458
178
2,398
7,602 $
$
The outstanding balances and maturity dates for short-term (including the current portion of long-term debt) and long-term
debt as of December 31, 2016 and December 31, 2015 are as follows (in thousands):
$
BONDS AND NOTES PAYABLE -
4.380% Series A 2016, maturing June 2028
4.580% Series B 2016, maturing June 2036
5.450% Series 2006, maturing December 1, 2017
5.600% Series 2006, maturing December 1, 2022
5.750% Series 2006, maturing December 1, 2032
6.550% Series 2007, maturing December 1, 2037 - net of
unamortized discount of $338
6.375% Series 2008, maturing December 1, 2018
7.500% Series 2008, maturing December 1, 2038
December 31, 2016
December 31, 2015
Short-term
Long-term
Short-term
Long-term
— $
—
—
—
—
—
—
—
—
28,750 $
86,250
—
—
—
—
—
—
115,000
— $
—
1,000
—
—
700
185
—
1,885
—
—
1,040
6,215
23,370
50,177
435
23,235
104,472
OTHER
Capital lease obligations
Debt issuance costs
Total debt
2016 Senior Secured Notes
25
—
25 $
54
(737)
114,317 $
109
—
1,994 $
178
(2,233)
102,417
$
On June 24, 2016, the Company closed the Note Purchase Agreement entered into on May 20, 2016, and 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 $86.3 million and bears an interest rate of 4.58% over a 20-year term. Series B is
interest only for the first five years, with $1.9 million principal payments paid semiannually thereafter. The proceeds of the senior
secured notes were primarily used to refinance the existing long-term tax exempt bonds, which were subject to an early redemption
option at 103%, plus accrued interest, as a result of the U.S. IPO. As part of the refinancing of the long-term debt, the Company paid a
prepayment penalty of $3.2 million and wrote off the remaining $2.2 million in capitalized loan fees related to the tax exempt bonds,
which were recorded as additional interest expense for the year ended December 31, 2016. The senior secured notes are collateralized
by a security interest in the Company’s equity interest in its subsidiaries, including all payments representing profits and qualifying
distributions.
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The senior secured notes require the Company 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, 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 ending June 30, 2021 through the quarter ending March 31,
2024, the ratio drops to 1.20. As of December 31, 2016, the Company was in compliance with its financial debt covenants.
Tax Exempt Bonds
We issued tax-exempt bonds through The Industrial Development Authority of the County of Pima in the amount of
$36,495,000 on December 28, 2006; $53,624,000, net of a discount of $511,000, on November 19, 2007; and $24,550,000 on October
1, 2008. Proceeds from these bonds were used for qualifying costs of constructing and equipping the water and wastewater treatment
facilities of our subsidiaries, Palo Verde and Santa Cruz. The tax-exempt bonds were redeemed in June 2016 with proceeds from the
2016 senior secured notes.
Debt Issuance Costs Reclassification
In April 2015, the FASB issued ASU 2015-03, which requires debt issuance costs be presented in the balance sheet as a
direct deduction from the carrying amount of the associated debt liability, consistent with the accounting of debt discounts. The
adoption of this guidance on January 1, 2016 resulted in the reclassification of the unamortized debt issuance costs of $2.2 million
from debt issuance costs to a reduction in long-term debt as of December 31, 2015.
At December 31, 2016, the remaining aggregate annual maturities of our debt and minimum lease payments under capital
lease obligations for the years ended December 31 are as follows (in thousands):
2017
2018
2019
2020
2021
Thereafter
Subtotal
Less: amount representing interest
Total
Debt
Capital Lease
Obligations
$
$
— $
—
—
—
1,917
113,083
115,000
—
115,000 $
25
32
25
6
—
—
88
(9)
79
At December 31, 2016, the carrying value of the non-current portion of long-term debt was $115.0 million, with an estimated
fair value of $108.4 million. At December 31, 2015, the carrying value of the non-current portion of long-term debt was $104.7
million, with an estimated fair value of $116.7 million. The fair value of our debt was estimated based on interest rates considered
available for instruments of similar terms and remaining maturities.
10.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2016 and December 31,
2015, the Company did not have any uncertain tax positions.
