Global Water Resources, Inc.
21410 N 19th Avenue, Suite 220
Phoenix, AZ 85027 USA
gwresources.com
2017 Annual Report
REGULATED REVENUE GROWTH
$ MILLIONS
19.4%
CAGR
2004 ‐ 2017
Market
Downturn
APPROVED RATE ORDER ALLOWS US TO
INCREASE RATES EVERY YEAR THRU 2021
$1.6M
Additional Annualized
Revenue Based on 2017
Connections
~5.1%
Increase over 2017
Regulated Revenue
32.0 32.2
31.3
31.1
29.7
30.7
28.5
PHASED IN REVENUE INCREASE
$ MILLIONS
22.7
19.1 19.3 19.4
14.8
10.2
3.1
N
O
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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
C
N
E
L
A
V
I
4.2
3.8
3.4
3.0
2.6
2.2
1.2
04 05 06 07 08 09 10 11 12 13 14 15 16 17
2015
2016
2017
2018P
2019P
2020P
2021P
Based on 2017 connections, excluding Valencia and Willow Valley.
DIVIDEND POLICY & HISTORY
SINCE U.S. IPO
~$0.28
Current Annualize Dividend
Paid Monthly
3.2%
Dividend Yield
@ Mar. 27, 2018
ACTIVE & TOTAL CONNECTIONS GROWTH
ACCELERATING
38,997
Active Service Connections
Dec. 31, 2017
$0.2835
$0.2767
Active Connections
Total Connections
39,618
38,997
$0.27
$0.264
$0.24
33,618
29,767
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2016 2017
08
09
10
11
12
13
14
15
16
17
At Year‐end, 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 & Director
Phoenix, Arizona, USA
David Tedesco
Director
Scottsdale, Arizona, USA
Richard M. Alexander
Director
Calgary, Alberta, Canada
L. Rita Theil
Director
Aurora, Ontario, Canada
Cindy M. Bowers
Director
Grenada, Mississippi, USA
EXECUTIVE OFFICERS
Ron L. Fleming
President, Chief Executive Officer and Director
Mike Liebman
Senior Vice President and Chief Financial Officer
Jonathan C. Corwin
Vice President and General Manager
Joanne Ellsworth
Vice President, Corporate and Regulatory Affairs
Jason Thuneman
Vice President, Project Management Office
INVESTOR INFORMATION
Ronald Both
CMA Investor Relations
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
1 State Street, 30th Floor
New York, NY 10004
April 6, 2018
Dear Fellow Shareholders,
2017 was another year of growth and expansion for our company as a leader in water
resource management. We made strong progress across the board, from generating topline
growth and completing a strategic acquisition, to accelerating facility improvements, and
increasing our dividend by 5% over the course of the year.
Revenues grew by 4.7% to $31.2 million, driven by growth in active connections, increased
consumption, and approved rate increases. By the end of 2017, total active connections
increased 4.3% to 38,997. This represents the strongest active connection growth we’ve
experienced in the last decade. These factors helped return a healthy bottom line of $4.6
million or $0.23 per share.
Our growth in active connections reflects the growing number of Metro Phoenix single-family
permits. According to the Home Builders Association of Central Arizona (HBACA), for
Maricopa County and Pinal County combined, single-family housing permits grew 12% to
19,863 units in 2017. New U.S. Census data also reveals that in 2017 Maricopa was the fastest
growing county in the U.S.
The outlook for these areas continues to be very positive, with the Greater Phoenix Blue Chip
Economic Forecast panel forecasting single-family permits to increase to about 24,000 in
2018 and 27,000 in 2019. In the city of Maricopa, which represents our largest water and
wastewater permitted utility service area, the HBACA reported a 59% increase in permits in
2017. This follows a 56% increase in 2016.
Throughout 2017, we have been preparing to take advantage of these growth trends. Under
our accelerated capital improvement program, we invested an additional $20.9 million of
cash flow and we remain on track for our planned facility improvements to be completed in
early 2018. We expect these improvements to drive revenue growth, reduce expenses, and
expand our rate base. Moreover, these prudent investments in our existing utilities enhance
the level of service we provide to our customers and supports the growth of the communities
we have the privilege to serve.
We are also seeing other potential growth drivers on the horizon. In our large, regional service
territory west of the Phoenix metropolitan area, we are excited about the announcement of
Bill Gates’ investment firm, Cascade Investments, recently purchasing $80 million in Arizona
real estate to build a “Smart City.” The development is expected to include space for 80,000
residential units, 470 acres for public schools, and 3,800 acres designated for offices,
commercial buildings and retail outlets.
Another related growth driver is the Nikola Motor Company’s plans to build a $1 billion
hydrogen-electric semi-truck manufacturing plant. While Nikola will not be our direct
customer, this type of project is certain to spur further growth in the surrounding region. In
fact, it is expected to bring 2,000 new jobs to the area immediately adjacent to the property
acquired by Cascade. We expect these major projects to accelerate organic growth in our
utilities.
Demonstrating our commitment to efficient and strong growth, we recently appointed as our
new director of Water Resources, Jake Lenderking, who is an accomplished water resource
executive and industry expert. We also nominated to our board of directors another
respected water industry professional, Deborah Coy, as well as Brett Huckelbridge, a capital
markets expert.
The combined skill sets of these additions will further ensure we have the resources necessary
to aggressively pursue our growth objectives and support Global Water Resources’ primary
mandate of providing safe, reliable and sustainable services to our customers.
In 2018, these objectives will involve growing cash flow from operations by driving topline
revenue growth, along with creating operational efficiencies and managing controllable
expenses. Meanwhile, we will continue to pursue accretive acquisitions that offer
consolidation benefits, and work to grow our dividend over time.
Finally, we would like to thank our talented teams at Global Water Resources for their
dedicated efforts which were truly the basis for our success in 2017, as well express our
appreciation to all our stakeholders for joining us on this journey. For our great company, we
believe the journey has only just begun.
Sincerely yours,
Ron L. Fleming
President & CEO
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, 2017
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, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
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, 2017) was $194.1 million based upon the closing sale price of the registrant’s common stock as reported on the NASDAQ
Global Select Market. As of March 9, 2018, the registrant had 19,631,266 shares of common stock, $0.01 par value per share, outstanding.
The information required by Part III of this Form 10-K, to the extent not set forth herein, is incorporated herein by reference to the registrant’s definitive
proxy statement relating to the 2018 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, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
EXPLANATORY NOTE
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.
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 7A.
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
Quantitative and Qualitative Disclosures About Market Risk
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
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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; the impact of tax reform; 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
PART I
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 nine water and wastewater utilities in strategically targeted communities in metropolitan Phoenix. We currently
serve more than 51,000 people in approximately 20,000 homes within our 336 square miles of certificated service areas, which
are serviced by five wholly-owned regulated operating subsidiaries as of December 31, 2017. Approximately 98.8% 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 $31.2 million in 2017, and total service connections increasing
from 8,113 as of December 31, 2004 to 39,618 as of December 31, 2017, 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.
-3-
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 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 $1.07 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 2021 fiscal year.
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 FATHOM™ 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.
-4-
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 7 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
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
41% 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
50,000 water utilities and approximately 16,000 community wastewater utilities, according to the U.S. Environmental
Protection Agency ("EPA"). The majority of the approximately 50,000 water utilities are small, serving a population
of 500 or less, and 86% of the water utilities serve only 10% 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, approximately 80% are provided service
by municipally-owned utilities. For homes connected to a community wastewater system, about 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
systems may be as much as $271 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.
-5-
•
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
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.
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.
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 50,000. 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 90% of the
recycled water goes towards common area non-potable irrigation and for use at a local farm, which allows
for the recycled water to naturally recharge into the aquifer. This reduces the total amount of limited ground
-6-
or surface water that would otherwise be required within the community by over 40%. To date, the Company
has reused 6.9 billion gallons of recycled water in the City of Maricopa.
•
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.
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.
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.
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 cellular
transmission units. The data is then presented to the utility, and may be available 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, hourly, daily, weekly,
or monthly usage back to the customers.
-7-
Back-Office Technologies and Paperless 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
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 utilities are regulated by the Arizona Corporation Commission (the “ACC”), as described further under “—Regulation
—Arizona Regulatory Agencies” below. As of December 31, 2017, our utilities collectively had 38,997 active service connections
offering predictable rate-regulated cash flows. Revenues from our regulated utilities accounted for approximately 99.8% of total
revenues in 2017. 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
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 relationships
with key regulatory bodies.
-8-
A summary description of our water utilities at December 31, 2017 is set forth in the following table and described in more detail
below:
Date of
Acquisition (A)
or Formation
(F)
Service Provided
Square Miles of
Service Area
(1)
Active Service
Connections
Average
Monthly Rate
Per Service
Connection
Company
MARICOPA / CASA GRANDE
REGION
Global Water-Santa Cruz Water
Company
Global Water-Palo Verde Utilities
Company
2004 (A) Water
2004 (A) Wastewater and
Recycled Water
WEST VALLEY REGION
Water Utility of Greater Tonopah
Water Utility of Northern Scottsdale
2006 (A) Water
2006 (A) Water
Eagletail Water Company
Balterra Sewer Corp
Hassayampa Utility Company
ELOY REGION
Global Water - Picacho Cove Water
Company
Global Water - Picacho Cove Utilities
Company
Total
2017 (A) Water
2008 (A) Wastewater and
Recycled Water
Wastewater and
Recycled Water
2005 (F)
2006 (F)
Water
2006 (F)
Wastewater and
Recycled Water
(1) Certified areas may overlap in whole or in part for separate utilities.
Maricopa/Casa Grande Region
73
102
105
1
8
2
41
2
2
$
$
$
$
$
19,375
19,146
340
82
54
—
—
—
—
57
71
97
180
62
—
—
—
—
336
38,997
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 7,904 active service connections (representing
approximately 4,000 homes) from December 2009 to December 2017. Development in the area is considered to be affordable and
represents one of the few areas within the U.S. 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 19,375 active service connections as of December 31, 2017
and revenues from Santa Cruz represented approximately 42.7% and 43.9% of our total revenue for the years ended December
31, 2017 and 2016, respectively. Palo Verde serves 19,146 active service connections as of December 31, 2017 and revenues from
Palo Verde represented approximately 52.6% and 53.0% of our total revenue for the years ended December 31, 2017 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.
-9-
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”, included in Part II, Item 7 of this Form 10-K, 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 12 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, 2017. 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.
In November 2017, the Bill and Melinda Gates Investment Group, through an investment vehicle, acquired 20,000 acres in the
Belmont development, located in the West Valley Region. Belmont is a mixed use, master planned community and is included
within the service area of Greater Tonopah and Hassayampa.
We acquired Northern Scottsdale in 2006. Northern Scottsdale serves 82 active service connections as of December 31, 2017.
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”, included in Part II, Item 7 of this Form 10-K, 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.
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”, included in Part II, Item 7 of this Form 10-K, for additional information.
We formerly operated additional utilities in the West Valley Region through Valencia, Greater Buckeye and Willow Valley. Valencia
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 to the City of Buckeye. See “Management’s Discussion and Analysis of Financial Condition
-10-
and Results of Operations—Recent Events—Stipulated Condemnation of the Operations and Assets of Valencia”, included in Part
II, Item 7 of this Form 10-K, 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”, included in
Part II, Item 7 of this Form 10-K, for additional information.
