2021 Annual Report
2021 Annual Report
Global Water Resources, Inc.
Global Water Resources, Inc.
21410 N 19th Avenue, Suite 220
21410 N 19th Avenue, Suite 220
Phoenix, AZ 85027 USA
Phoenix, AZ 85027 USA
GWResources.com
GWResources.com
REGULATED ANNUAL REVENUE GROWTH
REGULATED ANNUAL REVENUE GROWTH
$ MILLIONS
$ MILLIONS
ANNUAL WATER CONSUMPTION
ANNUAL WATER CONSUMPTION
Billions of Gallons
Billions of Gallons
38.6%
38.6%
Increase over 2016
Increase over 2016
3.2B
3.2B
Gallons of water consumed
Gallons of water consumed
~45.5%
~45.5%
Increase over 2016
Increase over 2016
41.2
41.2
38.5
38.5
35.4
35.4
33.0
33.0
31.1
31.1
29.7
29.7
2.8
2.8
2.6
2.6
2.2
2.2
2.3
2.3
3.3
3.3
3.2
3.2
16
16
17
17
18
18
19
19
20
20
21
21
2016
2016
2017
2017
2018
2018
2019
2019
2020
2020
2021
2021
ACQUISITIONS SINCE 2017
ACQUISITIONS SINCE 2017
Cumulative
Cumulative
4,450+
4,450+
Connections added
Connections added
~30
~30
Square miles of
Square miles of
service area
service area
ACTIVE & TOTAL CONNECTIONS GROWTH
ACTIVE & TOTAL CONNECTIONS GROWTH
53,882
53,882
Active Service Connections
Active Service Connections
December 31, 2021
December 31, 2021
11
11
9
9
8
8
6
6
4
4
2
2
11
11
Acquisitions
Acquisitions
Since 2017
Since 2017
54,182
54,182
53,882
53,882
7.6%
7.6%
CAGR
CAGR
2016 ‐ 2021
2016 ‐ 2021
38,026
38,026
37,387
37,387
Total Active
Total Active
Total Connections
Total Connections
2021
2021
At Year‐end, adjusted for Willow Valley disposition.
At Year‐end, adjusted for Willow Valley disposition.
16
16
17
17
18
18
19
19
20
20
21
21
1
1
2017
2017
BOARD OF DIRECTORS
BOARD OF DIRECTORS
EXECUTIVE OFFICERS & SENIOR MANAGEMENT
EXECUTIVE OFFICERS & SENIOR MANAGEMENT
President, and Chief Executive Officer
President, and Chief Executive Officer
the Board
the Board
Ron L. Fleming
Ron L. Fleming
President, Chief Executive Officer and Chairman of
President, Chief Executive Officer and Chairman of
Ron L. Fleming
Ron L. Fleming
Chairman of the Board,
Chairman of the Board,
Phoenix, Arizona, USA
Phoenix, Arizona, USA
Richard M. Alexander
Richard M. Alexander
Lead Independent Director
Lead Independent Director
Calgary, Alberta, Canada
Calgary, Alberta, Canada
Debra G. Coy
Debra G. Coy
Director
Director
Fulton, Maryland, USA
Fulton, Maryland, USA
Brett Huckelbridge
Brett Huckelbridge
Director
Director
Phoenix, Arizona, USA
Phoenix, Arizona, USA
David Rousseau
David Rousseau
Director
Director
Phoenix, Arizona, USA
Phoenix, Arizona, USA
Jonathan L. Levine
Jonathan L. Levine
Director
Director
Phoenix, Arizona, USA
Phoenix, Arizona, USA
Andrew M. Cohn
Andrew M. Cohn
Director
Director
Phoenix, Arizona, USA
Phoenix, Arizona, USA
Mike Liebman
Mike Liebman
Senior Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer
Christopher D. Krygier
Christopher D. Krygier
Chief Strategy Officer
Chief Strategy Officer
Joanne Ellsworth
Joanne Ellsworth
Executive Vice President of Corporate Affairs
Executive Vice President of Corporate Affairs
Jake Lenderking
Jake Lenderking
Senior Vice President, Water Resources
Senior Vice President, Water Resources
Steven Brill
Steven Brill
Vice President, IT Operations and Security
Vice President, IT Operations and Security
Jonathan C. Corwin
Jonathan C. Corwin
Vice President and General Manager
Vice President and General Manager
Jason Thuneman
Jason Thuneman
Vice President, Project Management Office
Vice President, Project Management Office
Suzanne (“Shelley”) Kitts
Suzanne (“Shelley”) Kitts
Controller
Controller
INVESTOR INFORMATION
INVESTOR INFORMATION
Ronald Both
Ronald Both
CMA Investor Relations
CMA Investor Relations
949.432.7566
949.432.7566
GWRS@cma.team
GWRS@cma.team
Stock Exchange Listings
Stock Exchange Listings
NASDAQ
NASDAQ
Stock symbol: GWRS
Stock symbol: GWRS
The Toronto Stock Exchange
The Toronto Stock Exchange
Stock symbol: GWR
Stock symbol: GWR
Transfer Agent & Registrar
Transfer Agent & Registrar
Continental Stock Transfer & Trust
Continental Stock Transfer & Trust
1 State Street, 30th Floor
1 State Street, 30th Floor
New York, NY 10004
New York, NY 10004
March 18, 2022
Dear Fellow Shareholders,
As I reflect upon 2021, I’m especially proud of our
company and employees for navigating the year’s
challenges and opportunities safely and successfully.
For employee and customer health and safety,
regulatory compliance, and overall customer service,
our performance on these top mandates throughout
the year demonstrated the outstanding professional‐
ism and dedication of our employees.
2021 was also a strong year for Global Water
Resources financially, with our increased top‐line
driven by organic growth, strategic acquisitions, and
greater water consumption in a metropolitan service
region that continues to expand at a rapid pace.
Our revenues totaled $41.9 million in 2021, up $3.3
million or 8.5% versus 2020. Total active connections
increased 10.2% to 53,882 by yearend.
During the year we delivered 1.12 billion gallons of
recycled water. Maximum reuse of recycled water is
a primary element of our Total Water Management
approach for our growing communities and it
enables us to achieve meaningful conservation.
We continued to expand our footprint with the
acquisition and successful integration of Las Quintas
Serenas, our largest acquisition since Red Rock
Utilities in 2018. The size and close proximity of Las
Quintas Serenas to our other utilities made it an
ideal addition to our portfolio.
We also signed agreements to acquire two smaller
‘tuck‐in’ acquisitions, which were completed shortly
after yearend.
In addition to acquisitions, we also expanded our
service areas during the last year by processing new
Certificates of Convenience and Necessity through
the Arizona Corporation Commission (ACC) at the
request of numerous landowners who want to be
served by our regional, integrated utilities.
Altogether, this has increased our total service area
by 15.5 square miles.
In regard to the establishment of brand‐new utility
systems, in the third quarter of last year, we
completed the first phase of a water solution for the
Nikola plant, allowing us to activate its water
services. The Nikola plant is a manufacturing facility
located in Coolidge, Arizona, and is adjacent to
Inland Port Arizona which covers 3.4 square miles of
land wherein additional large‐scale projects are
actively being pursued by the landowner.
It is worth noting, that Metro‐Phoenix as a whole is
experiencing tremendous success in landing such
large scale, commercial and industrial development,
beyond what it has ever realized before. Thus, we
are excited about the long‐term growth prospects of
Nikola, the surrounding Inland Port Arizona area, and
other industrial zoned properties throughout our
large service areas.
We believe that our approach to utility operations at
these water and wastewater systems, whether
acquired or built from the ground‐up, will help
promote safe, reliable, smart water management
practices and benefit all stakeholders involved.
In August of 2020, we submitted a rate application to
the ACC. Our most recent filing made after the
formal hearing included an approximate 8% rate
increase or equivalent to about $3.0 million in
additional revenue. We now await the administrative
law judge to issue the recommended opinion and
order that the commissioners will vote upon. We
anticipate the final decision will be made in the
second quarter of 2022. However, I should note that
rate cases typically involve a lengthy and uncertain
process. So, we cannot provide any assurances in
terms of timing or outcome.
In 2022, we expect continued top‐line and bottom‐
line improvements, with these driven mostly by
organic growth in new connections. We also
anticipate growth from acquisitions, as we continue
to pursue accretive opportunities with consolidation
benefits.
Our capital resources include cash and cash
equivalents of $12.6 million as of the end of 2021,
and an unused credit line of $10 million. We believe
this provides ample liquidity for us to continue as a
strong utility partner for the communities where we
have the privilege to serve. It also enables us to
pursue growth through investments in organic
expansion, acquisitions and new projects, both big
and small.
In 2022, Global Water will continue to serve at the
forefront of the water management industry, as we
advance our mission of achieving efficiency and
consolidation.
As our newly acquired facilities and expanded service
areas become further integrated with our Total
Water Management approach, we anticipate the
local communities will benefit from our efficiency
upgrades, automation and exceptional customer
service, as well as our strong financial resources and
economies of scale.
We value your support and participation, as we
continue to address the many important issues
facing utility, water resource and economic
development in Arizona and potentially beyond.
Sincerely,
Ron L. Fleming
Chairman, President & CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
x
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2021
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, Arizona
(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
Trading Symbol(s)
GWRS
Name of Each Exchange on Which Registered
The NASDAQ Stock Market, LLC
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 in Rule 405 of the Securities Act. ☐ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes x 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. x Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). x Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth
Act.
company"
Exchange
12b-2
Rule
the
of
in
Large accelerated filer
Non-accelerated filer
☐
x
Accelerated filer
Smaller reporting company
Emerging growth company
☐
x
☐
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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x 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, 2021) was $184.7 million based upon the closing sale price of the registrant’s common stock as reported on the
NASDAQ Global Market. As of March 10, 2022, the registrant had 22,649,242 shares of common stock, $0.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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 2022 annual meeting of stockholders to be filed with the Securities and Exchange Commission not later than 120 days
2021.
after
registrant’s
December
ended
fiscal
year
end
31,
the
the
of
TABLE OF CONTENTS
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
[Reserved]
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
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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
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.
Item 9C.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Item 16.