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The income tax benefit from continuing operations for the years ended December 31, 2016, December 31, 2015, and
December 31, 2014 is comprised of the following (in thousands):
Current income tax expense
Deferred income tax expense
Income tax benefit
Current income tax benefit
Deferred income tax benefit
Income tax benefit
Current income tax benefit
Deferred income tax benefit
Income tax benefit
Federal
121 $
(1,470)
(1,349) $
2016
State
— $
(140) $
(140) $
Federal
63 $
17,735
17,798 $
2015
State
— $
2,825 $
2,825 $
Total
121
(1,610)
(1,489)
Total
63
20,560
20,623
Federal
(10) $
(15,472)
(15,482) $
2014
State
(1) $
(1,512)
(1,513) $
Total
(11)
(16,984)
(16,995)
$
$
$
$
$
$
The income tax benefit for the years ended December 31, 2016, December 31, 2015, and December 31, 2014 differs from the
amount that would be computed using the federal statutory income tax rate due to the following (in thousands):
Computed federal tax expense (benefit) at statutory rate
State income taxes - net of federal tax benefit
Gain on condemnation of Valencia
Valuation allowance
Other differences
Income tax expense
For the Years Ended December 31,
2016
2015
2014
(1,476) $
(140)
—
—
127
(1,489) $
14,275 $
1,865
4,312
—
171
20,623 $
16,298
2,056
—
(35,800)
451
(16,995)
$
$
ASC Topic 740, Income Taxes, prescribes the method to determine whether a deferred tax asset is realizable and significant
weight is given to evidence that it can be objectively verified. As of December 31, 2016 and December 31, 2015, the Company’s
valuation allowance totaled $8,500, which relates to state net operating loss carryforwards expected to expire prior to utilization.
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The following table summarizes the Company’s temporary differences between book and tax accounting that give rise to the
deferred tax assets and deferred tax liabilities, including the valuation allowance, as of December 31, 2016 and December 31, 2015 (in
thousands):
December 31, 2016
December 31, 2015
DEFERRED TAX ASSETS:
Taxable meter deposits
Net operating loss carry forwards
Balterra intangible asset acquisition
Deferred gain on Sale of GWM
Deferred gain on ICFA funds received
Equity investment loss
Property, plant and equipment
Other
Total deferred tax assets
Valuation allowance
Net deferred tax asset
DEFERRED TAX LIABILITIES:
CP Water intangible asset acquisition
ICFA intangible asset
Property, plant and equipment
Gain on condemnation of Valencia
Total deferred tax liabilities
Net deferred tax liability
$
40 $
4,976
336
1,652
7,350
459
—
1,606
16,419
(9)
16,410
(571)
(502)
(642)
(17,078)
(18,793)
(2,383) $
$
46
5,322
336
1,705
7,346
333
863
482
16,433
(9)
16,424
(571)
(141)
—
(19,876)
(20,588)
(4,164)
As of December 31, 2016, we have a pproximately $13.9 million in federal net operating loss (“NOL”) carry forwards and
$7.2 million in state NOLs available to offset future taxable income, with federal and state NOLs expiring in 2030-2036.
The effective tax rates used for the years ended December 31, 2016, 2015, and 2014 were 34.6%, 49.1%, and (37.0)%,
respectively. The income tax provision was computed based on the Company’s estimated effective tax rate and forecasted income
expected for the full year, including the impact of any unusual, infrequent, or non-recurring items. The effective tax rate for the year
ended December 31, 2016 was greater than the federal statutory rate of 34.0% primarily due to state income taxes.
11. DEFERRED COMPENSATION AWARDS
Stock-based compensation
Stock-based compensation related to option awards is measured based on the fair value of the award. The fair value of stock
option awards is determined using a Black-Scholes option-pricing model. We recognize compensation expense associated with the
options over the vesting period.
2011 stock option grant
At December 31, 2016 and December 31, 2015, there were options to acquire 43,395 shares of common stock of GWRI
outstanding, adjusting for the 100.68 to 1.00 stock split effected on April 28, 2016. The options were all vested and exercisable as of
each date. The stock options have a remaining contractual life of approximately 1.50 years and have a split-adjusted exercise price of
$8.65 per share.