On May 15, 2017, we acquired Eagletail Water Company ("Eagletail") via merger. Eagletail serves 54 active connections as of
December 31, 2017. Eagletail has a CC&N for eight square miles located west of metropolitan Phoenix.
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 19,000.
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 two congruent 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 approximately 60 to 500 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.
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.
-11-
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 service
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 9,700 water quality tests in 2017 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 2017, we achieved a compliance rate of 99.9% for meeting state and
federal drinking water standards and 99.1% for compliance with wastewater requirements, for an overall compliance rating of
99.1%. 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
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.
-12-
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 U.S., 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, 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,” included in Part II, Item
7 of this Form 10-K, for additional information.
-13-
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,” included in Part I, Item 1A of this Form 10-K, for additional information.
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.
-14-
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 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 in the near
future 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. There is no assurance that the Arizona Department of Water
Resources would add any additional acre-feet to either Designation of Assured Water Supply in the future.
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.
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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.
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, 2017, we employed 47 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.
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ITEM 1A.
RISK FACTORS
Regulatory and Legislative Factors
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 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.
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. Failure by us
to observe the conditions and comply with the requirements of 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 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.
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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;
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 employment, property ownership, or general business
regulations; changing environmental requirements and the imposition of additional requirements and costs on our
operations; and 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.
Uncertainties in the interpretation and application of the 2017 Tax Cuts and Jobs Act could materially affect our tax obligations
and effective tax rate.
Significant judgment is required in determining our provision for income taxes. Our calculation of the provision for income
taxes is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. In addition, our income tax
returns are subject to periodic examination by the Internal Revenue Service and other taxing authorities.
The 2017 Tax Cuts and Jobs Act (the “TCJA”) was enacted on December 22, 2017, and significantly affected U.S. tax law by
changing how the U.S. imposes income tax on corporations. The U.S. Department of Treasury has broad authority to issue
regulations and interpretative guidance that may significantly impact how we will apply the law, which ultimately could impact
our results of operations in the period issued.
The TCJA requires complex computations not previously provided in U.S. tax law. As such, the application of accounting guidance
for such items is currently uncertain. Further, compliance with the TCJA and the accounting for such provisions require accumulation
of information not previously required or regularly produced. As a result, we have provided a provisional estimate on the effect
of the TCJA in our financial statements. As additional regulatory guidance is issued by the applicable taxing authorities, as
accounting treatment is clarified, as we perform additional analysis on the application of the law, and as we refine estimates in
calculating the effect, our final analysis, which will be recorded in the period completed, may be different from our current
provisional amounts, which could materially affect our tax obligations and effective tax rate.
In addition, the ACC opened a docket to address the utility ratemaking implications of the TCJA. It is not clear what actions the
ACC will ultimately take with regard to our regulated utilities. See “Management’s Discussion and Analysis of Results of Operations
and Financial Condition - ACC Tax Docket” in Part II, Item 7 of this Form 10-K for more information on the ACC docket that
addresses the utility ratemaking implications of the TCJA.
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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.
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
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.”
Operational Factors
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.
Water shortages may affect us in a variety of ways. For example, water shortages could:
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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;
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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.
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.
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 FATHOM™ business,
which we previously owned, are an integral part of our business. For example, FATHOM™ systems allow us to read water meters
remotely, identify high water usage, and identify water theft from disconnected meters. FATHOM™ 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 FATHOM™ 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 FATHOM™ 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;
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 FATHOM™ 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 FATHOM™ systems, including billing systems,
could exacerbate the impact of any of the foregoing events.
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.
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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 $31.2 million
in 2017 and total service connections increasing from 8,113 as of December 31, 2004 to 39,618 as of December 31, 2017. We
have also expanded geographically, from 18 square miles of service areas in 2004 to 336 square miles as of December 31, 2017.
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, 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.
To manage growth effectively, we must:
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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;
• manage multiple relationships with our customers, regulators, suppliers, and other third parties; and
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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.
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.
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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.
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, 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.
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 utilities and 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.
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.
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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
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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.
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.
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
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legal actions for damages by our customers, including but not limited to damages based on commercial losses and effects
on human health.
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.
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.
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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 6.4% of our
total operating expenses in fiscal year 2017, 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. There is no assurance that these suppliers will continue to produce the
chemicals in the quantities and quality and at the times they are needed. Moreover, the replacement of any of these suppliers could
lead to significant delays and increase in our costs. Chemical costs represented approximately 1.7% of our total operating expenses
in fiscal year 2017.
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.
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.
Market and Financial Factors
Our operations of regulated utilities are currently located exclusively in the state of Arizona, and more specifically approximately
98.8% 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 98.8% 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, political, 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.
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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, 2017, we had total indebtedness of $115.1 million. In addition, we may incur substantial additional indebtedness
in the future. Our indebtedness could have important consequences, including:
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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.
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, we have 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.
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 perform well, 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.
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.
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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.
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.
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.
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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.
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.
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.
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.
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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, lower rates, 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.
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 59% of our outstanding common stock, including 49% held by our director, William S. Levine.
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:
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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;
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;
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strategic actions by us or our competitors, such as acquisitions or restructurings;
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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 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.
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 have also filed 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
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.
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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.
We have to 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. 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 may
encounter problems or delays for 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 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 currently intend to continue to pay a regular monthly dividend on our common stock of $0.023625 per share ($0.2835 per
share annually), or an aggregate of approximately $5.6 million on an annual basis. However, our future dividend policy is subject
to our compliance with applicable law, and depends 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
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 through 2021 or until the earliest of (i) the last day of the first fiscal year in which
our annual gross revenues exceed $1.07 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.
-31-
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.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
-32-
ITEM 2.
PROPERTIES
The following table lists the properties that we own or lease:
Nature of Property
Location
Operated By
Corporate Offices
Phoenix, Arizona
Global Water Resources, Inc.
Wastewater Treatment Plant
Maricopa, Arizona
Global Water - Palo Verde Utilities Company, LLC
Global Water Center - Regional Office Maricopa, Arizona
Global Water - Palo Verde Utilities Company, LLC
Wastewater Utility Plant
8 Lift Stations - Maricopa, Arizona
Global Water - Palo Verde Utilities Company, LLC
Water Utility Plant
Water Utility Plant
Water Utility Plant
Water Utility Plant
Water Utility Plant
16 Well Sites - Maricopa, Arizona
Global Water - Santa Cruz Water Company, LLC
5 Water Distribution Sites - Maricopa,
Arizona
Global Water - Santa Cruz Water Company, LLC
9 sites - Western Maricopa County, Arizona Water Utility of Greater Tonopah, LLC
4 sites - Northern Maricopa County, Arizona Water Utility of Northern Scottsdale, LLC
Western Maricopa County, Arizona
Eagletail Water Company, L.C.
Owned or
Leased
Leased
Owned
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.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
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, 2017:
Fiscal 2017:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Fiscal 2016:
1st Quarter
2nd Quarter (from April 28, 2016)
3rd Quarter
4th Quarter
Shareholders
Sales Price
High
Low
$
$
$
$
$
$
$
$
9.28
9.96
10.00
10.00
$
$
$
$
— $
$
$
$
8.97
9.18
9.29
7.90
8.43
9.17
9.00
—
6.23
7.36
7.56
As of March 3, 2018, there were approximately 7 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, 2017, we paid cash dividends to holders of our common stock totaling $5.4 million, which
included: from January 2017 through May 2017, a monthly dividend of $0.0225 per share; from June 2017 through November
2017, a monthly dividend of $0.02306 per share; and a monthly dividend of $0.023625 per share for December 2017.
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 for December 2016.
We currently intend to continue to pay a regular monthly dividend of $0.023625 per share ($0.2835 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.
-34-
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, 2017. 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.
* $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.
4/28/2016
6/30/2016
9/30/2016
12/31/2016
3/31/2017
6/30/2017
9/30/2017
12/31/2017
Global Water Resources, Inc. $ 100.00
$ 140.84
$ 128.26
S&P 500 Index
$ 100.00
$ 101.11
$ 104.45
Peer Group Index**
$ 100.00
$ 118.46
$ 106.04
$
$
$
145.78
107.85
117.88
$
$
$
139.44
113.82
118.74
$
$
$
158.75
116.75
125.88
$
$
$
151.12
121.37
130.86
$
$
$
149.91
128.80
144.10
Issuer Purchases of Equity Securities
None.
-35-
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 in Part II, Item 7 in this Form 10 K. The table presents the consolidated statements of operations and cash flow data for
the years ended December 31, 2017, 2016, and 2015 and the consolidated balance sheet data at December 31, 2017 and 2016,
which are derived from our audited consolidated financial statements included elsewhere in this Form 10 K. The table also presents
the consolidated statements of operations and cash flow data for the year ended December 31, 2014 and the consolidated balance
sheet data at December 31, 2015 and 2014, which were 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:
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
-36-
Year Ended December 31,
2017
2016
2015
2014
$ 213,459
9,665
$
$
15,444
$ 238,568
$ 200,489
24,740
$
$
13,590
$ 238,819
$ 194,152
18,715
$
$
22,875
$ 235,742
$ 240,424
12,293
$
$
52,162
$ 304,879
8,976
$
$ 114,363
$ 100,369
$ 223,708
$
14,860
$ 238,568
10,901
$
$ 114,317
$
98,612
$ 223,830
$
14,989
$ 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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
31,208
$
23,864
7,344
$
(3,394) $
$
3,950
$
601
$
4,551
$
29,799
$
23,987
5,812
$
(9,611) $
(3,799) $
1,287
(2,512) $
$
31,956
$
25,429
$
6,527
$
35,459
$
41,986
$ (20,623) $
$
21,363
32,559
(22,232)
54,791
(6,855)
47,936
16,995
64,931
0.23
0.23
11,156
5,399
0.28
20,885
19,851
19,146
$
$
$
$
$
$
(0.13) $
(0.13) $
$
1,895
$
5,036
$
0.26
$
8,588
19,013
18,374
$
$
$
$
$
$
1.17
1.17
4,245
27,607
1.43
3,355
19,964
17,820
3.54
3.54
11,646
3,454
0.20
1,655
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 $2.7
million have been reclassified from other assets to noncurrent liabilities for the years ended December 31, 2015 and 2014,
respectively.
The balance sheet as of December 31, 2016 and the income statement for the year ended December 31, 2016 have been adjusted
to reflect an immaterial correction of an error. See Footnote 1 - Description of Business, Basis of Presentation, Corporate
Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements, included in Part II, Item 8 of this Form
10-K, for additional information.
-37-
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read
in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Form 10-K.
Basis of Presentation
The financial statements of Global Water Resources, Inc. have been prepared in accordance with United States ("U.S.") generally
accepted accounting principles ("U.S. GAAP") and, except where otherwise indicated, are presented in U.S. dollars and references
to “$”, “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
2016 and 2017 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
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 continues to grow 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 people by 2020 and 6.8 million by 2040. During the twelve months ended December 31,
2017, Arizona’s employment rate improved by 1.7%, ranking the state in the top 14 nationally for job growth.
Also, 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 18,456
units for 2016.
For 2017, single family dwelling permits were up 12% to 19,863 permits in Maricopa and Pinal Counties combined according to
the Home Builders Association of Central Arizona. The forecasts by the Greater Phoenix Blue Chip Real Estate Consensus Panel
for 2018 and 2019 remain positive at approximately 24,000 and 27,000 single family dwelling 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.