Signatures
Exhibit Index
5
19
38
38
38
38
39
41
42
57
58
87
87
87
87
88
88
88
88
88
88
88
93
89
CAUTIONARY STATEMENT REGARDING 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; regulatory and Arizona
Corporation Commission ("ACC") proceedings and approvals, including the outcome and timing of our rate case application
and the anticipated timing of any resulting phase-in of new rates; population and growth projections; technologies; revenues;
metrics; operating expenses; market trends; liquidity; cash flows and uses of cash; dividends; amount and timing of capital
expenditures; depreciation and amortization; tax payments; our ability to repay indebtedness and invest in initiatives; impact
and resolutions of legal matters; the impact of tax changes; the impact of accounting changes and other pronouncements; and
the anticipated impacts from the COVID-19 pandemic on the Company, including to our business operations, results of
operations, cash flows, and financial position, and our future responses to the COVID-19 pandemic. 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
Part I, Item 1A of this Form 10-K, as updated from time to time in our subsequent filings 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. Further, any forward-looking statement speaks only as of the date of this Form 10-K. 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.
RISK FACTORS SUMMARY
We are subject to a variety of risks and uncertainties, including risks related to legal, regulatory, and legislative matters; risks
related to our business and operations; risks related to market and financial matters; risk related to technology; risks related to
the ownership of our common stock; and certain general risks, which could have a material adverse effect on our business,
financial condition, results of operations and cash flows. These risks include, but are not limited to, the following principal
risks:
•
new or stricter regulatory standards or other governmental actions could increase our regulatory compliance and
operating costs;
• we are subject to regulation by the Arizona Corporation Commission and our financial condition depends upon our
•
•
•
•
•
•
ability to recover costs in a timely manner from customers through regulated rates;
our ability to expand into new service areas and to expand current water and wastewater service depends on approval
from regulatory agencies;
changes to environmental and other regulation may require us to alter our existing treatment facilities or build
additional facilities;
our water and wastewater systems are subject to condemnation by governmental authorities;
inadequate water and wastewater supplies could have a material adverse effect upon our ability to achieve the
customer growth necessary to increase our revenues;
there is no guaranteed source of water;
the novel coronavirus global pandemic could adversely affect our business operations, cash flows and financial
position to an extent that is difficult to predict;
• we may have difficulty accomplishing our growth strategy within and outside of our current service areas;
•
•
service interruptions, including due to any disruption or problem at our facilities could increase our expenses;
any failure of our network of treatment facilities, water and wastewater pipes and water reservoirs could result in
losses and damages;
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;
our operations of regulated utilities are currently located exclusively in the state of Arizona and concentrated heavily
within a single municipality;
our utilities business is subject to seasonal fluctuations and other weather-related conditions;
•
•
•
-3-
•
•
•
our growth depends significantly on increased residential and commercial development in our service areas;
our information technology systems may be subject to cyberattacks and may be vulnerable to unauthorized external or
internal access due to hacking, ransomware, viruses, or other breaches; and
the concentration of our stock ownership with our officers, directors, certain stockholders and their affiliates will limit
our stockholders’ ability to influence corporate matters.
For a more complete discussion of the material risk factors applicable to us, see “Risk Factors” in Part I, Item 1A of this Form
10-K.
-4-
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. GWRI seeks to deploy an integrated
approach, which the Company refers to as “Total Water Management". Total Water Management is a comprehensive approach
to water utility management that reduces demand on scarce non-renewable water sources and costly renewable water supplies,
in a manner that ensures sustainability and greatly benefits communities both environmentally and economically. This approach
employs a series of principles and practices that can be tailored to each community:
•
•
•
•
•
•
Reuse of recycled water, either directly or to non-potable uses, through aquifer recharge, or direct potable reuse;
Regional planning;
Use of advanced technology and data;
Employing the best subject matter experts and retaining thought and application leaders;
Leading outreach and educational initiatives to ensure all stakeholders including customers, development partners,
regulators, and utility staff are knowledgeable on the principles and practices of our Total Water Management
approach; and
Establishing partnerships with communities, developers, and industry stakeholders to gain support of our Total Water
Management principles and practices.
We currently own and operate twenty-five water and wastewater systems in strategically targeted communities in metropolitan
Phoenix. We currently serve more than 74,048 people in approximately 27,630 homes within our 376 square miles of
certificated service areas, which are serviced by twenty-two wholly-owned regulated operating subsidiaries as of December 31,
2021. Approximately 90.9% of our active service connections are customers of our Global Water - Santa Cruz Water Company,
Inc. (“Santa Cruz”) and Global Water - Palo Verde Utilities Company, Inc. (“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 $41.9 million in 2021, and total service connections increasing from 8,113 as of December 31, 2004 to 54,182 as of
December 31, 2021, with regionally planned areas large enough to serve approximately two million service connections.
Our Corporate History
Global Water Resources, LLC (“GWR”) was organized in 2003 to acquire, own, and manage a portfolio of water and
wastewater utilities in the southwestern region of the United States (“U.S.”). Global Water Management, LLC (“GWM”) was
formed as an affiliated company to provide business development, management, construction project management, operations,
and administrative services to GWR and all of its regulated subsidiaries.
In early 2010, the members of GWR made the decision to raise money through the capital markets, and GWR and GWM were
reorganized to form Global Water Resources, Inc., a Delaware corporation. The members established a new entity, GWR
Global Water Resources Corp. (“GWRC”), which was incorporated under the Business Corporations Act (British Columbia) on
March 23, 2010 to acquire shares of our common stock and to actively participate in our management, business, and operations
through its representation on our board of directors and its shared management. On December 30, 2010, GWRC completed its
initial public offering in Canada and its common shares were listed on the Toronto Stock Exchange. On June 5, 2013, the
Company sold GWM.
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.
U.S. Water Industry Overview
U.S. Water Industry Areas of Business
-5-
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, the Company does not perform any unregulated services.
Key Characteristics of the U.S. Water Industry
In the U.S., the water industry is characterized by:
•
•
•
•
•
Significant Constraints on the Availability of Fresh Water. In Arizona, the Arizona Department of Water Resources
estimates that annual water usage is 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
serving a population of 5,000 or less, and 85% 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.
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
investment needs for buried drinking water infrastructure will total more than $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 has now increased to $259 billion per year over a 10-year period according to their recent press release.
-6-
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, and operate contracts; build, own, operate, and transfer contracts; and own, leaseback, and
operate contracts.
Privatization involves a transfer of responsibility for, and ownership of, the utility from the municipality to private
investors.
We believe investor-owned utilities that have greater access to capital are generally more capable of making mandated and
other necessary infrastructure upgrades to both water and wastewater utilities, addressing increasingly stringent environmental
and 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
water supplies versus develop new 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 four 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
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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 58,000. A community of this size produces an approximate
annual average of 3.2 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 3.2 million gallons back to the community for beneficial purposes. Approximately 59%
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 or surface water that would otherwise be required within the community by over 28%. To
date, the Company has reused 9.9 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 significant 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 Coolidge. 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, improve system availability and
reliability, and improve customer satisfaction.
◦
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. 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.
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◦
◦
Automated Meter Reading. The Company implements automated meter reading with 99% of active
customers meters either having automated meter reading or are being upgraded with such functionality in
the next 12 months. Currently, all meters in our Maricopa service areas allow for automated meter
reading allow for automated meter reading. 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 is
made 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.
Back-Office Technologies and Paperless Billing. The Company employs a series of technologies that
allow for the 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. We believe 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 ACC, as described further under “—Regulation—Arizona Regulatory
Agencies” below. As of December 31, 2021, our utilities collectively had 53,882 active service connections offering predictable
rate-regulated cash flows. Revenues from our regulated utilities accounted for approximately 98.3% of total revenues in 2021.
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 Sun Corridor Region.
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. Our 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.
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A summary description of our utilities at December 31, 2021 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)(2)
Active
Service
Connections
(2)
Average
Monthly Rate
Per Service
Connection
Utility
MARICOPA / CASA GRANDE REGION
Global Water - Santa Cruz Water Company, Inc.
Global Water - Palo Verde Utilities Company, Inc.
2004 (A) Water
2004 (A) Wastewater and
Recycled Water
Global Water - Turner Ranches Irrigation, Inc.
2018 (A) Water
WEST VALLEY REGION
Global Water - Greater Tonopah Water Company, Inc.
Global Water - Northern Scottsdale Water Company,
Inc.
Global Water - Eagletail Water Company, Inc.
Global Water - Balterra Utilities Company, Inc.
Global Water - Hassayampa Utilities Company, Inc.
2006 (A) Water
2006 (A) Water
2017 (A) Water
2008 (A) Wastewater and
Recycled Water
2005 (F) Wastewater and
Recycled Water
SUN CORRIDOR REGION
Global Water - Picacho Cove Water Company, Inc.
2006 (F) Water
Global Water - Picacho Cove Utilities Company, Inc.
2006 (F) Wastewater and
Recycled Water
81
105
7
103
1
8
2
42
6
6
24,613 $
24,346
962
395
93
71
—
—
2
—
Global Water - Red Rock Utilities Company, Inc.
2018 (A) Water,
11
1,905
Wastewater and
Recycled Water
PIMA COUNTY / TUCSON REGION
Global Water - Francesca Water Company, Inc.
Global Water - Mirabell Water Company, Inc.
Global Water - Lyn Lee Water Company, Inc.
Global Water - Tortolita Water Company, Inc.
Global Water - Las Quintas Serenas Water Company,
Inc.
0
2020 (A) Water
2020 (A) Water
2020 (A) Water
2020 (A) Water
2021 (A) Water
Total
0.4
0.4
1
0.1
2.5
124
64
39
22
1,246
376
53,882
56
73
70
93
221
86
—
—
826
—
70
50
65
41
64
52
(1) Certified areas may overlap in whole or in part for separate utilities.
(2) In January 2022 the Company completed the acquisitions of Twin Hawks Utility, Inc. ("Twin Hawks"), an operator of a water utility with service area in
Pinal county, Arizona and Rincon Water Company, Inc. ("Rincon"), an operator of a water utility with service area in Pima County, Arizona. These
acquisitions added an aggregate of 91 connections and approximately 9.1 square miles of service area.
Maricopa/Casa Grande Region
The City of Maricopa is located approximately 12 miles south of Phoenix. The relative proximity to a significant urban center,
coupled with relatively abundant and inexpensive land, were the key drivers of the real estate boom experienced by this
community. In 2005, the City of Maricopa was one of the fastest growing cities in the nation. While growth has slowed
nationally since 2007, the City of Maricopa continues to grow, as demonstrated by our addition of 18,342 active service
connections (representing approximately 7,330 homes) from December 2009 to December 2021. Development in the area is
still considered to be affordable with the median home value being $374,000 compared to $423,000 in the Phoenix Metro area.