2016 stock option grant
In May 2016, GWRI’s Board of Directors granted stock options to acquire 325,000 shares of GWRI’s common stock to the
members of the board. The options were granted with an exercise price of $7.50, the prevailing market price of the Company’s
common shares at the close of business on May 20, 2016. The options vest over a two-year period, with 50% vesting on May 2017
and 50% vesting on May 2018. The options have a three-year life. The Company will expense the $2.1 million fair value of the stock
option grant ratably over the two-year vesting period in accordance with ASC 323. Stock-based compensation expense of $649,000
was recorded for the year ended December 31, 2016. No stock-based compensation expense was recorded for the years ended
December 31, 2015 and 2014.
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Phantom stock compensation
On December 30, 2010, we adopted a phantom stock unit plan authorizing the directors of the Company to issue phantom
stock units (“PSUs”) to our employees. Following the consummation of the Reorganization Transaction, the awarded PSUs have been
amended such that the outstanding units now track with the value of GWRI’s share price. The vesting of the awards has not changed.
The value of the PSUs issued under the plan track to the performance of GWRI’s shares and give rise to a right of the holder to receive
a cash payment the value of which, on a particular date, is the market value of the equivalent number of shares of GWRI at that date.
The issuance of PSUs as a core component of employee compensation was intended to strengthen the alignment of interests between
the employees of the Company and the shareholders of GWRI by linking their holdings and a portion of their compensation to the
future value of the common shares of GWRI.
PSUs are accounted for as liability compensatory awards under ASC 710, Compensation – General, rather than as equity
awards. PSU awards are remeasured each period and a liability is recorded equal to GRWI’s closing share price as of the balance sheet
date multiplied by the number of units vested and outstanding. The value of the benefits is recorded as an expense in the Company’s
financial statements over the related vesting period. Vesting occurs ratably over 12 consecutive quarters beginning in the period
granted. The following table detailing the awards granted and the number of units outstanding as of December 31, 2016 along with the
amounts paid to holders of the PSUs for the years ended December 31, 2016 and 2015 (in thousands, except share amounts):
Grant Date
Units Granted
Units Outstanding
2016
2015
Amounts Paid
For the Years Ended
December 31,
Q4 2010
Q1 2012
Q1 2013
Q1 2014
Q1 2015
Q1 2016
Total
350,000
135,079
76,492
8,775
28,828
34,830
634,004
— $
—
—
371
12,012
26,123
38,506 $
— $
—
29
10
82
46
167 $
1,398
38
110
8
38
—
1,592
-77-
Stock appreciation rights compensation
The Company historically accounted for SARs as liability compensatory awards under ASC 710, Compensation – General,
valued using the intrinsic value method, as permitted by ASC 718 for nonpublic entities, with changes to the value of the SARs
recognized as compensation expense at each quarterly reporting date. Upon becoming a public company, as defined in ASC 718, in
the first quarter of 2016, the Company was required to change its methodology for valuing the SARs. While the SARs will continue to
be remeasured at each quarterly reporting date, the SARs are required to be accounted for prospectively at fair value using a fair value
pricing model, such as Black-Scholes. The Company recorded the impact of the change in valuation methods as a cumulative effect of
a change in accounting principle, as permitted by ASC 250. The effect of the change increased the SAR liability by $103,000 which
was the difference in compensation cost measured using the intrinsic value method and the fair value method. An offsetting change to
accumulated deficit in the consolidated balance sheet was recorded with the revaluation, net of $38,000 in taxes. Any future changes
in fair value will be recorded as compensation expense in the consolidated statement of operations.
Beginning January 2012, in an effort to reward employees for their performance, the Company adopted a stock appreciation
rights plan authorizing the directors of the Company to issue SARs to our employees. The value of the SARs issued under the plan
track the performance of GWRI’s shares. Each holder has the right to receive a cash payment amounting to the difference between the
exercise price and the closing price of GWRI’s common shares on the exercise date, provided that the closing price is in excess of the
exercise price. Holders of SARs may exercise their awards once vested. Individuals who voluntarily or involuntarily leave the
Company forfeit their rights under the awards. The following table details the recipients of the awards, the grant date, units granted,
exercise price, outstanding shares as of December 31, 2016 and amounts paid during the years ended December 31, 2016 and 2015 (in
thousands, except share and per share amounts):
Amounts Paid
For the Years Ended
December 31,
Recipients
Employees below senior management level (1)
Key Executive (2)(4)
Key Executive (2)(5)
Members of Management (2)(6)
Key Executives (3)(7)
Total
Grant Date
Granted
Units
Exercise
Price
Units Outstanding
2016
2015
Q1 2012
Q3 2013
Q4 2013
Q1 2015
Q2 2015
152,091 $ C 4.00
1.59
100,000 $
2.69
100,000 $
4.26
299,000 $
5.13
300,000 $
951,091
— $
45,000
50,500
233,000
300,000
628,500 $
— $
151
137
112
—
400 $
67
37
—
—
—
104
(1) The SARs vested in equal installments over four quarters and expired four years after the date of issuance.