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;
-38-
•
•
•
economic environment;
the need for infrastructure investment;
production and treatment costs;
• weather and seasonality; and
•
access to and quality of water supply.
We are subject to economic regulation by the state regulator, the 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, increased 1,592
connections, or 4.2%, from a total of 38,026 as of December 31, 2016 to 39,618 as of December 31, 2017. This increase is due
primarily to the positive growth in new connections.
As of December 31, 2017, we have 38,997 active service connections compared to 37,387 active service connections as of December
31, 2016, an increase of 1,610, or 4.3%. As with the increase in total service connections, the increase is due primarily to the
growth in new connections. Approximately 98.8% of the 38,997 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
as of December 31, 2017.
The graph below presents the historical change in active and total connections for our ongoing operations, adjusting for the July
2015 condemnation of the assets and operations of Valencia Water Company ("Valencia") and the May 2016 sale of Willow Valley.
-39-
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 621 or 1.6% of total connections as
of December 31, 2017.
Economic and Environmental Utility Regulation
We are subject to extensive regulation of our rates by the ACC, which is charged with establishing rates based on the provision
of reliable service at a reasonable cost while also providing an opportunity to earn a fair rate of return on rate base for investors
of utilities. The ACC uses a historical test year to evaluate whether the plant in service is used and useful, to assess whether costs
were prudently incurred, and to set “just and reasonable” rates. Rate base is typically the depreciated original cost of the plant in
service (net of contributions in aid of construction (“CIAC”) and advances in aid of construction (“AIAC”) which are funds or
property provided to a utility under the terms of a main extension agreement, the value of which may be refundable), that has been
determined to have been “prudently invested” and “used and useful”, although the reconstruction cost of the utility plant may also
be considered in determining the rate base. The ACC also decides on an applicable capital structure based on actual or hypothetical
analyses. The ACC determines a “rate of return” on that rate base, which includes the approved capital structure and the actual
cost of debt and a fair and reasonable cost of equity based on the ACC's judgment. The overall revenue requirement for rate making
purposes is established by multiplying the rate of return by the rate base and adding “prudently” incurred operating expenses for
the test year, depreciation, and any applicable pro forma adjustments.
-40-
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 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. See “—Recent Rate Case Activity” for additional information.
Our water and wastewater operations are also subject to extensive United States 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.
We have made significant capital investments in our territories within the last fourteen 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 will qualify under the Internal Revenue
-41-
Code §1033 re-investment criteria pursuant to a favorable Private Letter Ruling with the Internal Revenue Service. See “—Recent
Events—Private Letter Ruling” for additional information.
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 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.
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.
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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 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 hook-up fee or ICFA, we must first use the HUF funds received, after which
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, including construction of sufficient operating capacity
to serve the customers for which revenue was deferred.
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 are 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. The taxability of
AIAC and CIAC was changed with the enactment of the TCJA. Previously, the majority of AIAC and CIAC that we collected
were not taxable. However, with the enactment of the TCJA, they will be taxable going forward. The scope, timing and effect
of the regulatory treatment of AIAC and CIAC under the TCJA are not known at this time.
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 United States (“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 U.S. 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 transaction, which proceeds were primarily used to pay down
the outstanding $106.7 million in tax-exempt bonds at 103%. For additional information, see “—Liquidity and Capital Resources
—Senior Secured Notes.”
Stipulated Condemnation of the Operations and Assets of Valencia
On July 14, 2015, the Company closed the stipulated condemnation to transfer the operations and assets of Valencia to the City
of Buckeye. Terms of the condemnation were agreed upon through a settlement agreement and stipulated final judgment of
condemnation wherein the City of Buckeye acquired all the operations and assets of Valencia and assumed operation of the utility
upon close. The City of Buckeye 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.
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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
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, 2017),
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, 2017, 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. Upon settlement of the Sonoran acquisition
liability in June 2016, the Company recorded a gain of $954,000 in other income.
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.
Pursuant to Internal Revenue Code §1033, the Company would have been able to defer the gain on condemnation through the end
of 2017. On April 18, 2017, the Company filed a request for a one-year extension to defer the gain to the end of 2018, which the
IRS approved on August 8, 2017. Following the approval of the extension, the Company has slightly modified the timing of certain
planned investments within its capital improvement plan in accordance with Internal Revenue Code §1033. Accordingly, the
Company substantially completed these investments in 2017, with the remaining improvements to be completed in early 2018.
As a result of the Private Letter Ruling, the Company increased capital expenditures in 2017 as compared to recent years, and
expects corresponding reductions to occur in 2018, 2019, and beyond. As of December 31, 2017, our deferred tax liability relating
to the condemnation was approximately $7.2 million.
Acquisition of Eagletail Water Company
On May 15, 2017, the Company acquired Eagletail Water Company ("Eagletail") for approximately $80,000. At the time of
acquisition, Eagletail, a small water utility located west of metropolitan Phoenix, added approximately 55 active water connections
and eight square miles of approved service area to Global Water’s existing regional service footprint.
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ACC Tax Docket
On December 20, 2017, the ACC opened a docket to address the utility ratemaking implication of the Federal Tax Cut and Jobs
Act (the “TCJA”). Numerous companies, including GWRI’s regulated utilities, filed comments on or before January 22, 2018.
The ACC subsequently held a workshop regarding the tax issue on January 31, 2018, and then discussed and approved an order
on February 6, 2018. The order requires all utilities in Arizona to “apply regulatory accounting treatment which, includes the use
of regulatory assets and regulatory liabilities, to address all impacts from the enactment of the TCJA.” The order also orders
specified utilities on “Attachment A” to make one of the following three types of filings by April 7, 2018, “1) file an application
for a tax expense adjustor mechanism, 2) file an intent to file a rate case within 90 days, or 3) any such other application to address
rate making implications of the TCJA”. All of our currently operating regulated utilities are listed on Attachment A (with the
exception of Eagletail). We are evaluating our options regarding our April 7 filing. The proposals we make on or before April 7
will then be reviewed by the ACC and the ACC will issue an order approving, modifying, or rejecting the proposals. It is not clear
what actions the ACC will ultimately take with regard to our regulated utilities.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating
performance. In consideration of the Financial Accounting Standards Board’s Accounting Standards Codification 280, Segment
Reporting, 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.
Comparison of Results of Operations for the Years Ended December 31, 2017 and 2016
The following table summarizes our results of operations for the years ended December 31, 2017 and 2016 (in thousands):
Revenues
Operating expenses
Operating income
Total other expense
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Basic earnings (losses) per common share
Diluted earnings (losses) per common share
For the Year Ended December 31,
2017
2016
$
$
$
$
31,208
23,864
7,344
(3,394)
3,950
601
4,551
0.23
0.23
$
$
$
$
29,799
23,987
5,812
(9,611)
(3,799)
1,287
(2,512)
(0.13)
(0.13)
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Revenues – The following table summarizes our revenues for the years ended December 31, 2017 and 2016 (in thousands).
Water services
Wastewater and recycled water services
Unregulated revenues
Total revenues
For the Year Ended December 31,
2017
2016
$
$
14,367
16,765
76
31,208
$
$
13,978
15,740
81
29,799
Total revenues increased $1.4 million, or 4.7%, for the year ended December 31, 2017 compared with the year ended December
31, 2016. The operations of Willow Valley contributed revenue of $306,000 for the year ended December 31, 2016 compared to
no revenue for the year ended December 31, 2017. The revenue for the remaining operating utilities increased $1.7 million, or
5.8%, to $31.2 million for the year ended December 31, 2017 compared to $29.5 million for the year ended December 31,
2016. 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 4.3% increase in active service connections, coupled with an increase in consumption
during the year ended December 31, 2017 compared to the year ended December 31, 2016.
Water Services – Water services revenue increased $389,000, or 2.8%, to $14.4 million for the year ended December 31, 2017
compared to $14.0 million for the year ended December 31, 2016. The operations of Willow Valley contributed $306,000 for the
year ended December 31, 2016 compared to no revenue for the year ended December 31, 2017. The water services revenue for
the remaining operating utilities increased $695,000, or 5.1%, for the year ended December 31, 2017 compared to the year ended
December 31, 2016.
Water services revenue based on consumption increased $136,000, or 2.2%, to $6.4 million for the year ended December 31, 2017
compared to $6.2 million for the year ended December 31, 2016. The operations of Willow Valley contributed $67,000 for the
year ended December 31, 2016 compared to no revenue for the year ended December 31, 2017. Consumption revenue for the
remaining operating utilities increased $203,000, or 3.3%, to $6.4 million for the year ended December 31, 2017 compared to
$6.2 million for the year ended December 31, 2016. The increase in consumption revenue for the remaining utilities is primarily
driven by an increase in consumption combined with an increase in rates for the year ended December 31, 2017 compared to the
year ended December 31, 2016.
Active water connections increased 4.4% to 19,851 as of December 31, 2017 from 19,013 as of December 31, 2016 primarily due
to the positive growth in new connections.
Water consumption increased 3.3% to 2.3 billion gallons for the year ended December 31, 2017, compared to 2.2 billion gallons
for the year ended December 31, 2016. However, adjusting for the sale of Willow Valley, which operations accounted for 17 million
gallons of consumption for the year ended December 31, 2016, water consumption for the remaining operating utilities increased
4.1% to 2.3 billion gallons. The increase in consumption at the remaining operating utilities is primarily attributed to an increase
in irrigation, residential, and golf course consumption, which was partially offset by a decrease in commercial consumption for
the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in irrigation and residential
consumption is driven by an increase in active connections combined with an increase in average temperature.
Water services revenue, excluding miscellaneous charges associated with the basic service charge, increased $112,000, or 1.5%,
to $7.6 million for the year ended December 31, 2017 compared to $7.5 million for the year ended December 31, 2016. The
operations of Willow Valley contributed revenue of $235,000, for the year ended December 31, 2016 compared to no revenue for
the year ended December 31, 2017. The remaining utilities' basic water services revenue increased $347,000, or 4.8%, for the year
ended December 31, 2017 compared to the year ended December 31, 2016. This increase resulted from an increase in active service
connections for the remaining operating utilities, combined with an increase in rates related to Rate Decision No. 74364.
Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $1.0 million, or 6.5%, for
the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in wastewater and recycled
water services revenue is primarily driven by a $902,000 increase in wastewater services revenue combined with a $123,000
increase in recycled water services revenue for the year ended December 31, 2017 compared to the year ended December 31,
2016. The increase in wastewater services revenue reflects the increase in rates related to Rate Decision No. 74364, as well as the
increase in active wastewater connections, which increased 4.2% to 19,146 as of December 31, 2017 from 18,374 as of December
31, 2016.
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Recycled water services revenue, which is based on the number of gallons delivered, increased $123,000, or 17.7%, to $816,000
for the year ended December 31, 2017 compared to $693,000 for the year ended December 31, 2016. The increase in recycled
water services revenue is primarily related to the increase in recycled water consumption coupled with an increase in recycled
water rates. The volume of recycled water delivered increased 63 million gallons, or 9.9%, to 699 million gallons for the year
ended December 31, 2017 compared to 635 million gallons for the year ended December 31, 2016. Recycled water rates increased
11.5% per Rate Decision No. 74364 compared to 2016.