We operate in this region through Santa Cruz, Palo Verde, and Global Water - Turner Ranches Irrigation, Inc. ("Turner").
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We acquired Santa Cruz and Palo Verde in 2004. Santa Cruz serves 24,613 active service connections as of December 31, 2021
and revenues from Santa Cruz represented approximately 39.5% and 39.6% of our total revenue for the years ended December
31, 2021 and 2020, respectively. Palo Verde serves 24,346 active service connections as of December 31, 2021 and revenues
from Palo Verde represented approximately 50.7% and 50.8% of our total revenue for the years ended December 31, 2021 and
2020, respectively.
The Santa Cruz and Palo Verde service areas include approximately 186 square miles, which we believe provide further
opportunities for growth. Most of the Santa Cruz and Palo Verde infrastructure is less than eighteen 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.
We acquired Turner in May 2018. Turner is a non-potable irrigation water utility located in Maricopa County, Arizona, with
approximately seven square miles of service area. Turner serves 962 residential irrigation customers as of December 31, 2021.
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 used to evaluate the utilities’ rates.
The rate proceedings were completed in February 2014. On August 28, 2020, Santa Cruz, Palo Verde and Turner each filed a
rate case application with the ACC. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Rate Case Activity”, included in Part II, Item 7 of this Form 10-K, for additional information.
West Valley Region
We operate in this region through Global Water - Greater Tonopah Water Company, Inc. (“Greater Tonopah”), Global Water -
Northern Scottsdale Water Company, Inc. (“Northern Scottsdale”), Global Water - Balterra Utilities Company, Inc.
(“Balterra”), Global Water - Hassayampa Utilities Company, Inc. (“Hassayampa”), and Global Water - Eagletail Water
Company, Inc. ("Eagletail"), 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 395 active service connections as of December 31, 2021.
Greater Tonopah has a Certificate of Convenience and Necessity ("CC&N") for 103 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 approximately 100,000 home sites plus commercial, schools, parks, and
industrial developments at full build-out.
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 93 active service connections as of December 31, 2021.
Northern Scottsdale has a CC&N for one square mile and provides water services to two small subdivisions in Northern
Scottsdale.
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 42 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
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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
—Corporate Transactions—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 and Results of Operations—Corporate Transactions—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”).
On May 15, 2017, we acquired Eagletail via merger. Eagletail serves 71 active connections as of December 31, 2021. Eagletail
has a CC&N for eight square miles located west of metropolitan Phoenix.
Rate proceedings were completed in 2010 for Greater Tonopah. Northern Scottsdale completed a rate proceeding in 2008. In
July 2012, these five utilities in the West Valley Region 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. On August 28,
2020, Greater Tonopah, Northern Scottsdale, Balterra, Hassayampa, and Eagletail each filed a rate case application with the
ACC. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Rate Case Activity”,
included in Part II, Item 7 of this Form 10-K, for additional information.
Sun Corridor Region
The Sun Corridor Region is approximately equidistant between Phoenix and Tucson, along the I-10 Corridor.
We operate in this region through Global Water-Picacho Cove Water Company, and Global Water-Picacho Cove Utilities
Company (collectively, “Picacho Cove”), and Global Water - Red Rock Utilities Company, Inc. (“Red Rock”).
We formed Picacho Cove in 2006 to provide water and wastewater services in the City of Eloy and currently have CC&Ns for
approximately six congruent square miles. These utilities currently have two active service connections.
We acquired Red Rock in October 2018. Red Rock consists of a water and a wastewater utility with service areas in the Pima
and Pinal counties of Arizona, with approximately nine square miles of service area. Red Rock serves 963 active water
connections and 942 active sewer connections as of December 31, 2021.
On August 28, 2020, Picacho Cove and Red Rock each filed a rate case application with the ACC. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Rate Case Activity”, included in Part II, Item 7 of
this Form 10-K, for additional information.
Pima County / Tucson Region
We operate in this region through Global Water - Mirabell Water Company, Inc. (“Mirabell”), Global Water - Francesca Water
Company, Inc. (“Francesca”), Global Water - Tortolita Water Company, Inc. (“Tortolita”), Global Water - Lyn Lee Water
Company, Inc. (“Lyn Lee”), and Global Water - Las Quintas Serenas Water Company, Inc. (“Las Quintas Serenas”).
We acquired Mirabell in October 2020. Mirabell serves 64 active water connections as of December 31, 2021. Mirabell has a
CC&N for 0.4 square miles located in the southwest area of Tucson, Arizona.
We acquired Francesca, Tortolita and Lyn Lee in November 2020. Francesca is located in the southwest area of Tucson,
Arizona whereas Tortolita and Lyn Lee are located in Marana, Arizona. As of December 31, 2021, Francesca, Tortolita, and
Lyn Lee serve 124, 22, and 39 active water connections, respectively.
We acquired Las Quintas Serenas in November 2021. Las Quintas Serenas serves over 1,100 connections with approximately
2.5 square miles of service area located in the northern area of Green Valley, Arizona.
Operations
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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 ("ADEQ"). Recycled water can be used for irrigation, facilities cooling, and
industrial applications and in a residential setting for toilet flushing and lawn watering.
See “Risk Factors—Business and Operational Factors—There is no guaranteed source of water,” included in Part I, Item 1A of
this Form 10-K, for additional information.
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.
The comprehensive technology platform that we use 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. The comprehensive
technology platform that we use includes automated meter reading technology, which allows us to read water meters remotely
rather than physically, improves water resources accounting, allows for identification of high water usage and water theft from
disconnected meters. We also use automated voice, internet billing, payment processing, and customer service applications that
contribute to additional reduced headcount and a reduction in associated personnel costs.
Decentralized Treatment Facilities
We design and build standard, decentralized facilities that are scaled to the service areas they serve in order to achieve optimum
efficiency in providing both water and wastewater services. The replication of our standard facility also improves design,
construction, and operating efficiency because we are able to employ similar, proven processes and equipment and technologies
at each of our facilities.
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 ADEQ, 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
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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 13,276 water quality tests in 2021 at subcontracted laboratory facilities in addition to providing continuous online
instrumentation for monitoring parameters such as turbidity and disinfectant residuals and allowing for adjustments to chemical
treatment based on changes in incoming water quality. For 2021, we achieved a compliance rate of 99.96% for meeting state
and federal drinking water standards and 99.88% for compliance with wastewater requirements, for an overall compliance
rating of 99.9%. 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.
Contaminants of emerging concern ("CECs") are chemicals and other substances that have no regulatory standard, but have
been discovered in water or in the environment where they had not previously been detected, or were only present at
insignificant levels. We believe CECs may form the basis for additional regulatory initiatives and requirements in the future.
We rely on governmental agencies to establish regulatory standards regarding CECs and we meet or exceed these standards,
when established.
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
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are reported to the EPA through the ADEQ. 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 a four year term. Companies that wish to provide water or
wastewater service apply for a CC&N, which, if granted, 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 under which a public service corporation operates. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Rate Case Activity,” included in
Part II, Item 7 of this Form 10-K, for additional information regarding rate case activity involving the ACC.
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 Governments and
the Maricopa Association of Governments), the ADEQ, and the Arizona Department of Water Resources. The Central Arizona
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 ADEQ
requirements in Maricopa County. The Pima County Department of Environmental Quality has delegated authority for
overseeing ADEQ requirements in Pima County. The ADEQ regulates water quality and permits water reclamation facilities,
discharges of recycled water, re-use of recycled water, and recharge of recycled water. The ADEQ also regulates the clean
closure requirements of facilities. In Arizona, the ADEQ 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 ADEQ for
discharges to waters of the U.S. in Arizona are termed “Arizona Pollutant Discharge Elimination System,” or “AZPDES,”
permits. The ADEQ 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, ADEQ, 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, and have adopted a proactive attitude toward regulatory compliance.
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 our 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—Business and Operational 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.
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Nearly all of our service areas are located in “Active Management Areas,” areas within which the use of groundwater is
regulated by the Arizona Department of Water Resources in order to manage ongoing problems with groundwater overdraft.
The Phoenix, Prescott, and Tucson Active Management Areas are legally mandated to achieve “safe yield” by 2025 or sooner.
However, we do not expect any of these Active Management Areas to achieve their safe yield goals. Safe yield requires
groundwater pumping to not draw down the groundwater aquifers, or “over-draft,” as all pumping is offset or replaced within
the Active Management Area from a renewable supply. The Pinal Active Management Area, which encompasses our major
service areas near Maricopa, is managed to allow development of non-irrigation uses and to preserve existing agricultural
economies in the Active Management Area for as long as feasible, consistent with the necessity to preserve future water
supplies for non-irrigation uses.
Under Arizona’s assured water supply laws and regulations, a new subdivision inside an Active Management Area must
demonstrate that it has an “assured water supply” to the satisfaction of the Arizona Department of Water Resources before the
developer is permitted to sell lots. Demonstration of an assured water supply requires, among other things, that an applicant
demonstrate that water supplies will be physically, continuously, and legally available to satisfy the water needs of the proposed
use for at least 100 years. A developer may make an independent showing of an assured water supply (resulting in a Certificate
of Assured Water Supply for a subdivision) or may obtain a written commitment for service from a designated water provider,
such as a privately owned water company or a municipal water supplier. Under the latter approach, the water provider 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 water 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 existing water supplies and any
additional supplies acquired for use within the Designation of Assured Water Supply. Over time, we anticipate Santa Cruz will
apply to increase the Designation of Assured Water Supply as sufficient increased demand is established in the area. Under our
highly efficient Total Water Management model, which is intended to achieve much lower per-unit potable water use rates than
would be expected for average developments, 22,900 acre-feet could be sufficient water supply for approximately 91,600
homes per year.
In our West Valley service territory (Greater Tonopah), we are seeking a Designation of Assured Water Supply in the future.