(2) The SARs vest ratably over sixteen quarters from the grant date.
(3) The SARs vest over sixteen quarters, vesting 20% per year for the first three years, with the remainder (40%) vesting in
year four.
(4) The exercise price was determined by taking the weighted average share price of the five days prior to the grant date of July
1, 2013.
(5) The exercise price was determined by taking the weighted average share price of the 30 days prior to the grant date of
November 14, 2013.
(6) The exercise price was determined to be the fair market value of one share of stock on the grant date of February 11, 2015.
(7) The exercise price was determined to be the fair market value of one share of stock on the grant date of May 8, 2015.
As a result of the merger of GWRC into the Company and the U.S. IPO, the exercise prices for the preceding awards were
translated to U.S. dollars using the prevailing noon-day Bank of Canada foreign exchange rate of US$0.7969 per CAD$1.00 as
measured on May 2, 2016, the day prior to the closing of the merger. The vesting of the awards has not changed. Subsequent to the
merger, each SAR will provide the holder the right to receive a cash payment amounting to the difference between the per share
exercise price and the closing price of GWRI’s common shares on the exercise date, provided that the closing price is in excess of
exercise price per share.
-78-
For the years ended December 31, 2016, 2015, and 2014 the Company recorded approximately $1.8 million, $695,000, and
$1.3 million of compensation expense related to the PSUs and SARS, respectively. Based on GWRI’s closing share price on
December 30, 2016, deferred compensation expense to be recognized over future periods is estimated for the years ending
December 31 as follows (in thousands):
2017
2018
2019
2020
Total
PSUs
SARs
193
106
—
—
299 $
909
692
97
—
1,698
$
12.
SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental cash flow information for the years ended December 31, 2016, 2015, and 2014 (in thousands):
Cash paid for interest
Cash paid for taxes
Cash paid for bond prepayment fee
Reclassification of deferred IPO costs to equity
Capital expenditures included in accounts payable
$
and accrued liabilities
Deferred compensation change in accounting principle $
Bond reserve funds used to repay bond debt
$
Equity method investment gain on recapitalization of
FATHOM
$
$
$
$
$
2016
For the Year Ended December 31,
2015
2014
5,969 $
184 $
3,201 $
97 $
2,909 $
103 $
— $
7,475 $
— $
— $
— $
184 $
— $
— $
— $
—
8,116
—
—
—
253
—
1,833
1,088
13. COMMITMENTS AND CONTINGENCIES
Commitments
Prior to the sale of GWM, we leased certain office space in Arizona under operating leases with terms that expired in
February 2016. The operating lease agreements were between GWM and the landlord. Accordingly, effective June 2013 through
February 2016, the Company was not a party under the lease agreements. GWRI subleased a portion of the office space covered under
the GWM lease agreements. In February 2016, the Company entered into a three-year lease agreement with the landlord to occupy the
same space previously subleased under GWM's lease agreements, inclusive of necessary facility upgrades. Beginning in March 2016,
the Company began recording approximately $8,000 in monthly rent expense related to the new agreement. Rent expense arising from
the operating leases totaled approximately $92,000, $64,000, and $70,000 for the years ended December 31, 2016, 2015, and 2014,
respectively.
Contingencies
From time to time in the ordinary course of business, the Company may be subject to pending or threatened lawsuits in which
claims for monetary damages are asserted. Management is not aware of any legal proceedings of which the ultimate resolution could
materially affect our financial position, results of operations, or cash flows.