Operating Expenses – The following table summarizes our operating expenses for the years ended December 31, 2017 and 2016
(in thousands):
Operations and maintenance
Operations and maintenance - related party
General and administrative
Depreciation
Total operating expenses
For the Year Ended December 31,
2017
2016
$
$
6,087
1,462
9,407
6,908
23,864
$
$
6,188
1,853
9,667
6,279
23,987
Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily
chemicals and purchased electrical power), maintenance costs, and property tax, decreased $101,000, or 1.6%, for the year ended
December 31, 2017 compared to the year ended December 31, 2016.
Property tax expense increased $162,000, or 8.9%, to $2.0 million for the year ended December 31, 2017 compared to $1.8 million
for the year ended December 31, 2016. Property taxes are calculated using a centrally valued property calculation, which derives
property values based upon three-year historical average revenues. As revenues increase, we expect property taxes to also increase.
Chemical and supply expenses decreased $143,000, or 26.4%, to $398,000 for the year ended December 31, 2017 compared to
$541,000 the year ended December 31, 2016. The decrease is primarily driven by a reduction in chemical utilization for the year
ended December 31, 2017 compared to the year ended December 31, 2016, as additional chemicals were required in 2016 to
ensure optimal operation of the wastewater facility in readiness for the inception of the Palo Verde wastewater recycling facility
expansion project, which is underway.
Repairs and maintenance expense decreased $66,000, or 26.2%, to $186,000 for the year ended December 31, 2017 compared to
$252,000 for the year ended December 31, 2016. The decrease in repair and maintenance expense is primarily attributed to work
performed as part of the accelerated capital expenditure plan. See "– Recent Events – Private Letter Ruling" for additional
information. The addition of assets added through the plan has reduced the repair and maintenance requirements.
Total personnel expenses decreased $40,000, or 2.3%, to $1.7 million for the year ended December 31, 2017 compared to $1.7
million for the year ended December 31, 2016, primarily due to a decrease in personnel related to the sale of Willow Valley, which
operations represented $60,000 of personnel expense for the year ended December 31, 2016 compared to zero expense for the
year ended December 31, 2017. Total personnel costs for the remaining operating utilities increased $20,000, or 1.2%, for the year
ended December 31, 2017 compared to the year ended December 31, 2016. The increase in personnel expenses for the remaining
utilities was primarily driven by an increase in medical insurance expense, which increased $21,000 for the year ended December
31, 2017 compared to the year ended December 31, 2016.
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 $391,000, or 21.1%, to $1.5 million for the year ended December 31, 2017 compared to $1.9 million for
the year ended December 31, 2016. FATHOM™ service fees partially decreased as a result of the sale of Willow Valley, which
operations represented $60,000 of such expenses for the year ended December 31, 2016 compared to zero expense for the year
ended December 31, 2017. FATHOM™ service fees for the remaining operating utilities decreased $331,000, or 18.5%, for the
year ended December 31, 2017 compared to the year ended December 31, 2016. The decrease in service fees for the remaining
operating utilities was driven by the renegotiation of the FATHOM™ service contract in November 2016, wherein the monthly
rate per water connection decreased $1.55, or 19.9%, from $7.79 per month to $6.24 per month beginning in January 2017.
General and Administrative – General and administrative costs include the day-to-day expenses of office operations, personnel
costs, legal and other professional fees, insurance, rent, and regulatory fees. These costs decreased $260,000, or 2.7%, for the year
ended December 31, 2017 compared to the year ended December 31, 2016.
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Deferred compensation expense decreased $477,000, or 26.5%, to $1.3 million for the year ended December 31, 2017 compared
to $1.8 million for the year ended December 31, 2016. The decrease was primarily related to the lower increase in the carrying
value of our equity awards due to the change in stock price, which increased $0.26 for the year ended December 31, 2017 compared
to an increase of $3.60 for the year ended December 31, 2016. The effect of the change in carrying value was partially offset by
the vesting of the 2017 stock option grant for the year ended December 31, 2017.
Board compensation expense decreased $112,000, or 12.9%, to $754,000 for the year ended December 31, 2017 compared to
$866,000 for the year ended December 31, 2016. The decrease is related to the unrealized gains on the deferred phantom units
("DPUs"), due to a lower increase in stock price for the year ended December 31, 2017 compared to the year ended December
31, 2016. This decrease was partially offset by increases in stock option expense associated with the 2016 option grant.
Personnel related costs increased $109,000, or 3.9%, to $2.9 million for the year ended December 31, 2017 compared to $2.8
million for the year ended December 31, 2016. The increase was driven by an increase in salaries coupled with an increase in
medical expenses for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in salaries
expense was primarily related to personnel changes due to becoming a U.S. public company.
Public company expenses increased $132,000, or 163.0%, to $213,000 for the year ended December 31, 2017 compared to $81,000
for the year ended December 31, 2016 due to becoming a U.S. public company in May 2016, with the year ended December 31,
2017 containing a full 12 months of expenses compared to eight months in 2016. Public company expenses were historically
recorded at GWRC. Public company expenses primarily consist of listing fees, filing fees, and transfer agent expenses.
Franchise taxes increased $82,000, or 68.9%, to $200,000 for the year ended December 31, 2017 compared to $118,000 for the
year ended December 31, 2016. The increase in franchise taxes is associated with GWRI (a Delaware corporation) becoming a
U.S. public company which requires that we pay $200,000 in Delaware franchise tax each year, of which a pro rata amount of
eight months was paid in 2016, compared to a full year in 2017.
Other Expense – Other expense totaled $3.4 million for the year ended December 31, 2017 compared to other expense of $9.6
million for the year ended December 31, 2016. The decrease of $6.2 million in other expense was primarily driven by a $6.7
million decrease in interest expense, associated with the June 2016 debt refinancing, combined with a $219,000 change in Other
– related party income, associated with our investment in FATHOMTM, which were partially offset by a decrease in other income
of $744,000, primarily related to the gain on the settlement of the Sonoran purchase liability recognized in the year ended December
31, 2016.
Interest expense decreased $6.7 million, or 56.8%, to $5.1 million for the year ended December 31, 2017 compared to $11.9
million for the year ended December 31, 2016. Interest expense decreased due to the June 2016 debt refinancing. 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 during the year ended December 31, 2016. Additionally, interest expense was further reduced by approximately
$865,000 due to reduced interest rates on the new notes.
Other – related party income increased $219,000 to income of $234,000 for the year ended December 31, 2017 compared to
income of $15,000 for the year ended December 31, 2016. Other related party income includes royalty income based upon a
percentage of certain FATHOM™ recurring revenue combined with the equity method gains and losses associated with our equity
method investment in FATHOM™. The change in other related party income was primarily driven by a $243,000 gain from the
revaluation of our ownership interest in FATHOM™ in connection with FATHOM™’s financing transaction in March 2017 (See
Note 5 – “Equity Method Investment” to the condensed consolidated financial statements in Part II, Item 8 of this report) combined
with a reduction of our share of FATHOM™ operating losses for the year ended December 31, 2017 compared to December 31,
2016.
Other income decreased $744,000 to $1.5 million for the year ended December 31, 2017 compared to $2.2 million for the year
ended December 31, 2016. The decrease in other income is primarily related to the $954,000 gain on the settlement of the Sonoran
purchase liability recognized in the year ended December 31, 2016. Partially offsetting the decrease was an increase in the Valencia
earnout of $240,000 to $1.4 million for the year ended December 31, 2017 compared to $1.2 million for the year ended December
31, 2016. The Valencia earnout consists of $3,000 for each new water meter installed within Valencia’s prior service areas. This
increase was primarily driven by accelerated growth in our former service territory. Other income was also affected by a $54,000
loss we recorded for the sale of Willow Valley for the year ended December 31, 2016.
Income Tax (Expense) Benefit – Income tax benefit of $0.6 million was recorded for the year ended December 31, 2017 compared
to an income tax benefit of $1.3 million for the year ended December 31, 2016. The income tax benefit recorded is primarily
related to the recording of the impacts of the TCJA, partially offset by the expense incurred due to pre-tax net income for the year
ended December 31, 2017.
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Net Income (Loss) – Our net income totaled $4.6 million for the year ended December 31, 2017 compared to a net loss of $2.5
million for the year ended December 31, 2016. The $7.1 million increase for the year ended December 31, 2017 compared to the
year ended December 31, 2016 is primarily attributed to the $6.7 million reduction of interest expense, a $1.5 million operating
income increase, a $240,000 increase in the Valencia earnout, a $204,000 change of our equity method investment, and a $0.7
million change in income taxes. Additionally, net income for the year ended December 31, 2016 included a $954,000 gain on the
settlement of the Sonoran purchase liability.
Comparison of Results of Operations for the Years Ended December 31, 2016 and 2015
The following table summarizes our results of operations for the years ended December 31, 2016 and 2015 (in thousands):
Revenues
Operating expenses
Operating income
Total other expense
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Basic earnings (losses) per common share
Diluted earnings (losses) per common share
For the Year Ended December 31,
2016
2015
$
29,799
23,987
5,812
(9,611)
(3,799)
1,287
(2,512) $
(0.13) $
(0.13) $
31,956
25,429
6,527
35,459
41,986
(20,623)
21,363
1.17
1.17
$
$
$
$
Revenues – The following table summarizes our revenues for the years ended December 31, 2016 and 2015 (in thousands).
Water services
Wastewater and recycled water services
Unregulated revenues
Total revenues
For the Year Ended December 31,
2016
2015
$
$
13,978
15,740
81
29,799
$
$
16,320
15,020
616
31,956
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.
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 services revenue was partially offset by an
increase in water services 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.
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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.
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.
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 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.
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.
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.
Operating Expenses – The following table summarizes our operating expenses for the years ended December 31, 2016 and 2015
(in thousands):
Operations and maintenance
Operations and maintenance - related party
General and administrative
Depreciation
Total operating expenses
For the Year Ended December 31,
2016
2015
$
$
6,188
1,853
9,667
6,279
23,987
$
$
7,080
2,179
7,957
8,213
25,429
Operations and Maintenance – Operations and maintenance costs 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.
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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.
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.
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.
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.
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.
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 phantom stock units ("PSUs") and stock appreciation rights ("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.
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
and Santa Cruz. 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.
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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.
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.
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.
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.
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 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.
Income Tax (Expense) 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.
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.
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Outstanding Share Data
As of March 9, 2018, there were 19,631,266 shares of our common stock outstanding and options to acquire an additional 740,000
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, 2017, we have no notable near-term cash expenditure or 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 9, 2017, we announced a
monthly dividend increase from $0.02306 per share ($0.27672 per share annually) to $0.023625 per share ($0.2835 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 and debt service ratio covenant
requirements (see “—Senior Secured notes").
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, weather, and
seasonality.
For the year ended December 31, 2017, our net cash provided by operating activities totaled $11.2 million compared to $1.9 million
for the year ended December 31, 2016. The $9.3 million change in cash from operating activities is primarily driven by the increase
in operating income for the year ended December 31, 2017 compared to the year ended December 31, 2016 coupled with a decrease
in interest expense due to the June 2016 debt refinancing, decrease in payments made relating to accounts payable and other current
liabilities, and increase in deferred income tax expense.
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.