Assuming implementation of our high-efficiency Total Water Management model throughout the service area, we believe this
could be a sufficient water supply for tens of thousands of homes. There is no assurance that the Arizona Department of Water
Resources would provide a new Designation of Assured Water Supply or add any additional acre-feet to our Designations 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
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concerning vulnerability assessments and have made filings to the EPA as required. Vulnerability assessments are conducted
regularly to evaluate the effectiveness of existing security controls and serve as the basis for further capital investment in
security for the facility. Information security controls are deployed or integrated to prevent unauthorized access to company
information systems, assure the continuity of business processes dependent upon automation, ensure the integrity of our data
and support regulatory and legislative compliance requirements. In addition, communication plans have been developed as a
component of our procedures. While we do not make public comments on the details of our security programs, we have been in
contact with federal, state, and local law enforcement agencies to coordinate and improve the security of our water delivery
systems and to safeguard our water supply.
Competition
As an owner and operator of regulated utilities, we do not face competition within our existing service areas because Arizona
law provides the holder of a CC&N for water and wastewater service with an exclusive right to provide that service within the
certificated area, as against other public service corporations. In addition, the high cost of constructing water and wastewater
systems in an existing market creates a barrier to entry. We do, however, face competition from other water and wastewater
utilities for new service areas and with respect to the acquisition of smaller utilities. We believe our principal competitors for
new service areas and acquisitions in Arizona are EPCOR Water Arizona Inc., Arizona Water Company, Central States Water
Resources, Northwest Natural Water Company, LLC, Ullico Inc. 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 implement 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. We do not have any customers that contribute more
than 10% to our revenues or revenue streams. 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.
Human Capital Resources
As of December 31, 2021, we employed 86 full-time individuals and 2 part-time employees. This represents an increase of
seven employees, or 8.6% from December 31, 2020 due primarily to the hiring of additional employees throughout the
organization as the company continues to grow. Currently, none of our employees participate in collective bargaining
agreements, and we consider our employee relations to be good.
We offer comprehensive compensation and benefits package to attract and retain top talent. In addition to competitive base
wages, additional benefits include annual bonus opportunities, employee stock options, Company matched 401(k) plan,
healthcare and insurance benefits, flexible spending accounts and paid time off.
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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
Securities Exchange Act of 1934, as amended (the "Exchange Act") are accessible through our website, free of charge, as soon
as reasonably practicable after these reports are filed electronically with, or furnished to, 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 SEC maintains an
Internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC at www.sec.gov.
ITEM 1A.
RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the following factors, which could
materially affect our business, financial condition, or results of operations in future periods. The risks described below are not
the only risks facing our company. Additional risks not currently known to us or that we currently deem to be immaterial also
may materially adversely affect our business, financial condition, or results of operations in future periods.
Legal, Regulatory, and Legislative Factors
We are subject to regulation by the Arizona Corporation Commission and our financial condition depends upon our ability
to recover costs in a timely manner from customers through regulated rates.
We are subject to comprehensive regulation by several federal, state and local regulatory agencies that significantly influence
our business, liquidity, and results of operations and our ability to fully recover costs from utility customers in a timely manner.
The Arizona Corporation Commission (“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. Our profitability is
affected by the rates we may charge and the timeliness of recovering costs incurred through our rates. Accordingly, our
financial condition and results of operations are dependent upon the satisfactory resolution of any rate proceedings and ancillary
matters which may come before the ACC. In addition, the ACC may reopen prior decisions and modify otherwise final orders
under certain circumstances. Decisions made by the ACC could have a material adverse impact on our financial condition,
results of operations and cash flows.
On August 28, 2020, 12 of our 18 regulated utilities each filed a rate case application with the ACC for water, wastewater, and
recycled water rates, as well as the consolidation of water and/or wastewater rates for certain of the utilities. There can be no
assurance, however, that the ACC will approve the requested rate increase or any increase or the consolidation of water and
wastewater rates described above, and the ACC could take other actions as a result of the rate case. Further, it is possible that
the ACC may determine to decrease future rates. There can also be no assurance as to the timing of when an approved rate
increase (if any) would go into effect.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Rate Case Activity”, included
in Part II, Item 7 of this Form 10-K, for additional information regarding matters relating to the ACC.
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, including the inability to proceed with
development in our service areas.
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We may incur higher compliance or remediation costs than expected in any particular period and may not be able to pass those
increased costs along to our customers immediately through rate increases, or at all. This is because we must obtain regulatory
approval to increase our rates, which can be time-consuming and costly and our requests for increases may not be approved in
part or in full.
We are required to test our water quality for certain parameters and potential contaminants on a regular basis. If the test results
indicate that parameters or contaminants exceed allowable limits, we may be required either to commence treatment to remedy
the water quality or to develop an alternate water source. Either of these outcomes may be costly, and there can be no assurance
that the regulatory authorities would approve rate increases to recover these additional compliance costs. In addition, by the
time that test results are available, contaminated water may have been provided to customers, which may result in liability for
us and damage our reputation.
In addition, governments or government agencies that regulate our operations may enact legislation or adopt new requirements
that could have an adverse effect on our business, including:
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restricting ownership or investment;
providing for the expropriation of our assets by the government through condemnation or similar proceedings;
providing for changes to water and wastewater quality standards;
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 the
COVID-19 pandemic or 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.
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.
Prior to 2014, 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 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
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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.
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 generally coterminous with the CC&N and can grow into adjacent areas as needed.
Further, our wastewater facilities require ADEQ 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 “—Market and Financial Factors—
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.”
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, which
may cause us to incur significant additional costs. 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 ADEQ, Arizona Pollution Discharge Elimination System permits from the ADEQ, 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.
Changes in, interpretations of, or enforcement trends related to tax rules and regulations may adversely affect our effective
income tax rates or operating margins and we may be required to pay additional tax assessments.
Our effective income tax rate could be adversely affected by various factors, many of which are outside of our control,
including:
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changes in tax laws, regulations, and/or interpretations of such tax laws in multiple jurisdictions, including but not
limited to U.S. federal and state regulations or interpretations resulting from the 2017 Tax Cuts and Jobs Act (the
"TCJA");
increases in corporate tax rates and the availability of deductions or credits;
tax effects related to purchase accounting for acquisitions; and
resolutions of issues arising from tax examinations and any related interest or penalties.
Our determination of tax liabilities is always subject to review or examination by applicable tax authorities. Any adverse
outcome of such review or examination could have a material adverse effect on our financial condition and results of
operations.
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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.
See “Management’s Discussion and Analysis of Results of Operations and Financial Condition —Corporate Transactions —
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.
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.
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. For example, the assets of our former utility subsidiaries, Cave Creek Water Co. and Valencia,
were acquired from us by municipalities pursuant to condemnation proceedings, and our other utility subsidiaries could be
subjects of such proceedings in the future. 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.
Proposals to change policy in Arizona made through ballot initiatives may impact our growth, business plans and financial
condition.
In Arizona, a person or organization may file a ballot initiative with the Arizona Secretary of State and, if a sufficient number of
verifiable signatures are submitted, the initiative may be placed on the ballot for the public to vote on the matter. Ballot
initiatives may relate to any matter, including taxes and policy and regulation related to our industry, and may change statutes
or the state constitution in ways that could impact our customers, the Arizona economy, and the Company. The passage of this
or other initiatives could depress expected population growth, impact our business or growth plans, and have a material adverse
impact on our financial condition, results of operations or cash flows.
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
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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.
Business and Operational 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.
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”, we have not
performed hydrological studies or modeling to evaluate the amount of groundwater likely to be available to meet present and
expected future demands. Insofar as we intend to rely on the pumping of groundwater and the generation and delivery of
recycled water to meet future demands in our current service areas, our ability and/or the ability of developers inside of our
service areas to meet regulatory requirements and to demonstrate assured and adequate water supplies is essential to the
continued growth of our service connections and our capacity to supply water to our customers.
Insufficient availability of water or wastewater treatment capacity could materially and adversely affect our ability to provide
for expected customer growth necessary to increase revenues. We continuously look for new sources of water to augment our
reserves in our service areas, but have not yet obtained surface water rights. Our ability to obtain such rights may depend on
factors beyond our control, such as the future availability of Colorado River water supplies. We also plan to construct facilities
and obtain the necessary permits to recharge recycled water to stretch and augment our existing and planned future water
supplies, but do not yet have this capability in all of our service areas. As a result, it is possible that, in the future, we will not be
able to obtain sufficient water or water supplies to increase customer growth necessary to increase or even maintain our
revenues.
We 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.
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. 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
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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.
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 may, under certain circumstances, 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;
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 utilities through the rate setting process.
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.
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We cannot guarantee that our systems will operate as designed or be free from defects. The failure of our systems to operate
properly could cause significant public harm. Any defects in our systems or significant reliability, quality, or performance
problems with respect to our systems or services could have a number of negative effects on our profitability, results of
operations, liquidity, and cash flows, including:
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loss of revenues;
diversion of management and development resources and the attention of engineering personnel;
significant customer relations problems;
increased repair, support, and insurance expenses;
adverse regulatory actions; and
legal actions for damages by our customers, including but not limited to damages based on commercial losses and
effects on human health.
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 operating utilities 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.
We face competition for new service areas and acquisition targets.
We face competition from other water and wastewater utilities for new service areas and with respect to acquisitions of smaller
utilities. These competitors consist primarily of municipalities and investor-owned utilities seeking expansion opportunities.
Some of our competitors are larger than we are and have more resources and access to capital than we do. If we are unable to
compete effectively for new service areas and acquisitions of existing utilities, our ability to increase our rate base and revenue
could be adversely affected.
If 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, failure to achieve expected synergies and
operating efficiencies, 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.
Although we may not be able to achieve similar growth as we have seen since our formation in 2003, 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
•
expand, train, and manage our employee base.
We may not be able to effectively manage 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.
Operating costs, construction costs, and costs of providing services can be volatile and may rise faster than revenue.
Our ability to increase rates over time is dependent upon approval of rate increases by the ACC, 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. For example, costs for chemicals used to treat water and wastewater, as well as costs for power used to
operate pumps and other equipment, can be volatile. See “—Operational Factors—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.”
Additionally, 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.
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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.
Our operations of regulated utilities are currently located exclusively in the state of Arizona, and more specifically
approximately 90.9% of our active service connections are within a single municipality, which increases the impact of local
conditions on our results of operations.
The customers of our regulated utilities are currently located exclusively in the state of Arizona and 90.9% of our active service
connections are located in the City of Maricopa, Arizona. As a result, we cannot diversify or mitigate the risks presented by
local regulatory, economic, 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 operated more broadly in other geographic areas.