-79-
14.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended December 31, 2016
Revenues
Operating income
Net income/(loss)
Basic earnings/(loss) per common share
Diluted earnings/(loss) per common share
Year Ended December 31, 2015
Revenues
Operating income
Net income/(loss)
Basic earnings/(loss) per common share
Diluted earnings/(loss) per common share
First
Second
Third
Fourth
Quarter
6,816 $
1,061 $
(314) $
(0.02) $
(0.02) $
7,589 $
826 $
(3,594) $
(0.19) $
(0.19) $
Quarter
8,180 $
2,665 $
1,146 $
0.06 $
0.06 $
7,214
718
(90)
(0.00)
(0.00)
First
Second
Third
Fourth
7,622 $
775 $
(915) $
(0.05) $
(0.05) $
9,082 $
2,280 $
403 $
0.02 $
0.02 $
8,143 $
2,056 $
21,905 $
1.20 $
1.20 $
7,109
1,416
(30)
(0.00)
(0.00)
$
$
$
$
$
$
$
$
$
$
-80-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Office and Chief Financial Officer, reviewed and evaluated
our disclosure controls and procedures as of the end of the period covered by this Form 10-K. Based on that evaluation, our Chief
Executive Office and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in providing
them with timely material information relating to the Company.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fiscal quarter ended December 31, 2016 that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
This Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or
an attestation report of the Company’s independent registered accounting firm due to a transition period established by rules of the
SEC for newly public companies.
In addition, we are an emerging growth company, as defined under the Jumpstart Our Business Startups Act (the "JOBS
Act"), our registered public accounting firm will not be required to attest to, or report on, management’s assessment regarding internal
control over financial reporting for as long as the Company is deemed to be an emerging growth company.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT, AND CORPORATE GOVERNANCE
The information required by Item 10 is included under the following captions in our definitive proxy statement relating to our
2017 annual meeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31,
2016 and is incorporated herein by reference: “Proposal One: Election of Directors”, “Executive Officers”, “Other Matters—Section
16(a) Beneficial Ownership Reporting Compliance”, “Other Matters—Code of Conduct and Ethics”, and “Corporate Governance—
Board and Committee Information”.
ITEM 11. EXECUTIVE COMPENSATION
We are an emerging growth company, as defined under the Jumpstart Our Business Startups Act (the "JOBS Act"), and are
therefore not required to provide certain disclosures regarding executive compensation required of larger public companies or hold a
nonbinding advisory vote on executive compensation.
The information required by Item 11 is included under the following captions in our definitive proxy statement relating to our
2017 annual meeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31,
2016 and is incorporated herein by reference: “Corporate Governance—Compensation of Directors”, “Executive Compensation”,
“Compensation Committee Interlocks and Insider Participation”, and “Report of the Compensation Committee”.
-81-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 is included under the following captions in our definitive proxy statement relating to our
2017 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our
fiscal year ended December 31, 2016 and is incorporated herein by reference: “Security Ownership of Certain Beneficial Owners and
Management” and “Equity Plan Information”.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is included under the following captions in our definitive proxy statement relating to our
2017 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our
fiscal year ended December 31, 2016 and is incorporated herein by reference: “Corporate Governance—Independence of Directors”
and “Certain Relationships and Related Party Transactions.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is included under the following caption in our definitive proxy statement relating to our
2017 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our
fiscal year ended December 31, 2016 and is incorporated herein by reference: “Audit Matters—Independent Auditor’s Fees.”
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) Exhibit
See Exhibit Index.
(b) Financial Statements and Financial Statement Schedules.
Our consolidated financial statements are included in Part II, Item 8 of this Form 10-K. All other schedules for which
provision is made in the applicable accounting regulations of the SEC are included in the consolidated financial statements, including
the notes thereto, or are inapplicable, and therefore have been omitted.
ITEM 16. FORM 10-K SUMMARY
None.
-82-
SIGNATURES
Pursuant to the requirements of 13 of 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Global Water Resources, Inc.