Cash Used In Investing Activities
Our net cash used in investing activities totaled $21.0 million for the year ended December 31, 2017 compared to $6.2 million
for the year ended December 31, 2016. The $14.8 million change in cash used in investing activities was primarily driven by an
increase in capital expenditures of $12.3 million for the year ended December 31, 2017 compared to the year ended December
31, 2016. In addition, cash provided by investing activities for the year ended December 31, 2016 included $2.3 million in cash
proceeds from the sale of Willow Valley.
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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.
We continue to invest capital prudently in our existing, core service areas where we are able to deploy our Total Water Management
model as service connections grow. This includes any required maintenance capital expenditures and the construction of new water
and wastewater treatment and delivery facilities. Capital expenditures increased 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 Private Letter Ruling
(see “—Recent Events—Private Letter Ruling”). 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 used in financing activities totaled $5.4 million for the year ended December 31, 2017, a $18.7 million change as
compared to the $13.3 million in cash provided by financing activities for the year ended December 31, 2016. This change was
primarily driven by the refinancing of tax exempt bonds in 2016, 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 $5.6 million in net proceeds from our U.S. IPO. Proceeds for the year
ended December 31, 2016 were partially offset by the $2.8 million payment to settle our Sonoran acquisition liability.
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 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.
Senior Secured Notes
On June 24, 2016, we 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.
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, 2017, the Company was in compliance with its financial debt covenants.
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.
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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. Additionally, an evaluation
of the recoverability of deferred tax gains is based on an assessment of the Company's ability to fully utilize the deferred tax gain
before its expires. The Company's assessment is based upon the ability to acquire qualifying properties. If the assessment of the
Company's ability to fully utilize the deferred tax gain changes, the Company would be required to recognize income tax expense
in the period in which the deferred tax gain expires.
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.
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 second
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, 2017 and 2016, we did not have any off-balance sheet arrangements.
-56-
Contractual Obligations
The following table summarizes our contractual cash obligations as of December 31, 2017 (in thousands):
Long term debt obligations
Interest on long-term debt (2)
Operating lease obligations
FATHOM™ purchase obligations(3)
Total (1)
Payments Due By Period
Total
115,064
$
$
Less than 1
Year
1 - 3 Years
3 - 5 Years
8
$
18
$
5,757
$
67,217
225
717
5,212
124
717
10,422
60
—
10,288
41
—
More than 5
Years
109,281
41,295
—
—
$
183,223
$
6,061
$
10,500
$
16,086
$
150,576
(1) In addition to these obligations, the Company pays annual refunds on advances in aid of construction over a specific period of time based
on operating revenues generated from developer-installed infrastructure. The refund amounts are considered an investment in
infrastructure and eligible for inclusion in future rate base. These refund amounts are not included in the above table because the refund
amounts and timing are dependent upon several variables, including new customer connections, customer consumption levels, and future
rate increases, which cannot be accurately estimated. Portions of these refund amounts are payable annually over the next two decades,
and amounts not paid by the contract expiration dates become nonrefundable and are transferred to contributions in aid of construction.
(2) Interest on the long-term debt is based on the fixed rates of the Company’s senior secured notes.
(3) The Company entered into an agreement with FATHOM™ to replace a majority of its meter infrastructure in 2017, this project was
completed in 2017, the final amount to be paid is reflective of finalizing contractual terms of the agreement. See Note 7 –
“Transactions with Related Parties” of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-
K for additional information.
Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk associated with changes in commodity prices, equity prices, and interest rates. The
Company uses fixed-rate long-term debt to reduce the risk from interest rate fluctuations. Although the Company’s long-term debt
is based on fixed rates, changes in interest rates could impact the fair market value of the Company’s long-term debt. As
of December 31, 2017, the fair market value of the Company’s long-term debt was $115.7 million. For additional information
about the Company’s long-term debt, see Note 9 – “Debt” of the Notes to the Condensed Consolidated Financial Statements
included in Part II, Item 8 of this Form 10-K.
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.
-57-
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, 2017 and 2016
Consolidated Statements of Operations for the Years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Cash Flows for the Years ended December 31, 2017, 2016, and 2015
Notes to Consolidated Financial Statements
59
60
61
62
63
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of
Global Water Resources, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Global Water Resources, Inc. and subsidiaries (the "Company")
as of December 31, 2017 and 2016, the related consolidated statements of operations, shareholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 9, 2018
We have served as the Company's auditor since 2003.
-59-
GLOBAL WATER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31, 2017
December 31, 2016
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
Total current assets
OTHER ASSETS:
Intangible assets — net
Regulatory asset
Bond service fund and other restricted cash
Equity method investment
Other noncurrent assets
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
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:
Common stock, $0.01 par value, 60,000,000 shares authorized; 19,631,266 and 19,581,266
shares issued as of December 31, 2017 and December 31, 2016, respectively
Paid in capital
Retained earnings/(accumulated deficit)
Total shareholders' equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
See accompanying notes to the consolidated financial statements
-60-
289,051
(75,592)
213,459
5,248
1,528
430
1,759
700
9,665
12,772
1,871
436
345
20
15,444
238,568
321
7,252
—
1,395
8
8,976
114,363
19,746
8,463
62,725
4,425
3,114
934
962
214,732
223,708
196
14,288
376
14,860
238,568
273,366
(72,877)
200,489
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
2,585
934
913
212,929
223,830
196
18,968
(4,175)
14,989
238,819
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
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 BENEFIT (EXPENSE)
NET INCOME (LOSS)
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Dividends declared per common share
Year Ended December 31,
2017
2016
2015
$
14,367
$
13,978
$
16,765
76
31,208
6,087
1,462
9,407
6,908
23,864
7,344
19
(5,125)
—
1,478
234
(3,394)
15,740
81
29,799
6,188
1,853
9,667
6,279
23,987
5,812
18
(11,866)
—
2,222
15
(9,611)
3,950
601
4,551
0.23
0.23
0.28
$
$
$
$
(3,799)
1,287
(2,512) $
(0.13) $
(0.13) $
$
0.26
$
$
$
$
16,320
15,020
616
31,956
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
Weighted average number of common shares used in the determination
of:
Basic
Diluted
19,605,239
19,644,768
19,146,534
19,146,534
18,297,504
18,297,504
See accompanying notes to the consolidated financial statements
-61-
GLOBAL WATER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share and per share amounts)
BALANCE - December 31, 2014
Shares
18,239,441
$
Dividend declared $1.43 per share
Deemed distribution to related party
—
90,007
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
Dividend declared $0.28 per share
Merger of GWRC
Stock option exercise
Stock compensation
Net income
BALANCE - December 31, 2017
(87,702)
—
18,241,746
$
1,339,520
—
—
—
—
—
—
—
19,581,266
$
—
—
50,000
—
Common
Stock
Treasury
Stock
Paid-in
Capital
Retained
Earnings/
(Accumulated
Deficit)
$
$
$
2
—
—
—
—
2
281
—
—
(87)
—
—
—
—
196
—
—
—
—
— $
—
—
—
—
— $
—
—
(87)
87
—
—
—
—
— $
—
—
—
—
$
$
$
50,639
(27,607)
(909)
(464)
—
21,659
5,258
(5,042)
(2,365)
—
(648)
106
—
—
18,968
(5,404)
53
375
296
(22,961) $
—
—
—
21,363
(1,598) $
—
—
—
—
—
(65)
(2,512)
(4,175) $
—
—
—
—
Total Equity
27,680
(27,607)
(909)
(464)
21,363
20,063
5,539
(5,042)
(2,452)
—
(648)
106
(65)
(2,512)
14,989
(5,404)
53
375
296
—
19,631,266
$
—
196
$
—
— $
—
14,288
$
4,551
376
$
4,551
14,860
See accompanying notes to the consolidated financial statements
-62-
GLOBAL WATER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
$
4,551
$
(2,512) $
21,363
Year Ended December 31,
2017
2016
2015
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
Loss on equity investment
Other gains
Provision for doubtful accounts receivable
Deferred income tax expense (benefit)
Changes in assets and liabilities, net of acquisition related purchase accounting adjustments:
Accounts receivable
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
Cash received from the sale of Loop 303 contracts
Cash advance to related party
Repayment of related party cash advance
Proceeds from the sale of Willow Valley
Withdrawals (deposits) of restricted cash, net
Other cash flows from investing activities
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid
Advances in aid of construction
Proceeds from stock option exercise
Principal payments under capital lease
Refunds of advances for construction
Loan borrowings
Loan repayments
Repayments of bond debt
Proceeds withdrawn from bond service fund
Proceeds from sale of stock
Share repurchase
Payment of Sonoran acquisition liability
Debt issuance costs paid
Payments of offering costs for sale of stock
Net cash provided by (used in) financing activities
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS — Beginning of period
CASH AND CASH EQUIVALENTS – End of period
1,550
6,908
—
44
—
—
—
136
—
128
529
(179)
(116)
(1,247)
(1,763)
615
11,156
(20,885)
—
—
—
—
—
(208)
95
(20,998)
2,234
6,279
2,165
428
—
—
54
340
(978)
70
(1,408)
(409)
(415)
(4,087)
117
17
1,895
(8,588)
—
—
—
—
2,254
154
13
(6,167)
(5,036)
(5,399)
346
574
—
375
(378)
(79)
(794)
(854)
115,000
—
(5)
—
— (106,695)
8,825
—
8,372
—
—
—
(2,800)
—
(760)
(20)
(2,823)
—
13,257
(5,408)
8,985
(15,250)
11,513
20,498
20,498
5,248
$
$
$
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
296
(12,745)
12,745
—
(70)
(6)
51,972
(27,607)
357
—
(99)
(975)
—
(21,719)
(1,775)
1,001
—
(464)
—
—
—
(51,281)
4,936
6,577
11,513
See accompanying notes to the consolidated financial statements
-63-
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 nine water and wastewater utilities in strategically targeted communities in metropolitan Phoenix. GWRI
currently serves more than 51,000 people in approximately 20,000 homes within our 336 square miles of certificated service areas,
which are serviced by five wholly-owned regulated operating subsidiaries as of December 31, 2017. Approximately 98.8% 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 $31.2 million in 2017, and total service connections increasing from 8,113 as of December 31, 2004 to 39,618 as of December
31, 2017, 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 Company prepares its financial statements in accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC"). The preparation of the financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results
could differ from those estimates. The U.S. dollar is the Company’s reporting currency and functional currency.
The Company 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. The Company 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. The Company 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.
-64-
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 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 of 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 million over the term of the agreement. For the years ended December 31, 2017, 2016, and 2015, the Company
recognized $1.4 million, $1.2 million, and $624,000, respectively, 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 Co., 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 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. Therefore, it was determined the transaction did not represent a strategic shift. 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.
-65-
Merger with 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, which liability has since been settled. A corresponding reduction in paid in capital was recorded with the merging
of these liabilities into GWRI. The 8,726,747 outstanding common shares of the Company held by GWRC, and acquired by the
Company at the time of merger, were recorded as treasury stock and were retired in December 2016.
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.
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 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
relating to the issuance of the Company's senior secured notes (“Note Purchase Agreement”), see Note 9 – “Debt – 2016 Senior
Secured Notes”. 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.
Private Letter Ruling
On June 2, 2016, the Company received a Private Letter Ruling from the Internal Revenue Service ("IRS") 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.