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 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. Supply chain constraints
may result in increased costs of supplies, products and materials that are critical to or used in the Company's business
operations. Also, 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.
Service interruptions, including due to 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.
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Other global incidents, such as the COVID-19 pandemic, could have a similar effect of disrupting our business to the extent
they reach and impact the service areas in which we operate, the availability of supplies we need, the customers we serve, or the
employees who operate our businesses. See “—Market and Financial Factors—The recent COVID-19 pandemic could have a
material adverse effect on our business operations, cash flows, and financial position” for additional information.
Climate variability may cause increased volatility in weather and may impact water usage and related revenue or require
additional expenditures, all of which may not be fully recoverable in rates or otherwise.
The issue of climate variability is receiving increasing attention nationally and worldwide. There is consensus among climate
scientists that there will be worsening of weather volatility in the future associated with climate variability. Many climate
variability predictions present several potential challenges to water and wastewater utilities, including us, such as:
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increased frequency and duration of droughts;
challenges associated with changes in temperature or increases in ocean levels;
potential degradation of water quality;
decreases in available water supply and changes in water usage patterns;
increased precipitation and flooding;
increased frequency and severity of storms and other weather events;
increases in disruptions in service;
increased costs to repair damaged facilities; or
increased costs to reduce risks associated with the increasing frequency and severity of natural events, including to
improve the resiliency and reliability of our water and wastewater treatment and conveyance facilities and systems.
Because of the uncertainty of weather volatility related to climate variability, we cannot predict its potential impact on our
business, financial condition, results of operations, cash flows and liquidity. Furthermore, laws and regulations have been
enacted that seek to reduce or limit greenhouse gas emissions and require additional reporting and monitoring, and these
regulations may become more pervasive or stringent in light of changing governmental agendas and priorities, although the
exact nature and timing of these changes is uncertain. There can be no assurance that we would be able to recover any
expenditures or costs associated with the impact of climate variability and related laws and regulations on a timely basis, or at
all, for our regulated utilities through the rate setting process.
Doing business in jurisdictions other than Arizona may present unforeseen regulatory, legal, and operational challenges
that could impede or delay our operations or adversely affect our profitability.
We may decide to pursue growth opportunities in states other than Arizona. Other states may present substantially different
regulatory frameworks, and we may have difficulty acquiring the necessary approvals and permits or complying with
environmental, health and safety, or quality standards. In addition, it may become more costly or difficult for us to comply with
a multitude of standards and requirements across multiple states.
Other states may also expose us to new legal precedents, condemnation risks, and liability concerns based on state legislation or
case law.
Our cost structure in other states may be significantly different than our current cost structure due to regional differences. For
example, our cost structure may be significantly impacted by differences in labor and energy costs in other markets and the
significant portion of overall production costs that they represent.
We 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;
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risks related to planning and commencing new operations, including inaccurate assessment of the demand for water,
engineering and construction difficulties, and inability to begin operations as scheduled;
droughts or water shortages that could increase water conservation efforts to a point that materially reduces revenue;
regulatory restrictions or other factors that could adversely affect our access to sources of water supply;
our potential inability to identify suitable acquisition opportunities or to form the relationships with developers and
municipalities necessary to form strategic partnerships; and
barriers to entry presented by existing water utilities in prospective service areas.
If we are unable to execute our growth strategy effectively, we will need to rely more heavily on regulatory rate increases to
increase our revenue. However, there can be no assurance that the regulatory authorities will approve any rate increases.
Any failure of our network of treatment facilities, 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
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water source, including, in some cases, through the purchase of water from a supplier. We may incur significant costs in order
to warn consumers and to treat the contaminated source through expansion of current treatment facilities or development of new
treatment methods. Using a new water source is generally associated with increased costs compared to an existing water source
and, as indicated above, purchasing water is typically more expensive than obtaining the water from other means. If we are
unable to treat or substitute our water supply in a cost-effective manner, our financial condition, results of operations, cash
flow, liquidity, and reputation may be adversely affected. We may not be able to recover costs associated with treating
contaminated water or developing new sources of supply through the rate setting process or through insurance.
We 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.
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.
The novel coronavirus ("COVID-19") global pandemic could adversely affect our business operations, cash flows, and
financial position to an extent that is difficult to predict.
The COVID-19 pandemic has adversely affected economies, supply chains, workforce participation and financial markets
across the globe. While the COVID-19 pandemic did not have a material effect on our business operations, results of
operations, cash flows, and financial position for the year ended December 31, 2021, the COVID-19 pandemic and the related
responses from government authorities could adversely impact us in a number of ways, including, but not limited to, the
following:
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disruptions to our operations and business activities, including any closures of offices or facilities, and to those of
governmental agencies regulating our business, suppliers, customers, and other business partners;
reduced demand for our water and wastewater services from our commercial customers, particularly as businesses are
shutdown;
greater difficulty in collecting customer receivables;
a slowdown or disruption in the supply chain for the supplies used in our operations, including chemicals used to treat
water and wastewater, in addition to higher costs;
limitations on employee resources and availability, including due to sickness, government restrictions, labor supply
shortages, and the desire of employees to avoid contact with large groups of people;
potential legislative or regulatory efforts to impose new requirements on our operations;
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a continuation of worsening of general economic conditions, including increased inflation;
an increase in the cost or the difficulty to obtain debt or equity financing could affect our financial condition or future
investment opportunities; and
an increase in regulatory restrictions or continued market volatility could hinder our ability to execute strategic
business activities, including acquisitions, as well as negatively impact our stock price.
The spread of the COVID-19 has caused us to modify our business practices (including additional cybersecurity measures,
employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and
we may take further actions as may be required by government authorities or that we determine are prudent to support the well-
being of our employees, customers, suppliers, business partners, and others. There is no certainty that such measures will be
sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be harmed.
Additionally, the COVID-19 pandemic could affect our internal controls over financial reporting as a portion of our workforce
is required to work from home and therefore new processes, procedures, and controls could be required to respond to changes in
our business environment. Further, should any key employees become ill from COVID-19 and unable to work, the attention of
the management team could be diverted.
Any of the foregoing could adversely affect our business operations, results of operations, cash flows, and financial position.
The potential effects of the COVID-19 pandemic may also impact our other risk factors described in this "Risk Factors" section.
More recently, new variants of COVID-19, such as the Delta and Omicron variants, that are more contagious than previous
strains have emerged. Accordingly, the ultimate extent of the impact of the COVID-19 pandemic on our business operations,
results of operations, cash flows, and financial position, including our ability to execute our business strategies and initiatives in
the expected time frame, will depend on future developments, which are highly uncertain, continuously evolving and cannot be
predicted. This includes, but is not limited to, the duration and spread of the COVID-19 pandemic; its severity; the emergence
and severity of its variants; the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines
(particularly with respect to emerging strains of the virus) and potential hesitancy to utilize them; general economic factors,
such as increased inflation; supply chain constraints; labor supply issues; restrictions on travel and transportation, and how
quickly and to what extent normal economic and operating conditions can resume.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Update,” included
in Part II, Item 7 of this Form 10-K, for additional information.
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. 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.
Market and Financial Factors
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
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be able to take advantage of expansion opportunities, make the capital expenditures necessary to support our growth, or
otherwise execute our strategic plan.
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 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, 2021, we had total indebtedness of $113.1 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.
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 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, from 2006 through 2019, both nationally and in Arizona had been below historical rates.
During the second half of 2020, residential real estate development began to rise to similar 2006 rates, although there is no
guarantee that such growth will be sustained or continue to increase. The sale of, for instance, single family residences is
affected by a number of national and regional economic factors, including:
•
•
•
•
•
•
•
•
•
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, home building, and mortgage financing;
availability of financing for development and for home purchasers;
changes in the income tax treatment relating to real property ownership;
-32-
•
•
•
•
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.
Technology Factors
Our information technology systems may be vulnerable to unauthorized external or internal access due to hacking,
ransomware, viruses, or other cybersecurity breaches.
As operators of critical infrastructure, we may face a heightened risk of cyberattacks from internal or external sources. For
example, a hacker accessed a Florida water treatment plant's control system and attempted to increase the amount of lye used to
treat the water to a potentially dangerous level. Unauthorized access to confidential information located or stored on these
systems could negatively and materially impact our customers, employees, suppliers and other third parties. Further, third
parties, including vendors, suppliers and contractors, who perform certain services for us or administer and maintain our
sensitive information, could also be targets of cyberattacks and unauthorized access. While we have instituted safeguards to
protect our information technology systems, those safeguards may not always be effective due to the evolving nature of
cyberattacks and cyber vulnerabilities. We cannot guarantee that such protections will be completely successful in the event of a
cyberattack.
If our information technology systems, or that of third parties on which we rely on, are affected by a significant cyber breach,
this could result in, among other things, a significant disruption to our operations; costly investigations and remediation;
misappropriation of confidential information of the Company or that of our customers, employees, business partners or others;
litigation and potential liability; enforcement actions and investigations by regulatory authorities; loss of customers and
contracts; harm to our reputation; and a loss of management time, attention and resources from our regular business operations,
any of which could have a negative impact on our business, results of operations, and cash flows. These types of events, either
impacting our facilities or the industry in general, could also cause us to incur additional security and insurance related costs.
Our cyber insurance is subject to a number of exclusions and may not cover the total loss or damage caused by a breach. In
addition, the costs of responding to and recovering from a cyber incident may not be covered by insurance.
We rely on information technology systems to assist with the management of our business and customer relationships. A
disruption or interruption of these systems could adversely affect our business and operations.
Our information technology systems, which includes information technology functions that are outsourced to various third-
party service providers and software vendors, are an integral part of our business. For example, our information technology
systems allow us, among other things, to bill our customers, provide customer service through our call center, manage certain
financial records, track assets and accounts receivable collections, read water meters remotely, identify high water usage, and
identify water theft from disconnected meters. A disruption of our information technology 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 are vulnerable to damage or interruption from:
•
power loss, computer systems failures, and internet, telecommunications, or data network failures;
-33-
•
•
•
•
•
operator negligence or improper operation by, or supervision of, employees;
physical and electronic loss of customer data, including as a result of or security breaches, cyberattacks,
misappropriation, and similar events;
computer viruses;
intentional acts of vandalism and similar events; and
fires, floods, earthquakes, and other natural disasters.