Date: March 10, 2017
By:
/s/ Ron L. Fleming
Ron L. Fleming
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ron
L. Fleming and Michael J. Liebman, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of
substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection
therewith the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he or she might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Ron L. Fleming
Ron L. Fleming
President, Chief Executive Officer, and Director
(Principal Executive Officer)
March 10, 2017
/s/ Michael J. Liebman
Michael J. Liebman
Chief Financial Officer and Corporate Secretary
(Principal Financial and Accounting Officer)
March 10, 2017
/s/ Trevor T. Hill
Trevor T. Hill
/s/ William S. Levine
William S. Levine
/s/ Richard M. Alexander
Richard M. Alexander
/s/ Rita Theil
L. Rita Theil
/s/ David C. Tedesco
David C. Tedesco
/s/ Cindy M. Bowers
Cindy M. Bowers
Chairman of the Board
March 10, 2017
March 10, 2017
March 10, 2017
March 10, 2017
March 10, 2017
March 10, 2017
Director
Director
Director
Director
Director
-83-
EXHIBIT INDEX
Exhibit
Number
2.1.1
Arrangement Agreement
2.1.2
Plan of Arrangement
Description of Exhibit
Method of Filing
Incorporated by reference to Exhibit 2.1 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
Incorporated by reference to Exhibit 2.1.2 of Amendment No. 2 to the
Company’s Registration Statement on Form S-1 (File No. 333-209025) filed
with the SEC on April 13, 2016
3.1
3.2
4.1
4.2
4.3
10.1
10.2
Second Amended and Restated Certificate of Incorporation of Global
Water Resources, Inc.
Incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed
with the SEC on May 4, 2016
Amended and Restated Bylaws of Global Water Resources, Inc.
Incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed
with the SEC on May 4, 2016
Form of Common Stock Certificate
Incorporated by reference to Exhibit 4.1 of Amendment No. 4 to the
Company’s Registration Statement on Form S-1 (File No. 333-209025) filed
with the SEC on April 26, 2016
Form of 4.38% Senior Secured Notes, Series A due on June 15, 2028
Incorporated by reference to Exhibit 4.1 to the Company’s Current Report
on Form 8-K filed with the SEC on June 28, 2016
Form of 4.58% Senior Secured Notes, Series B due on December 15, 2036 Incorporated by reference to Exhibit 4.2 to the Company’s Current Report
on Form 8-K filed with the SEC on June 28, 2016
Settlement Agreement for Stipulated Condemnation with the City of
Buckeye, Arizona, dated March 19, 2015
Incorporated by reference to Exhibit 10.1 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
License Agreement with City of Maricopa, Arizona, dated November 9,
2006
Incorporated by reference to Exhibit 10.2 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
10.3
Employment Agreement with Ron Fleming, dated May 13, 2015*
10.4
Employment Agreement with Michael J. Liebman, dated May 13, 2015*
Incorporated by reference to Exhibit 10.3 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
Incorporated by reference to Exhibit 10.4 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
10.5
10.6
10.7
10.8
10.9
Infrastructure Coordination Agreement with Pecan Valley Investments,
LLC, dated January 28, 2004
Incorporated by reference to Exhibit 10.5 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
Infrastructure Coordination Agreement with JNAN, LLC, dated July 1,
2004
Incorporated by reference to Exhibit 10.6 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
Infrastructure Coordination and Finance Agreement with Dana B. Byron
and Jamie Maccallum, dated July 21, 2006
Incorporated by reference to Exhibit 10.7 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
Infrastructure Coordination and Finance Agreement with The Orchard at
Picacho, LLC, dated January 8, 2008
Incorporated by reference to Exhibit 10.8 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
Infrastructure Coordination, Finance and Option Agreement with Sierra
Negra Ranch, LLC, dated July 10, 2006
Incorporated by reference to Exhibit 10.9 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
10.10
Infrastructure Coordination and Finance Agreement, dated December 20,
2007
10.11.1
GWR Global Water Resources Corp. Stock Option Plan*
Incorporated by reference to Exhibit 10.10 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
Incorporated by reference to Exhibit 10.17.1 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
-84-
Exhibit
Number
10.11.2
10.11.3
10.12.1
10.12.2
10.13.1
10.13.2
10.14.1
Description of Exhibit
Method of Filing
First Amendment to GWR Global Water Resources Corp. Stock Option
Plan, dated September 12, 2012*
Incorporated by reference to Exhibit 10.17.2 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
Second Amendment to GWR Global Water Resources Corp. Stock Option
Plan*
Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed
with the SEC on May 4, 2016
Global Water Resources, Inc. First Amended and Restated Stock
Appreciation Rights Plan, dated March 23, 2015*
Incorporated by reference to Exhibit 10.18 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
Amendment to Global Water Resources, Inc. First Amended and Restated
Stock Appreciation Rights Plan*
Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed
with the SEC on May 4, 2016
Global Water Resources, Inc. Deferred Phantom Stock Unit Plan, dated
January 1, 2011*
Incorporated by reference to Exhibit 10.19 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
Amendment to Global Water Resources, Inc. Deferred Phantom Stock
Unit Plan*
Incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed
with the SEC on May 4, 2016
Global Water Resources, Inc. Phantom Stock Unit Plan, dated May 1,
2015*
Incorporated by reference to Exhibit 10.20 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
10.14.2
Amendment to Global Water Resources, Inc. Phantom Stock Unit Plan*
10.15.1
GWR Global Water Resources Corp. Deferred Phantom Stock Unit Plan,
dated January 1, 2011*
Incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed
with the SEC on May 4, 2016
Incorporated by reference to Exhibit 10.21 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
10.15.2
Amendment to GWR Global Water Resources Corp. Deferred Phantom
Stock Unit Plan*
Incorporated by reference to Exhibit 10.5 of the Company’s Form 8-K filed
with the SEC on May 4, 2016
10.16
Securities Purchase Agreement, dated June 5, 2013
10.17.1
Service Agreement, dated June 5, 2013
Incorporated by reference to Exhibit 10.22 of Amendment No. 1 to the
Company’s Registration Statement on Form S-1 (File No. 333-209025) filed
with the SEC on March 17, 2016
Incorporated by reference to Exhibit 10.23 of Amendment No. 1 to the
Company’s Registration Statement on Form S-1 (File No. 333-209025) filed
with the SEC on March 17, 2016
10.17.2
First Amendment to Service Agreement, dated November 17, 2016, by
and among the certain wholly-owned subsidiaries of Global Water
Resources, Inc. and Global Water Management, LLC
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed with the SEC on November 18, 2016
10.18
Note Purchase Agreement, dated as of May 20, 2016, by and among
Global Water Resources, Inc. and certain Initial Purchasers
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed with the SEC on May 26, 2016
10.19
Guaranty Agreement, dated as of June 24, 2016, by Global Water, LLC
Incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed with the SEC on June 28, 2016
10.20
10.21
10.22
10.23
Guaranty Agreement, dated as of June 24, 2016, by West Maricopa
Combine, Inc.
Incorporated by reference to Exhibit 10.3 to the Company’s Current Report
on Form 8-K filed with the SEC on June 28, 2016
Pledge and Security Agreement, dated as of June 24, 2016, by and
between Global Water Resources, Inc. and U.S. Bank National
Association, as collateral agent
Pledge and Security Agreement, dated as of June 24, 2016, by and
between Global Water, LLC and U.S. Bank National Association, as
collateral agent
Pledge and Security Agreement, dated as of June 24, 2016, by and
between West Maricopa Combine, Inc. and U.S. Bank National
Association, as collateral agent
Incorporated by reference to the Exhibit 10.4 to Company’s Current Report
on Form 8-K filed with the SEC on June 28, 2016
Incorporated by reference to Exhibit 10.5 to the Company’s Current Report
on Form 8-K filed with the SEC on June 28, 2016
Incorporated by reference to Exhibit 10.6 to the Company’s Current Report
on Form 8-K filed with the SEC on June 28, 2016
14.1
Code of Ethics
Incorporated by reference to Exhibit 14.1 of the Company’s Form 8-K filed
with the SEC on May 4, 2016
-85-
Exhibit
Number
21.1
24.1
31.1
31.2
32.1
99.1
Description of Exhibit
Method of Filing
Subsidiaries of Global Water Resources, Inc.
Filed herewith
Power of Attorney
See signature page hereto
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Filed herewith
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Filed herewith
Section 1350 Certification of Chief Executive Officer and Chief Financial
Officer
Filed herewith
Arizona Corporation Commission Decision No. 74364
Incorporated by reference to Exhibit 99.1 of the Company’s Registration
Statement on Form S-1 (File No. 333-209025) filed with the SEC on
January 19, 2016
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
Filed herewith
Filed herewith
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
Filed herewith
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
Filed herewith
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
Filed herewith
101. PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith
*
Management contract or compensatory plan or arrangement.