Pursuant to Internal Revenue Code §1033, the Company would have been able to defer the gain on condemnation through the end
of 2017. On April 18, 2017, the Company filed a request for a one-year extension to defer the gain to the end of 2018, which the
IRS approved on August 8, 2017. Following the approval of the extension, the Company has slightly modified the timing of certain
planned investments within its capital improvement plan in accordance with Internal Revenue Code §1033. Accordingly, the
Company substantially completed these investments in 2017, with some remaining improvements to be completed in early 2018.
As a result of the Private Letter Ruling, the Company increased capital expenditures in 2017 as compared to recent years, and
expects corresponding reductions to occur in 2018, 2019, and beyond. As of December 31, 2017, our deferred tax liability relating
to the Valencia condemnation was approximately $7.2 million.
Acquisition of Eagletail Water Company
On May 15, 2017, the Company acquired Eagletail Water Company ("Eagletail") via merger. At the time of acquisition, Eagletail,
a small water utility located west of metropolitan Phoenix, added approximately 55 active water connections and eight square
miles of approved service area to the Company’s existing regional service footprint. Total consideration was approximately $80,000.
As part of the transaction, the Company acquired assets of approximately $80,000 and assumed liabilities of approximately $78,000.
-66-
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, 2017, 2016, and 2015, the Company recognized $307,000, $236,000, and $276,000
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.
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.
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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.
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, 2017 and 2016 (in thousands):
HUF funds
Certificate of deposits
Income Taxes
December 31,
2017
December 31,
2016
$
$
9
427
436
$
$
10
218
228
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
zero and $8,500 as of December 31, 2017 and 2016, respectively (see Note 10 – “Income Taxes”).
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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, 2017, the Company had 740,000 options outstanding to acquire an equivalent number of shares of GWRI
common stock. As of December 31, 2017, 275,000 options were in the money, and had common share equivalents of 39,529,
which were included within the calculation of diluted earnings per share, along with $154,000 of unrecognized stock compensation.
The remaining 465,000 options were out of the money in the period, and therefore the Company did not have any common share
equivalents to be considered for purposes of calculating earnings per share. As of December 31, 2016, the Company had 368,395
options outstanding, 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, the
Company had 43,395 options outstanding, which options were out of the money in the 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.
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 $44,000 for the year ended December 31, 2017. 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.
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.
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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 $24,000 and $311,000 were transferred to
CIAC for the years ended December 31, 2017 and 2016, 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 $62.7 million and $62.0 million as of December 31, 2017 and 2016, 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, 2017 and 2016, the Company held $427,000 and $218,000 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 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.
-70-
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 second 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.
Immaterial Correction of an Error in Previously Issued Financial Statements — Subsequent to the filing of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2016 and the Company’s Quarterly Report on Form 10-Q for the
three months ended March 31, 2017, the Company identified prior period misstatements in stock compensation expense that
resulted in the overstatement of general and administrative expense in the Company's consolidated statements of operations. The
Company assessed the materiality of these misstatements both quantitatively and qualitatively and determined the correction of
these errors to be immaterial to the prior consolidated financial statements taken as a whole. As a result, the Company has corrected
the misstatements in the accompanying financial statements. The misstatements had no impact on the net cash flows from operating,
investing, or financing activities.
The following tables summarize the impact of the correction to the prior financial statements (in thousands).
Three Months Ended
December 31, 2016
(as Previously Reported)
Adjustments
Three Months Ended
December 31, 2016
(as Corrected)
$
$
General and administrative
Total operating expenses
Operating income
Income before income taxes
Income tax expense
Net income
Basic earnings per common share
Diluted earnings per common share
General and administrative
Total operating expenses
Operating income
Income (loss) before income taxes
Income tax benefit (expense)
Net income (loss)
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
(220) $
(220)
220
220
(82)
138
—
—
(542) $
(542)
542
542
(202)
340
0.02
0.02
2,879
6,276
938
114
(66)
48
—
—
Year Ended
December 31, 2016
(as Corrected)
9,667
23,987
5,812
(3,799)
1,287
(2,512)
(0.13)
(0.13)
$
3,099
6,496
718
(106)
16
(90)
—
—
Adjustments
$
Year Ended
December 31, 2016
(as Previously Reported)
10,209
24,529
5,270
(4,341)
1,489
(2,852)
(0.15)
(0.15)
-71-
December 31, 2016
(as Previously Reported)
Adjustments
December 31, 2016
(as Corrected)
Deferred income tax liabilities, net
$
2,383
$
202
$
Total liabilities
Paid in capital
Accumulated deficit
Total shareholders' equity
223,628
19,510
(4,515)
15,191
202
(542)
340
(202)
2,585
223,830
18,968
(4,175)
14,989
The correction decreased general and administrative expense by $542,000 and net loss by $340,000 for the year ended December 31,
2016, as previously reported.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“ASU”) 2014-09, Revenue
from Contracts with Customers (Topic 606) (“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: (1) retrospective adoption to each
prior period presented with the option to elect certain practical expedients; or (2) 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: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract;
(3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) 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. Due to qualifying as an emerging growth company, the Company plans to
adopt the ASU at January 1, 2019. The Company is continuing to monitor the American Institute of Certified Public Accountant's
Power and Utility Entities Revenue Recognition Task Force recommendations and proposals specific to utilities, in particular
contributions in aid of construction, which the Company does not believe will have an effect on the recognition of revenue.
Additionally the Company is assessing the impact of ASU 2014-09 with regard to recognition of revenue received under
Infrastructure Coordination and Financing Agreements in connection with substantial completion of capital improvements that
will increase the capacity of Palo Verde's wastewater reclamation facility. The Company is evaluating whether this update will
have an impact on the recognition of ICFA revenue, which is recognized historically at the time wastewater capacity is completed
to serve the property for which ICFA revenues were received.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-2”). 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. For all other entities, the guidance is effective for annual periods beginning after December 15, 2019, and
interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. Due to qualifying as an
emerging growth company, the Company plans to adopt the ASU at January 1, 2020. The Company does not expect this update
to have a material impact on its 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. The Company adopted this accounting standard in 2017 and the adoption did not have a material effect on
the Company’s consolidated financial statements.
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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 U.S. GAAP and thereby reduce the current diversity in 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. Due to qualifying as an emerging growth
company, the Company plans to adopt the ASU at January 1, 2019. 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 2016-16, 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 (compared to current U.S. 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. Due to qualifying as an emerging growth company, the
Company plans to adopt the ASU at January 1, 2019. 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 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) (“ASU 2016-18”). 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. Due to qualifying as an emerging growth company, the Company
plans to adopt the ASU at January 1, 2019. 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 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. Due to
qualifying as an emerging growth company, the Company plans to adopt the ASU at January 1, 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.
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:
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•
For the Company’s utilities, adjusting for the condemnation of the operations and assets of Valencia Water Company 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 infrastructure
coordination and financing agreements (“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.
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.
-74-
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 the funds 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, 2017 and December 31, 2016, 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, the
Company had the one regulatory asset in the amount of $110,000, related to costs incurred in connection with Rate Decision No.
74364. This asset amortized over a three-year period ending December 31, 2017.
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,
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.
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.
-75-
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment at December 31, 2017 and December 31, 2016 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
4. ACCOUNTS RECEIVABLE
Average
Depreciation Life
(in years)
47
25
10
12
8
5
3
December 31, 2017
117,381
$
72,863
29,904
12,693
368
720
242
861
428
53,591
289,051
(75,592)
213,459
$
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
$
Accounts receivable as of December 31, 2017 and December 31, 2016 consist of the following (in thousands):
Billed receivables
Less allowance for doubtful accounts
Accounts receivable – net
December 31, 2017
1,691
$
(163)
1,528
$
December 31, 2016
1,547
$
(76)
1,471
$
The following table summarizes the allowance for doubtful accounts activity as of and for the years ended December 31, 2017,
December 31, 2016, and December 31, 2015 (in thousands).
Allowance for doubtful accounts:
Year Ended December 31, 2017
Year Ended December 31, 2016
Year Ended December 31, 2015
5. EQUITY METHOD INVESTMENT
Balance at
Beginning of
Period
Additions
Charged to
Expense
Charged to
Other
Accounts
Write-offs
Balance at End
of Period
$
$
$
(76) $
(194) $
(158) $
(125) $
(52) $
(36) $
— $
— $
(12) $
38
170
12
$
$
$
(163)
(76)
(194)
On June 5, 2013, the Company sold Global Water Management, LLC (“GWM”), a wholly-owned subsidiary of GWRI, that owned
and operated the FATHOM Water Management Holdings, LLP ("FATHOM™") business. In connection with the sale of GWM,
the Company made a $1.6 million investment in FATHOM™ (the "FATHOM™ investment”). This limited partnership investment
is accounted for under the equity method due to the FATHOM™ investment being considered more than minor.
In March 2017, FATHOM™ completed a round of financing, wherein our ownership percentage was reduced from 8.0% to 7.1%
on a fully diluted basis. In conjunction with the recapitalization, the Company's equity interest was adjusted in accordance with
ASC 323, Investments-Equity Method and Joint Ventures, wherein we recorded a $243,000 gain for the year ended December 31,
2017. The adjustment to the carrying value of the FATHOM™ investment 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 in the first quarter of 2017. The carrying value of the FATHOM™ investment consisted of a balance of $345,000 as of
December 31, 2017 and $480,000 as of December 31, 2016, and reflects our initial investment, the adjustments related to subsequent
rounds of financing, and our proportionate share of FATHOM™'s cumulative earnings (losses).
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We evaluate the FATHOM™ investment for impairment whenever events or changes in circumstances indicate that the carrying
value of the FATHOM™ investment may have experienced an “other-than-temporary” decline in value. Since the sale of GWM,
the losses incurred on the FATHOM™ investment were greater than anticipated; however, based upon our evaluation of various
relevant factors, including the recent round of financing and the ability of FATHOM™ to achieve and sustain an earnings capacity
that would justify the carrying amount of the FATHOM™ investment, we do not believe the FATHOM™ investment to be impaired
as of December 31, 2017.
We have evaluated whether the FATHOM™ investment 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 the FATHOM™ investment
may not be sufficient to absorb the losses of the FATHOM™ investment, the Company currently views the FATHOM™ investment
as a VIE. However, considering the Company’s minority interest and limited involvement with the FATHOM™ business, the
Company is not required to consolidate FATHOM™. Rather, the Company has accounted for the FATHOM™ investment under
the equity method.
6. INTANGIBLE ASSETS
Intangible assets as of December 31, 2017 and December 31, 2016 consisted of the following (in thousands):
INDEFINITE LIVED INTANGIBLE ASSETS:
December 31, 2017
December 31, 2016
Gross
Amount
Accumulated
Amortization
Net
Amount
Gross
Amount
Accumulated
Amortization
Net
Amount
CP Water Certificate of Convenience
& Necessity service area
Intangible trademark
AMORTIZED INTANGIBLE ASSETS:
Acquired ICFAs
Sonoran contract rights
$
1,532
$
— $
1,532
$
1,532
$
— $
1,532
13
1,545
17,978
7,406
25,384
—
—
(12,154)
(2,003)
(14,157)
(14,157) $
13
1,545
5,824
5,403
11,227
13
1,545
17,978
7,406
25,384
12,772
$
26,929
$
—
—
(12,154)
(2,003)
(14,157)
(14,157) $
13
1,545
5,824
5,403
11,227
12,772
Total intangible assets
$
26,929
$
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 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, 2017 and December 31, 2016.