Damages or interruptions due to any of the foregoing could result in, among other things, difficulties managing and operating
our business efficiently, such as with the timely issuances of billings, physical and electronic loss of customer, employee or
financial data, security breaches, misappropriation of property, and other adverse consequences. The lack of redundancy for
some of our information technology systems, including billing systems, could exacerbate the impact of any of the foregoing
events. Additionally, we may not be successful in further developing, implementing or acquiring technology to enable us to
continue to operate at our current level of efficiency or to meet the future needs of our business. Any of the foregoing could
have a material adverse impact on our business, financial condition, results of operations, and cash flows.
Maintaining our operational technology and information technology systems or implementing new systems could result in
higher than expected costs or otherwise adversely impact our internal controls environment, operations, and profitability.
Upgrades and improvements to computer systems and networks, or the implementation of new systems, may require substantial
amounts of management’s time and financial resources to complete, and may also result in system or network defects or
operational errors due to multiple factors, including employees’ ability to effectively use such new or upgraded system. While
we continue to implement technology to improve our business processes and customer interactions, any technical or other
difficulties in transitioning, upgrading or improving existing or implementing new technology systems may increase costs
beyond those anticipated and have an adverse or disruptive effect on our operations and reporting processes, including our
internal control over financial reporting. We may also experience difficulties integrating current systems with new or upgraded
systems, which may impact our ability to serve our customers effectively or efficiently. Although we make efforts to minimize
any adverse impact on our controls, business and operations, we cannot assure that all such impacts have been or will be
mitigated, and any such impacts could have a material adverse impact on our business, financial condition, results of operations,
and cash flows.
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 54% of our outstanding common stock, including 45% beneficially owned in the
aggregate by our former director, William S. Levine and current director Jonathan L. 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, due to many factors, outside our control, including those
described elsewhere in this “Risk Factors” section, as well as the following:
•
•
•
•
our operating and financial performance and prospects;
our quarterly or annual earnings or those of other companies in our industry compared to market expectations;
conditions that impact demand for our services;
future announcements concerning our business or our competitors’ businesses;
-34-
•
•
•
•
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 perception towards our reduced disclosure as a result of being a "smaller reporting company” as defined
in the Exchange Act;
• market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
•
•
•
•
•
•
•
•
strategic actions by us or our competitors, such as acquisitions or restructurings;
changes in laws or regulations which adversely affect our industry or us;
changes in accounting standards, policies, guidance, interpretations, or principles;
changes in senior management or key personnel;
issuances, exchanges, or sales, or expected issuances, exchanges, or sales of our capital stock;
changes in our dividend policy;
adverse resolution of new or pending litigation against us; and
changes in general market, economic, and political conditions in the U.S., and global economies or financial markets,
including those resulting from natural disasters, terrorist attacks, acts of war, other geopolitical uncertainties, public
health concerns (including health epidemics or outbreaks of communicable diseases such as the COVID-19
pandemic),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.
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 of 2002 (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 deemed a smaller reporting company that is a non-accelerated filer, 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 a smaller reporting
company that is a non-accelerated filer. If our independent registered public accounting firm is unable to provide an unqualified
attestation report on our internal controls after we cease to be a smaller reporting company that is a non-accelerated filer,
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.
-35-
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 $0.02458 per share ($0.29496 per
share annually), or an aggregate of approximately $6.6 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.
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.
Taking advantage of the reduced disclosure requirements applicable to smaller reporting companies may make our common
stock less attractive to investors.
We are a "smaller reporting company" as defined in the Exchange Act. As such, we are eligible to take advantage of certain
exemptions from various reporting requirements that are otherwise applicable generally to public 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 (so long as we also remain a non-accelerated filer); (ii) reduced disclosure obligations regarding executive compensation in
our periodic reports and proxy statements; and (iii) reduced disclosure obligations regarding financial statements.
We may take advantage of the scaled disclosures available to smaller reporting companies for so long as our voting and non-
voting common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal
quarter, or our annual revenue is less than $100 million during the most recently completed fiscal year and our voting and non-
voting common stock held by non-affiliates is less than $700 million measured on the last business day of our second fiscal
quarter.
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.
-36-
General Risk Factors
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.
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.
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.
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 with the SEC 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.
-37-
Owned or
Leased
Leased
Owned
Owned
Owned
Owned
Owned
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The following table lists the properties that we own or lease:
Nature of Property
Location
Operated By
Corporate Offices
Wastewater Treatment Plant
Global Water Center - Regional
Office
Phoenix, Arizona
Maricopa, Arizona
Maricopa, Arizona
Global Water Resources, Inc.
Global Water - Palo Verde Utilities Company, Inc.
Global Water - Palo Verde Utilities Company, Inc.
Wastewater Utility Plant
8 Lift Stations - Maricopa, Arizona
Global Water - Palo Verde Utilities Company, Inc.
Water Utility Plant
Water Utility Plant
Water Utility Plant
Water Utility Plant
Water Utility Plant
Irrigation Utility Plant
Water Utility Plant
Wastewater Utility Plant
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, Inc.
5 Water Distribution Sites - Maricopa,
Arizona
Global Water - Santa Cruz Water Company, Inc.
9 sites - Western Maricopa County, Arizona Global Water - Greater Tonopah Water Company, Inc.
Owned
4 sites - Northern Maricopa County, Arizona Global Water - Northern Scottsdale Water Company, Inc. Owned
Western Maricopa County, Arizona
Global Water - Eagletail Water Company, Inc.
Mesa, Arizona
Red Rock, Arizona
Red Rock, Arizona
Tucson, Arizona
Tucson, Arizona
Tucson, Arizona
Tucson, Arizona
Global Water - Turner Ranches Irrigation, Inc.
Global Water - Red Rock Utilities Company. Inc.
Global Water - Red Rock Utilities Company. Inc.
Global Water - Mirabell Water Company, Inc.
Global Water - Francesca Water Company, Inc.
Global Water - Tortolita Water Company, Inc.
Global Water - Lyn Lee Water Company, Inc.
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Green Valley, Arizona
Global Water - Las Quintas Serenas Water Company, Inc. 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 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.
Shareholders
As of March 10, 2022, there were approximately 16 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
We currently intend to continue to pay a regular monthly dividend of $0.02458 per share ($0.29496 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 and our revolving credit facility that limit the payment of dividends.
-39-
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 December 31, 2016 through December 31, 2021. The graph assumes that $100 was invested
on December 31, 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.
* Peer group includes American States Water Company, American Water Works, Aqua America, Inc., Artesian Resources
Corp., California Water, SJW Group, Middlesex Water Company, and York Water Co.
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
12/31/21
Global Water Resources, Inc.
S&P 500 Index
Peer Group Index**
$
$
$
145.78 $
149.91 $
163.04 $
211.78 $
232.44 $
107.85 $
128.80 $
120.76 $
155.64 $
180.94 $
117.88 $
144.10 $
161.07 $
207.70 $
231.18 $
248.02
218.36
264.86
Issuer Purchases of Equity Securities
The following table presents information with respect to purchases of common stock we made during the three months ended
December 31, 2021.
Period
October 1 to 31, 2021
November 1 to 30, 2021
December 1 to 31, 2021
Total
Total Number of
Shares Purchased
Average Price Paid Per
Share
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the
Plans or Programs
— $
— $
— $
—
—
—
—
—
—
—
—
—
—
—
Unregistered Sales of Equity Securities
None.
-40-
COMPARISION OF 60 MONTH CUMULATIVE TOTAL RETURN*Global Water Resources, Inc.S&P 500 IndexPeer Group Index*12/31/166/30/1712/31/176/30/1812/31/186/30/1912/31/196/30/2012/31/206/30/2112/31/21$80.00$100.00$120.00$140.00$160.00$180.00$200.00$220.00$240.00$260.00$280.00$300.00
ITEM 6.
[RESERVED]
-41-
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management’s discussion and analysis of Global Water Resources, Inc.'s (the "Company", "GWRI", "we", or
"us") financial condition and results of operations (“MD&A”) relate to the year ended December 31, 2021 and should be read
together with the condensed consolidated financial statements and accompanying notes included in Part II, Item 8 of this Form
10-K.
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. GWRI seeks to deploy an integrated
approach, which the Company refers to as “Total Water Management". Total Water Management is a comprehensive approach
to water utility management that reduces demand on scarce non-renewable water sources and costly renewable water supplies,
in a manner that ensures sustainability and greatly benefits communities both environmentally and economically. This approach
employs a series of principles and practices that can be tailored to each community:
•
•
•
•
•
•
Reuse of recycled water, either directly or to non-potable uses, through aquifer recharge, or direct potable reuse;
Regional planning;
Use of advanced technology and data;
Employing respected subject matter experts and retaining thought and application leaders;
Leading outreach and educational initiatives to ensure all stakeholders including customers, development partners,
regulators, and utility staff are knowledgeable on the principles and practices of our Total Water Management
approach; and
Establishing partnerships with communities, developers, and industry stakeholders to gain support of our Total Water
Management principles and practices.
COVID-19 Update
In late 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. In March 2020, the
World Health Organization declared the COVID-19 outbreak a global pandemic. Since that time, government authorities
around the world implemented numerous measures to try to reduce the spread of the COVID-19 pandemic, such as travel bans
and restrictions, quarantines, shelter-in-place, stay-at-home, or total lock-down (or similar) orders and business limitations and
shutdowns. Throughout 2021, states and localities were in the midst of a vaccine distribution program; however, the rate of
vaccination has been slowed by vaccine hesitancy in some areas. More recently, new variants of COVID-19, such as the Delta
and Omicron variants, that are more contagious than previous strains have emerged. The spread of these new strains have
caused many government authorities to reimplement the aforementioned measures to try to reduce the spread that had become
less prevalent.
Our water and wastewater services are essential services and we intend to continue to provide those services for our customers.
As a result of the economic hardships caused by the COVID-19 pandemic, we voluntarily agreed not to disconnect customers or
charge late fees during the year ended December 31, 2020.
However, we resumed disconnections starting February 9, 2021. In 2020, we also expanded our customer assistance program to
include a larger customer base, while increasing the annual maximum benefit and including additional qualifying categories to
include disabled veterans, deployed service members, furloughed workers, and customers with a medical hardship. As of
December 31, 2021, the COVID-19 pandemic did not have a material impact on uncollectible accounts. However, we continue
to face various uncertainties related to the impact of the continuing COVID-19 pandemic on the overall economy and our
business, including whether we will continue to be able to sustain our level of bad debt expense.