-86-
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REGULATED REVENUE GROWTH
($ IN MILLIONS)
20.9%
CAGR
(2004 – 2016)
$35M
$30M
$25M
$20M
$15M
$10M
$14.8
$10.2
$5M
$3.1
$0M
Market
Downturn
$22.7
$19.4
$19.3
$19.1
$32.0 $32.2
$
$31 3
$31.3
$29.7
$30.7
$28.5
N
O
I
T
I
S
O
P
S
I
D
Y
E
L
L
A
V
W
O
L
L
I
W
N
O
I
T
I
S
O
P
S
I
D
A
I
C
N
E
L
A
V
APPROVED RATE ORDER THAT ALLOWS US TO
INCREASE RATES EVERY YEAR UNTIL 2021
$1.9M
of additional annualized
revenue based on 2016
connections
~6.4%
increase over 2016
revenue (excluding
Willow revenue)
Phased in Revenue Increase
$ in millions
$4.1M
$3.7M
$3.3M
$2.9M
$2.6M
$2.2M
$4.5M
$4.0M
$3.5M
$3.0M
$2.5M
$2.0M
$1.5M
$0.5M
$0.0M
$1.0M
$1.2M
4
0
0
2
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
2015 2016 2017P 2018P 2019P 2020P 2021P
Based on 2016 connections, excluding Valencia and Willow Valley.
DIVIDEND POLICY & HISTORY
SINCE U.S. IPO
$0.27
current annual dividend
(paid monthly)
3.1%
dividend yield
(as of 3/24/2017)
AVERAGE ACTIVE CONNECTION GROWTH OF
3.0% AND PERMITS ARE ACCELERATING
37,387
3.0%
active service connections
CAGR
December 2016
(Dec 2011 – Dec 2016)
$0 26
$0.26 $0.26 $0.26 $0.26 $0.26
$0 26
$0 26
$0 26
$0 26
$0.27
$0.28
$0.27
$0 26
$0.26
$0.25
$0.24
$0.23
$0.22
$0.24 $0.24
38,026
37,387
40,000
Total Active
Total Connections
37,500
35,000
32,500
30,000
27,500
31,672
31,630
6
1
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6
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6
1
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l
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6
1
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g
u
A
6
1
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p
e
S
6
1
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t
c
O
6
1
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v
o
N
6
1
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7
0
-
c
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8
0
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J
8
0
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c
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D
9
0
-
n
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J
9
0
-
c
e
D
0
1
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n
u
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0
1
-
c
e
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1
1
-
n
u
J
1
1
-
c
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D
2
1
-
n
u
J
2
1
-
c
e
D
3
1
-
n
u
J
3
1
-
c
e
D
4
1
-
n
u
J
4
1
-
c
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D
5
1
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n
u
J
5
1
-
c
e
D
6
1
-
n
u
J
6
1
-
c
e
D
Adjusted for Willow Valley and Valencia disposition.
BOARD OF DIRECTORS
Trevor T. Hill
Chairman of the Board, Co-founder
Phoenix, Arizona, USA
Ron L. Fleming
President, Chief Executive Officer
and Director
Phoenix, Arizona, USA
William S. Levine
Co-founder & Independent Director
Phoenix, Arizona, USA
David Tedesco
Independent Director
Scottsdale, Arizona, USA
Richard M. Alexander
Independent Director
Calgary, Alberta, Canada
L. Rita Theil
Independent Director
Aurora, Ontario, Canada
Cindy M. Bowers
Director
Grenada, Mississippi, USA
pp ,
,
EXECUTIVE OFFICERS
Ron L. Fleming
President, Chief Executive Officer
and Director
Mike Liebman
Senior Vice President and
Chief Financial Officer
INVESTOR INFORMATION
Ron Both
Investor Relations, CMA
949.432.7566
rb@cma.bz
Stock Exchange Listings
NASDAQ
Stock symbol: GWRS
The Toronto Stock Exchange
Stock symbol: GWR
Transfer Agent & Registrar
Continental Stock Transfer & Trust
17 Battery Place
New York, NY 10004
Global Water Resources, Inc.
21410 N 19th Avenue, Suite 220
Phoenix, AZ 85027 USA
gwresources.com
2016 Annual Report