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.
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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, 2017, 2016, and 2015 totaled zero, $650,000, and $1.4 million, 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, which liability has since been settled. A corresponding reduction in additional
paid in capital was recorded with the merging of these liabilities into GWRI.
For the years ended December 31, 2017 and 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.
The Company provides 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 $342,000, $533,000, and $493,000
for the years ended December 31, 2017, 2016, and 2015, 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, 2017 and December 31, 2016, the
unremitted balance totaled $430,000 and $333,000, respectively. Notwithstanding the sale of GWM on June 5, 2013, GWM
continues to provide these services to the Company’s regulated utilities under a long-term service agreement. Based on current
service connections, annual fees to be paid to GWM for FATHOM™ services will be approximately $1.5 million at a rate of $6.24
per water account/month. For the years ended December 31, 2017, 2016, and 2015 the Company incurred FATHOM™ service
fees of approximately $1.5 million, $1.9 million, and $2.2 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 of approximately $11.4 million, wherein the Company replaced
a majority of its meter infrastructure. As of December 31, 2017, $10.7 million has been paid to GWM in connection with the meter
exchange program.
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 $370,000, $355,000, and $326,000 for the years ended December 31, 2017, 2016, and 2015,
respectively.
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8. ACCRUED EXPENSES
Accrued expenses at December 31, 2017 and December 31, 2016 consist of the following (in thousands):
Deferred compensation
Property taxes
Meter replacement - related party
Interest
Dividend payable
Asset retirement obligation
Tax obligation related to GWRC merger
Other accrued liabilities
Total accrued liabilities
9. DEBT
December 31, 2017
2,171
$
989
717
468
464
427
—
2,016
7,252
$
December 31, 2016
1,920
$
910
1,255
483
458
216
178
2,182
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, 2017 and December 31, 2016 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
1.200% WIFA Loan, maturing October 2032
4.650% Harquahala Loan, maturing January 2021
OTHER
Capital lease obligations
Debt issuance costs
Total debt
2016 Senior Secured Notes
December 31, 2017
December 31, 2016
Short-term
Long-term
Short-term
Long-term
$
$
— $
—
3
5
8
—
—
8
$
$
28,750
86,250
41
15
115,056
—
(693)
114,363
$
— $
—
—
—
—
25
—
25
$
28,750
86,250
—
—
115,000
54
(737)
114,317
On June 24, 2016, the Company issued two series of senior secured notes with an aggregate total principal balance of $115.0
million at a blended interest rate of 4.55%. Series A carries a principal balance of $28.8 million and bears an interest rate of 4.38%
over a twelve year term, with the principal payment due on June 15, 2028. Series B carries a principal balance of $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 previously
outstanding 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 in the second quarter of 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.
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, 2017, the Company was in compliance with its financial debt covenants.
-79-
Eagletail Loans
In May 2017, the Company acquired Eagletail. As part of the acquisition, the Company assumed two unsecured loans held by
Eagletail. These loans are payable to the Water Infrastructure Finance Authority of Arizona ("WIFA") and Harquahala Valley
Community Benefits Foundation ("Harquahala") and as of December 31, 2017 carry balances of $44,000 and $20,000, respectively.
The WIFA loan bears an interest rate of 1.20% over a 20-year term, while the Harquahala loan bears an interest rate of 4.65% over
a 15-year term.
Tax Exempt Bonds
We issued tax-exempt bonds through The Industrial Development Authority of the County of Pima in the amount of $36.5 million
on December 28, 2006; $53.6 million, net of a discount of $511,000, on November 19, 2007; and $24.6 million 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.
At December 31, 2017, the Company had no capital lease obligations outstanding and the remaining aggregate annual maturities
of debt for the years ended December 31 are as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
Debt
8
8
10
1,921
3,836
109,281
115,064
$
$
At December 31, 2017, the carrying value of the non-current portion of long-term debt was $115.1 million, with an estimated fair
value of $115.7 million. 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. 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, 2017 and December 31,
2016, the Company did not have any uncertain tax positions.
On December 22, 2017, President Trump signed into law the TCJA. Substantially all of the provisions of the TCJA are effective
for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the Internal Revenue Code of
1986, as amended (the “Code”), including amendments which significantly change the taxation of individuals and business entities,
and includes specific provisions related to regulated public utilities. Among its significant provisions, the TCJA (i) reduces the
federal corporate income tax rate from 35% to 21%; (ii) eliminates bonus depreciation for regulated utilities, but allows 100%
expensing for the cost of qualified property for non-regulated businesses; (iii) eliminates the provisions that treated AIAC and
CIAC provided to regulated water utilities as non-taxable; (iv) eliminates the domestic production activities deduction, and (v)
limits the amount of net interest that can be deducted; however, this limitation is not applicable to regulated utilities and, therefore
is not anticipated to have a material impact to the Company’s ability to deduct net interest. Non-regulated segments of the Company’s
business will be able to take advantage of the full expensing provisions of the TCJA.
-80-
Changes in the Code from the TCJA had a material impact on our financial statements in 2017. Under GAAP, specifically Accounting
Standards Codification (“ASC”) Topic 740, Income Taxes, the tax effects of changes in tax laws must be recognized in the period
in which the law is enacted. ASC 740 also requires deferred income tax assets and liabilities to be measured at the enacted tax rate
expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred
income taxes were re-measured based upon the new tax rate. For the Company’s regulated entities, substantially all of the change
in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates
are expected to be recovered from or refunded to customers. For deferred taxes related to the Company’s unregulated operations,
the change in deferred income taxes is recorded as a non-cash re-measurement adjustment to earnings. The re-measurement of
deferred income taxes at the new federal tax rate decreased income tax expense by $2.3 million for the year ended December 31,
2017. Additionally, the Company recorded a net regulatory asset of $1.3 million.
Following the enactment of the TCJA, the staff of the U.S. Securities and Exchange Commission (the “SEC”) issued Staff
Accounting Bulletin 118 — "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" (SAB 118) which provides for
a measurement period of up to one year from the enactment date to complete accounting under GAAP for the tax effects of the
legislation. The Company has made a reasonable estimate for the measurement and accounting of certain effects of the TCJA on
deferred income tax assets and liabilities and related regulatory assets and liabilities which have been reflected in these financial
statements, as discussed above. The Company has not recorded the impact of the TCJA for certain other items for which it has
not yet been able to gather, prepare, and analyze the necessary information in reasonable detail to complete the ASC 740 accounting
treatment. For these items, which include the impact of the TCJA on state income taxes, the current and deferred income taxes
were recognized and measured based on the provisions of the tax laws that were in effect immediately prior to the TCJA being
enacted. The determination of the impact of the income tax effects of these items, as well as the estimates we have recorded, will
require additional analysis of historical records, further interpretation of the TCJA from yet to be issued U.S. Treasury regulations,
and an evaluation of future administrative interpretations, court decisions, accounting interpretations, or other developments
relating to the TCJA.
The income tax benefit from continuing operations for the years ended December 31, 2017, December 31, 2016, and December
31, 2015 is comprised of the following (in thousands):
2017
State
2016
State
2015
State
— $
254
254
$
Total
138
(739)
(601)
— $
(123) $
(123) $
Total
121
(1,408)
(1,287)
— $
2,825
2,825
$
Total
63
20,560
20,623
Current income tax expense
Deferred income tax expense (benefit)
Income tax expense (benefit)
Current income tax expense
Deferred income tax benefit
Income tax benefit
Current income tax expense
Deferred income tax expense
Income tax expense
Federal
$
138
(993)
(855) $
Federal
$
121
(1,285)
(1,164) $
Federal
63
17,735
17,798
$
$
$
$
$
$
$
$
-81-
The income tax benefit for the years ended December 31, 2017, 2016, and 2015 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
Federal tax rate change
IRC Section 453A interest
Equity compensation
Other differences
Income tax expense
For the Years Ended December 31,
2017
2016
2015
$
$
$
1,343
126
—
(2,296)
113
83
30
(601) $
(1,291) $
(123)
—
—
121
—
6
(1,287) $
14,275
1,865
4,312
—
63
—
108
20,623
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, 2017 and 2016, the Company’s valuation allowance
totaled zero and $8,500, respectively, which related to state net operating loss carryforwards expected to expire prior to utilization.
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, 2017 and 2016 (in thousands):
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
Other
Total deferred tax assets
Valuation allowance
Net deferred tax asset
DEFERRED TAX LIABILITIES:
Regulatory asset
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
December 31,
2017
December 31,
2016
$
$
$
33
2,087
224
1,132
4,911
341
1,040
9,768
—
9,768
(315)
(381)
(577)
(4,392)
(7,217)
(12,882)
(3,114) $
40
4,976
336
1,652
7,350
459
1,404
16,217
(9)
16,208
—
(571)
(502)
(642)
(17,078)
(18,793)
(2,585)
As of December 31, 2017, we have approximately $9.4 million in federal net operating loss (“NOL”) carry forwards and $3.2
million in state NOLs available to offset future taxable income, with federal and state NOLs expiring in 2031-2036.
The effective tax rates used for the years ended December 31, 2017, 2016, and 2015 were (15.2%), 33.9%, and 49.1%, 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, 2017 was less than the federal statutory rate of 34% primarily due to the impact of federal tax reform.
-82-
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.
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 market price of the Company’s common
shares on the NASDAQ Global Market at the close of business on May 20, 2016. The options vest over a two-year period, with
50% vesting in May 2017 and 50% vesting in May 2018. The options have a three-year life. The Company will expense the
$348,000 fair value of the stock option grant ratably over the two-year vesting period in accordance with ASC 323. Stock-based
compensation expense of $174,000 and $106,000 was recorded for the years ended December 31, 2017 and December 31, 2016,
respectively. No stock-based compensation expense was recorded for the year ended December 31, 2015. As of December 31,
2017, 50,000 options have been exercised with 275,000 outstanding.
2017 stock option grant
In August 2017, GWRI's Board of Directors granted stock options to acquire 465,000 shares of GWRI's common stock to employees
throughout the Company. The options were granted with an exercise price of $9.40, the market price of the Company's common
shares on the NASDAQ Global Market at the close of business on August 10, 2017. The options vest over a four-year period, with
25% vesting in August 2018, 25% vesting in August 2019, 25% vesting in August 2020, and 25% vesting in August 2021. The
options have a 10-year life. The Company will expense the $1.3 million fair value of the stock option grant ratably over the four-
year vesting period in accordance with ASC 323. Stock-based compensation expense of $123,000 was recorded for the year ended
December 31, 2017. No stock-based compensation expense was recorded for the years ended December 31, 2016 and December
31, 2015.
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 track the value of GWRI’s share price. The vesting of the awards has not changed. The
PSUs 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 details total awards granted and the number of units outstanding as of December 31, 2017 along with
the amounts paid to holders of the PSUs for the years ended December 31, 2017, 2016, and 2015 (in thousands, except unit
amounts):
Grant Date
Units Granted
Units Outstanding
2017
2016
2015
Amounts Paid For the Year Ended December 31,
Q4 2010
Q1 2012
Q1 2013
Q1 2014
Q1 2015
Q1 2016
Q1 2017
Total
350,000
135,079
76,492
8,775
28,828
34,830
22,712
656,716
-83-
— $
—
—
—
2,402
14,513
17,034
— $
—
—
3
90
108
53
— $
—
29
10
65
63
—
1,398
38
110
8
38
—
—
33,949
$
254
$
167
$
1,592
Stock appreciation rights compensation
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 stock appreciation rights (“SARs”) to our employees. Following the
consummation of the Reorganization Transaction, 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 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. In connection with becoming a public company, as defined in ASC 718,
in the second 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
$38,000 in taxes. Any future changes in fair value will be recorded as compensation expense in the consolidated statement of
operations.