We continue to monitor the impact of COVID-19 pandemic on our business and operations, including how it will impact our
customers, employees, suppliers, vendors, and business partners. While the COVID-19 pandemic did not have a material effect
on our business operations, results of operations, cash flows, and financial position for the years ended December 31, 2021 and
2020, we are unable to predict the ultimate extent to which our business operations, results of operations, cash flows, and
financial position will be impacted by the COVID-19 pandemic. The degree to which the COVID-19 pandemic impacts our
-42-
business operations, results of operations, cash flows, and financial position will depend on future developments, which are
highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of
the COVID-19 pandemic; its severity; the emergence and severity of its variants; the actions to contain the virus or treat its
impact, such as the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and potential
hesitancy to utilize them; general economic factors, such as increased inflation; supply chain constraints; labor supply issues;
restrictions on travel and transportation; and how quickly and to what extent normal economic and operating conditions can
resume.
Further, our current results and financial condition discussed herein may not be indicative of future operating results and trends.
Refer to “Risk Factors” included in Part I, Item 1A of this Form 10-K for additional risks we face due to the COVID-19
pandemic.
Business Outlook
2020 and 2021 continued the trend of positive growth in new connections. According to the 2020 U.S. Census Data, the
Phoenix metropolitan statistical area (“MSA”) is the 11th largest MSA in the U.S. and had a population of 4.8 million, an
increase of 14% over the 4.2 million people reported in the 2010 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 the Phoenix Metropolitan area will have
a population of 5.7 million people by 2030 and 6.5 million by 2040. During the twelve months ended December 31, 2021, even
though Arizona’s unemployment rate decreased by 5.1%, the state ranked in the top fifteen nationally for job growth.
According to the W.P. Carey School of Business Greater Phoenix Blue Chip Real Estate Consensus Panel ("Greater Phoenix
Blue Chip Panel", the single family market experienced a period of very rapid growth in 2021 with approximately 31,000
building permits issued. Strong underlying demand and an extreme shortage of existing inventory pushed prices up rapidly. The
Greater Phoenix Blue Chip Panel expects this to continue but at a slower pace as lack of product and affordability issues slow
demand. Building permits are forecasted to increase to 35,000 and 36,000 in 2022 and 2023, respectively.
We believe that our utilities and service areas are directly in the anticipated path of growth primarily in the metropolitan
Phoenix area. Market data indicates that our service areas currently incorporate a large portion of the final platted lots, partially
finished lots, and finished lots in metropolitan Phoenix. Management believes that we are well-positioned to benefit from the
near-term growth in metropolitan Phoenix due to the availability of lots and existing infrastructure in place within our
services areas.
Factors Affecting our Results of Operations
Our financial condition and results of operations are influenced by a variety of industry-wide factors, including but not limited
to:
•
•
•
•
•
•
•
population and community growth;
economic and environmental utility regulation;
economic environment;
the need for infrastructure investment;
production and treatment costs;
weather and seasonality; and
access to and quality of water supply.
The COVID-19 pandemic may impact the degree to which these factors affect our financial condition and results of operations
as discussed above under "COVID-19 Update."
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
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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
5,024 connections, or 10.2%, from a total of 49,158 as of December 31, 2020 to 54,182 as of December 31, 2021. This increase
was due primarily to organic growth in new connections combined with the acquisition of Global Water - Las Quintas Serenas
Company, Inc. ("Las Quintas").
As of December 31, 2021, we have 53,882 active service connections compared to 48,899 active service connections as of
December 31, 2020, an increase of 4,983, or 10.2%. As with the increase in total service connections, the increase is due
primarily to the organic growth in new connections. Approximately 90.9% of the 53,882 active service connections are serviced
by our Global Water - Santa Cruz Water Company, Inc. (“Santa Cruz”) and Global Water - Palo Verde Utilities Company, Inc.
(“Palo Verde”) utilities as of December 31, 2021.
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.
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
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Total Active vs. Total ConnectionsTotal ActiveTotal ConnectionsMar-16Jun-16Sep-16Dec-16Mar-17Jun-17Sep-17Dec-17Mar-18Jun-18Sep-18Dec-18Mar-19Jun-19Sep-19Dec-19Mar-20Jun-20Sep-20Dec-20Mar-21Jun-21Sep-21Dec-2129,00030,00031,00032,00033,00034,00035,00036,00037,00038,00039,00040,00041,00042,00043,00044,00045,00046,00047,00048,00049,00050,00051,00052,00053,00054,00055,000 structure and the actual cost of debt and a fair and reasonable cost of equity based on the ACC's judgment. The overall revenue
requirement for rate making purposes is established by multiplying the rate of return by the rate base and adding “prudently”
incurred operating expenses for the test year, depreciation, and any applicable pro forma adjustments.
To ensure an optimal combination of access to water and water conservation balanced with a fair rate of return for investors,
our water utility operating revenue is based on two components: a fixed fee and a consumption or volumetric fee. For our water
utilities, the fixed fee, or “basic service charge,” provides access to water for residential usage and has generally been set at a
level to produce 50% of total revenue. The volumetric fee is based on the total volume of water supplied to a given customer
after the minimum number of gallons, if any, covered by the basic service charge, multiplied by a price per gallon set by a tariff
approved by the ACC. A discount to the volumetric rate applies for customers that use less than an amount specified by the
ACC. For all investor-owned water utilities, the ACC requires the establishment of inverted tier conservation oriented rates,
meaning that the price of water increases as consumption increases. For wastewater utilities, wastewater collection, and
treatment can be based on volumetric or fixed fees. Our wastewater utility services are billed based solely on a fixed fee,
determined by the size of the water meter installed. Recycled water is sold on a volumetric basis with no fixed fee component.
We are required to file rate cases with the ACC to obtain approval for a change in rates. Rate cases and other rate-related
proceedings can take a year or more to complete. As a result, there is frequently a delay, or regulatory lag, between the time of a
capital investment or incurrence of an operating expense increase and when those costs are reflected in rates. In normal
conditions, it would not be uncommon to see us file for a rate increase every three years based on year one being the test year,
year two being the rate case filing year, and year three being the rate case award year. However, based on our settlement with
the ACC in 2014 and extended new rate phase-in period, we did not initiate the next rate case on this timeline. On August 28,
2020, 12 of our 18 regulated utilities each filed a rate case application with the ACC for water, wastewater, and recycled water
rates, as well as the consolidation of water and/or wastewater rates for certain of the utilities, using the year ending December
31, 2019 as the test year for the rate case. Refer to “—Rate Case Activity” and “—Corporate Transactions—ACC Rate Case”
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 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 our permitted return on investment and revenue requirement. We are
generally able to recover a rate of return on these capital expenditures (return on equity and debt), together with debt service
and certain operating costs, through the rates we charge.
We have an established capital improvement plan to make targeted capital investments to repair and replace existing
infrastructure as needed, address operating redundancy requirements, improve our overall financial performance and expand
our infrastructure in areas where growth is occurring.
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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 completed in 2020 the planned investments within our capital improvement plan that
we determined would qualify under the Internal Revenue Code ("IRC") §1033 re-investment criteria pursuant to a favorable
Private Letter Ruling with the Internal Revenue Service (the "IRS"). Refer to “—Corporate Transactions—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. 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 Part I, 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 revenues 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.
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.
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For our utilities, adjusting for the condemnation of the operations and assets of Valencia and the sale of Willow Valley, the
settlement provided for a collective aggregate revenue requirement increase of $3.6 million based on 2011 test year service
connections, phased-in over time, with the first increase in January 2015 as follows (in thousands, not updated for the Federal
Tax Cuts and Jobs Act (the “TCJA”), refer to "—Corporate Transactions—ACC Tax Docket" for further details):
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.
On September 20, 2018, the ACC issued Rate Decision No. 76901, which set forth the reductions in revenue for our Santa
Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities due to the TCJA. Rate Decision No. 76901 adopted the
phase-in approach for the reductions to match the phase-in of our revenue requirement under Rate Decision No. 74364. Refer to
"— Corporate Transactions — ACC Tax Docket" for details regarding Decision No. 76901.
On August 28, 2020, 12 of our 18 regulated utilities each filed a rate case application with the ACC for water, wastewater, and
recycled water rates, as well as the consolidation of water and/or wastewater rates for certain of the utilities, using the year
ending December 31, 2019 as the test year for the rate case. Refer to “— Corporate Transactions — ACC Rate Case” for
additional information.
ICFA Treatment
From 2003 to 2008, we entered into approximately 154 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.
With the issuance of Rate Decision No. 74364, in February 2014, the ACC changed how ICFA funds would be characterized
and accounted for going forward. Most notably, the ACC changed the rate treatment of ICFA funds. 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 less than 30% of the ICFA fee as deferred revenue.
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We 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.
Pursuant to Rate Decision No. 74364, we have agreed not to enter into any new ICFAs, and instead would 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, through which funds, water line
extensions or wastewater line extensions are provided to us by the developers and are considered refundable advances for
construction. These AIACs are subject to refund by us to the developers through annual payments that are computed as a
percentage of the total annual gross revenue earned from customers connected to utility services constructed under the
agreement over a specified period. Upon the expiration of the agreements’ refunding period, the remaining balance of the AIAC
becomes nonrefundable and at that time is considered CIAC. CIAC is amortized as a reduction of depreciation expense over the
estimated remaining life of the related utility plant. For rate-making purposes, a utility plant funded by AIAC and CIAC is
excluded from rate base. 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 are taxable
going forward. On November 27, 2018, the ACC ruled that the utility may require that the contributor pay a gross-up to the
utility consisting of 55% of the income tax expense with the utility covering the remaining 45% of the income tax expense.
Effective January 1, 2021, CIAC and AIAC for regulated water and sewage disposal facility companies will be excluded from
income under IRC Section 118. Due to the 2021 IRC Section 118 amendment, the Company refunded $1.4 million in developer
taxes paid for contributions made after December 31, 2020. For more details regarding the ruling, refer to "—Corporate
Transactions — ACC Tax Docket."
Corporate Transactions
Stipulated Condemnation of the Operations and Assets of Valencia
On July 14, 2015, we 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 $0.1 million 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.
Private Letter Ruling
On June 2, 2016, we received a Private Letter Ruling from the 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 IRC §1033 as property similar or related in service or use.