The following table details the recipients of the SARs awards, the grant date, units granted, exercise price, outstanding shares as
of December 31, 2017 and amounts paid during the years ended December 31, 2017, 2016, and 2015 (in thousands, except unit
and per unit amounts):
Recipients
Grant
Date
Employees below senior management level (1) Q1 2012
Key Executive (2)(4)
Q3 2013
Key Executive (2)(5)
Members of Management (2)(6)
Key Executives (3)(7)
Members of Management (2)(8)
Total
Q4 2013
Q2 2015
Q1 2015
Q3 2017
Units
Granted
152,091 C$ 4.00
Exercise
Price
100,000
$ 1.59
100,000
$ 2.69
299,000
$ 4.26
300,000
$ 5.13
103,000
1,054,091
$ 9.40
Amounts Paid For the Year
Ended December 31,
Units
Outstanding
2017
2016
2015
— $ — $ — $
— $
—
233,000
300,000
103,000
636,000
$
366
312
—
—
—
678
$
$
151
137
112
—
—
400
67
37
$
$
104
(1) The SARs vest 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 GWRC 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 GWRC 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 GWRC 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 GWRC stock on the grant date of May 8, 2015.
(8) The exercise price was determined to be the fair market value of one share of GWRI stock on the grant date of
August 10, 2017
-84-
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 provides 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.
For the years ended December 31, 2017, 2016, and 2015, the Company recorded approximately $1.1 million, $1.8 million, and
$695,000 of compensation expense related to the PSUs and SARs, respectively. Based on GWRI’s closing share price on
December 29, 2017, deferred compensation expense to be recognized over future periods is estimated for the years ending
December 31 as follows (in thousands):
2018
2019
2020
2021
Total
PSUs
SARs
177
70
—
—
247
$
$
891
192
64
48
1,195
$
$
12. SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental cash flow information for the years ended December 31, 2017, 2016, and 2015 (in thousands):
Supplemental cash flow information:
Cash paid for interest
Cash paid for GWRC tax liability
Cash paid for bond prepayment fee
Cash paid for taxes
Non-cash financing and investing activities:
Capital expenditures included in accounts payable and accrued liabilities
Equity method investment gain on recapitalization of FATHOM™
Deferred compensation change in accounting principle
Reclassification of deferred IPO costs to equity
13. COMMITMENTS AND CONTINGENCIES
For the Year Ended December 31,
2017
2016
2015
$
$
$
$
$
$
$
$
5,224
125
$
$
— $
120
1,090
243
$
$
$
— $
— $
5,969
$
7,475
— $
3,201
184
$
$
2,909
$
— $
103
97
$
$
—
—
—
184
—
—
—
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 $98,000, $92,000, and $64,000 for the years ended December 31,
2017, 2016, and 2015, 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 proceeding of which the ultimate resolution
could materially affect our financial position, results of operations, or cash flows.
-85-
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended December 31, 2017
Revenues
Operating income
Net income
Basic earnings per common share
Diluted earnings per common share
Year Ended December 31, 2016
Revenues
Operating income
Net income/(loss)
Basic earnings/(loss) per common share
Diluted earnings/(loss) per common share
First
Second
Third
Fourth
Quarter
$
$
$
$
$
$
$
$
$
$
6,791
1,101
189
0.01
0.01
$
$
$
$
$
$
8,145
$
1,712
$
425
$
0.02
$
0.02
Quarter
8,472
2,810
1,203
0.06
0.06
First
Second
Third
$
6,816
1,061
$
(314) $
(0.02) $
(0.02) $
$
7,589
925
$
(3,532) $
(0.18) $
(0.18) $
8,180
2,887
1,285
0.07
0.07
$
$
$
$
$
$
$
$
$
$
7,800
1,721
2,734
0.14
0.14
Fourth
7,214
938
48
—
—
-86-
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 the
effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange
Act) as of the end of the period covered by this Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of December 31, 2017, our disclosure controls and procedures were effective to ensure
that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term
is defined under Rule 13a-15(f) and 15d-15(f) under the Exchange Act . Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the framework established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this
framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.
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.
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, 2017 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
-87-
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
2018 annual meeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December
31, 2017 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
2018 annual meeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December
31, 2017 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”.
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
2018 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, 2017 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
2018 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, 2017 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 2018
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, 2017 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.
-88-
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 9, 2018
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)
/s/ Michael J. Liebman
Michael J. Liebman
Chief Financial Officer and Corporate Secretary
(Principal Financial and Accounting Officer)
March 9, 2018
March 9, 2018
/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 9, 2018
Director
Director
Director
Director
Director
-89-
March 9, 2018
March 9, 2018
March 9, 2018
March 9, 2018
March 9, 2018
EXHIBIT INDEX
Exhibit
Number
Description of Exhibit
Method of Filing
2.1.1 Arrangement Agreement
2.1.2 Plan of Arrangement
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 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
3.2 Amended and Restated Bylaws of Global Water Resources, Inc.
4.1 Form of Common Stock Certificate
Incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K
filed with the SEC on May 4, 2016
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
4.2 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
4.3 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
10.1 Settlement Agreement for Stipulated Condemnation with the City of
Buckeye, Arizona, dated March 19, 2015
10.2 License Agreement with City of Maricopa, Arizona, dated
November 9, 2006
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
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 December 18,
2017*
Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-
K filed with the SEC on December 22, 2017
10.4 Employment Agreement with Michael J. Liebman, dated December
18, 2017*
Incorporated by reference to Exhibit 10.3 of the Company’s Form 8-
K filed with the SEC on December 22, 2017
10.5 Infrastructure Coordination Agreement with Pecan Valley
Investments, LLC, dated January 28, 2004
10.6 Infrastructure Coordination Agreement with JNAN, LLC, dated
July 1, 2004
10.7 Infrastructure Coordination and Finance Agreement with Dana B.
Byron and Jamie Maccallum, dated July 21, 2006
10.8 Infrastructure Coordination and Finance Agreement with The
Orchard at Picacho, LLC, dated January 8, 2008
10.9 Infrastructure Coordination, Finance and Option Agreement with
Sierra Negra Ranch, LLC, dated July 10, 2006
10.10 Infrastructure Coordination and Finance Agreement, dated
December 20, 2007
10.11.1 GWR Global Water Resources Corp. Stock Option Plan*
10.11.2 First Amendment to GWR Global Water Resources Corp. Stock
Option Plan, dated September 12, 2012*
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
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
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
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
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
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
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
-90-
Exhibit
Number
Description of Exhibit
Method of Filing
10.11.3 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
10.12.1 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
10.12.2 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
10.13.1 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
10.13.2 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
10.13.3 Second Amendment to Global Water Resources, Inc. Deferred
Phantom Stock Unit Plan*
Incorporated by reference to Exhibit 10.1 of the Company's Form 8-
K filed with the SEC on August 8, 2017
10.13.4 Third Amendment to Global Water Resources, Inc. Deferred
Phantom Stock Unit Plan*
Incorporated by reference to Exhibit 10.1 of the Company's Form 8-
K filed with the SEC on December 6, 2017
10.14.1 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*
Incorporated by reference to Exhibit 10.4 of the Company’s Form 8-
K filed with the SEC on May 4, 2016
10.15.1 GWR Global Water Resources Corp. Deferred Phantom Stock Unit
Plan, dated January 1, 2011*
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
10.18.1 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
10.18.2 Amendment No. 1 to Note Purchase Agreement, dated December
19, 2017, by and among Global Water Resources, Inc. and the
noteholders party thereto
Incorporated by reference to Exhibit 10.1 of the Company's Form 8-
K filed with the SEC on December 22, 2017
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 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
10.21 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
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
10.22 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
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
10.23 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 Exhibit 10.6 to the Company’s Current
Report on Form 8-K filed with the SEC on June 28, 2016
10.24 Standstill Agreement, dated December 21, 2017, by and among
Global Water Resources, Inc., Levine Investments Limited
Partnerships, William S. Levine, and Andrew M. Cohn
Incorporated by reference to Exhibit 10.4 of the Company's Form 8-
K filed with the SEC on December 22, 2017
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
-91-
Exhibit
Number
Description of Exhibit
Method of Filing
21.1 Subsidiaries of Global Water Resources, Inc.
Filed herewith
23.1 Consent of Deloitte & Touche LLP, Independent Registered Public
Filed herewith
Accounting Firm
24.1 Power of Attorney
See signature page hereto
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Filed herewith
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Filed herewith
32.1 Section 1350 Certification of Chief Executive Officer and Chief
Filed herewith
Financial Officer
99.1 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.
-92-
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REGULATED REVENUE GROWTH
$ MILLIONS
19.4%
CAGR
2004 ‐ 2017
Market
Downturn
22.7
19.1 19.3 19.4
14.8
10.2
3.1
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 ALLOWS US TO
INCREASE RATES EVERY YEAR THRU 2021
$1.6M
Additional Annualized
Revenue Based on 2017
Connections
~5.1%
Increase over 2017
Regulated Revenue
4.2
3.8
3.4
3.0
2.6
2.2
1.2
32.0 32.2
31.3
31.1
29.7
30.7
28.5
PHASED IN REVENUE INCREASE
$ MILLIONS
04 05 06 07 08 09 10 11 12 13 14 15 16 17
2015
2016
2017
2018P
2019P
2020P
2021P
Based on 2017 connections, excluding Valencia and Willow Valley.
DIVIDEND POLICY & HISTORY
ACTIVE & TOTAL CONNECTIONS GROWTH
SINCE U.S. IPO
~$0.28
Current Annualize Dividend
Paid Monthly
3.2%
Dividend Yield
@ Mar. 27, 2018
ACCELERATING
38,997
Active Service Connections
Dec. 31, 2017
$0.2835
$0.2767
Active Connections
Total Connections
39,618
38,997
$0.27
$0.264
$0.24
33,618
29,767
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2016 2017
08
09
10
11
12
13
14
15
16
17
At Year‐end, 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 & Director
Phoenix, Arizona, USA
David Tedesco
Director
Scottsdale, Arizona, USA
Richard M. Alexander
Director
Calgary, Alberta, Canada
L. Rita Theil
Director
Aurora, Ontario, Canada
Cindy M. Bowers
Director
Grenada, Mississippi, USA
EXECUTIVE OFFICERS
Ron L. Fleming
President, Chief Executive Officer and Director
Mike Liebman
Senior Vice President and Chief Financial Officer
Jonathan C. Corwin
Vice President and General Manager
Joanne Ellsworth
Vice President, Corporate and Regulatory Affairs
Jason Thuneman
Vice President, Project Management Office
INVESTOR INFORMATION
Ronald Both
CMA Investor Relations
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
1 State Street, 30th Floor
New York, NY 10004
Global Water Resources, Inc.
21410 N 19th Avenue, Suite 220
Phoenix, AZ 85027 USA
gwresources.com
2017 Annual Report