Pursuant to IRC §1033, as of December 31, 2020 the Company fully deferred the remaining tax liability.
ACC Tax Docket
On December 20, 2017, the ACC opened a docket to address the utility ratemaking implications of the TCJA. The ACC
subsequently approved an order in February 2018 requiring Arizona utilities 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.
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On September 20, 2018, the ACC issued Rate Decision No. 76901, which set forth the reductions in revenue for our Santa
Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities due to lower corporate tax rates under the TCJA. Rate
Decision No. 76901 adopted a phase-in approach for the reductions to match the phase-in of our revenue requirement under
Rate Decision No. 74364 enacted in February 2014. In 2021, the final year of the phase-in, the annual reductions in revenue for
our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities were approximately $415,000, $669,000,
$16,000, and $5,000, respectively. The ACC also approved a carrying cost of 4.25% on regulatory liabilities resulting from the
difference of the fully phased-in rates to be applied in 2021 versus the years leading up to 2021 (i.e., 2018 through 2020).
Rate Decision No. 76901, however, did not address the impacts of the TCJA on accumulated deferred income taxes (“ADIT”),
including excess ADIT (“EADIT”). Following the ACC's request for a proposal, the Company made its proposal in filings on
December 19, 2018 and July 1, 2019. ACC Staff reviewed the Company's filing and requested that the Company defer tariff
revisions until such revisions can be considered in the next rate case. ACC Staff also requested that the Company defer
consideration of the regulatory assets and regulatory liabilities associated with 2018 EADIT amortization. On July 18, 2019,
the Company made a filing proposing these items be deferred to the next rate case. Refer to " — Corporate Transactions —
ACC Rate Case" for additional information regarding the Company's next rate case.
On November 27, 2018, February 20, 2019, February 28, 2019, and January 23, 2020, the ACC adopted orders relating to the
funding for income taxes on CIAC and AIAC (which became taxable for our regulated utilities under the TCJA). Those orders
1) require that under the hybrid sharing method, a contributor will pay a gross-up to the utility consisting of 55% of the income
tax expense with the utility covering the remaining 45% of the income tax expense; 2) remove the full gross-up method option
for Class A and B utilities and their affiliates (which includes all of our utilities); 3) ensure proper ratemaking treatment of a
utility using the self-pay method; 4) clarify that pass-through entities that are owned by a “C” corporation can recover tax
expense according to methods allowed; and 5) require Class A and B utilities to self-pay the taxes associated with hook-up fee
contributions but permit using a portion of the hook-up fees to fund these taxes. The Company's utilities have adopted the
hybrid sharing method for income tax on CIAC and AIAC.
Effective January 1, 2021, contributions made in aid of construction and advances made in aid of construction for regulated
water and sewage disposal facility companies will be excluded from income under IRC section 118.
2020 Common Stock Offering
On January 21, 2020, we completed a public offering of 870,000 shares of common stock at a public offering price per share of
$12.50, for gross proceeds of $10.9 million. On January 30, 2020, we issued an additional 130,000 shares of common stock at
the public offering price of $12.50 per share, for gross proceeds of $1.6 million, resulting in total proceeds from the offering of
approximately $12.5 million. The issuance of the additional shares was completed pursuant to the exercise in full of the
underwriter's over-allotment option. We received net proceeds of approximately $11.5 million after deducting underwriting
discounts and commissions and offering expenses paid by us, which collectively totaled approximately $1.0 million.
ACC Rate Case
On August 28, 2020, 12 of our 18 regulated utilities each filed a rate case application with the ACC for water, wastewater, and
recycled water rates, which proposed a collective revenue requirement increase of $4.6 million (relative to expected revenues in
2021, which is the final year of the rate phase-in from the last rate case) based on a 2019 test year. On August 2, 2021, we filed
rejoinder testimony with the ACC updating our collective revenue increase to approximately $3.0 million. An evidentiary
hearing was conducted beginning August 9, 2021. Certain of our utilities, including Santa Cruz and Palo Verde, have also
requested that the rate increases be phased in over three years, beginning January 1, 2022. A final decision is not expected until
the second quarter of 2022; therefore, any phase-in will not begin as requested on January 1, 2022 and may be shorter or longer
than three years, if a revenue increase is approved.
We also requested the consolidation of water and/or wastewater rates for our Red Rock, Santa Cruz, Palo Verde, Picacho
Water, and Picacho Utilities located in Pinal County. Of our utilities filing a rate case, these utilities make up approximately
96% of the Company's active service connections; provide or will provide water, wastewater, and recycled water services; and
are expected to create economies of scale that are beneficial to all customers if consolidated.
There can be no assurance, however, that the ACC will approve the requested rate increase or any increase or the consolidation
of water and wastewater rates described above, and the ACC could take other actions as a result of the rate case. Further, it is
possible that the ACC may determine to decrease future rates. There can also be no assurance as to the timing of when an
approved rate increase (if any) would go into effect.
Revolving Credit Line
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On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation,
for a two-year revolving line of credit up to $10.0 million with an initial maturity date of April 30, 2022. This credit facility,
which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand the Company’s business, and
for general corporate purposes, bears an interest rate equal to the London Interbank Offered Rate (LIBOR) plus 2.00% and has
no unused line fee. This credit facility replaced the previous revolving line of credit with MidFirst Bank, which was terminated
in April 2020. As of December 31, 2021, we had no outstanding borrowings under this credit line.
On April 30, 2021, the Company and The Northern Trust Company entered into an amendment to the loan agreement pursuant
to which, among other things, the maturity date for the Company’s revolving line of credit was extended to April 30, 2024.
Recent Events
Acquisition of Rincon Water Company, Inc.
On January 20, 2022, the Company completed the acquisition of Rincon Water Company, Inc. ("Rincon"), an operator of a
water utility with service area in Pima County, Arizona. The acquisition added an additional 73 connections and approximately
8.6 square miles of service area at the time of acquisition.
Acquisition of Twin Hawks Utility, Inc
On January 13, 2022, the Company completed the acquisition of Twin Hawks Water Utility, Inc. ("Twin Hawks"), an operator
of a water utility with service area in Pinal County, Arizona. The acquisition added an additional 18 connections and
approximately 0.5 square miles of service area at the time of acquisition.
Acquisition of Las Quintas Serenas Water Company
On November 3, 2021, the Company completed the acquisition of Las Quintas Serenas Water Company ("Las Quintas"), an
operator of a water utility with service area in Pima County, Arizona. The acquisition added over 1,100 connections with
approximately 2.5 square miles of service area.
Sale of Wireless Communication Tower
On April 9, 2021, the Company sold a wireless communication tower and related easement rights which resulted in a
$1.5 million gain recorded as other income.
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.
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Comparison of Results of Operations for the Years Ended December 31, 2021 and 2020
The following table summarizes our results of operations for the years ended December 31, 2021 and 2020 (in thousands):
Revenues
Operating expenses
Operating income
Total other expense
Income before income taxes
Income tax expense
Net income
Basic earnings per common share
Diluted earnings per common share
For the Year Ended December 31,
2021
2020
41,914 $
34,935
6,979
(2,220)
4,759
(1,150)
3,609 $
0.16 $
0.16 $
38,627
31,292
7,335
(5,459)
1,876
(771)
1,105
0.05
0.05
$
$
$
$
Revenues – The following table summarizes our revenues for the years ended December 31, 2021 and 2020 (in thousands):
Water services
Wastewater and recycled water services
Unregulated revenues
Total revenues
For the Year Ended December 31,
2021
2020
$
$
18,944 $
22,241
729
41,914 $
18,072
20,394
161
38,627
Total revenues increased $3.3 million, or 8.5%, to $41.9 million for the year ended December 31, 2021 compared to $38.6
million for the year ended December 31, 2020. This increase was primarily driven by increased rates and organic growth in
connection. Also, the increase was attributable to the recognition of $0.7 million of ICFA revenue related to funds received
during 2021 for an area where the Company had completed all obligations under the ICFA related agreement, including water
and wastewater services. Refer to Note 2 — "Regulatory Decision and Related Accounting and Policy Changes" for additional
information about our ICFAs.
Water Services – Water services revenue increased $0.9 million, or 4.8%, to $18.9 million for the year ended December 31,
2021 compared to $18.1 million for the year ended December 31, 2020. The increase in water services revenue was primarily
due to increased rates and organic growth.
Water services revenue based on consumption decreased $0.2 million, or 1.9%, to $8.6 million for the year ended December 31,
2021 compared to $8.8 million for the year ended December 31, 2020. The decrease was primarily driven by the decrease in
consumption resulting from higher precipitation for the year ended December 31, 2021 compared to the year ended December
31, 2020, partially offset by an increase in residential, construction and commercial consumption due to new connections added
during the year.
Active water connections increased 12.4% to 28,594 as of December 31, 2021 from 25,449 as of December 31, 2020, primarily
due to growth in new connections.
Water consumption decreased 2.3% to 3.2 billion gallons for the year ended December 31, 2021, compared to 3.3 billion
gallons for the year ended December 31, 2020. The decrease in consumption was primarily related to a decrease in
consumption resulting from higher precipitation, partially offset by an increase in residential, construction and commercial
consumption due to new connections added during the year.
Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.8 million, or
8.8%, to $9.9 million for the year ended December 31, 2021 compared to $9.1 million for the year ended December 31, 2020.
The increase was primarily driven by an increase in active water connections, combined with an increase in rates related to Rate
Decision No. 74364.
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Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $1.8 million, or 9.1%,
for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase in wastewater and
recycled water services revenue was primarily driven by a $1.9 million increase in wastewater services revenue. The increase in
wastewater services revenue was attributable to the increase in rates related to Rate Decision No. 74364, as well as the increase
in active wastewater connections, which increased 7.8% to 25,288 as of December 31, 2021 from 23,450 as of December 31,
2020.
Recycled water services revenue, which is based on the number of gallons delivered, decreased by less than $0.1 million or
3.8%, to $1.1 million for the year ended December 31, 2021 compared to $1.2 million for the year ended December 31, 2020.
The decrease in recycled water services revenue was primarily driven higher precipitation partly offset by an increase in rates.
The volume of recycled water delivered decreased 85 million gallons, or 11.1%, to 683 million gallons for the year ended
December 31, 2021 compared to 768 million gallons for the year ended December 31, 2020. Recycled water rates increased
7.9% per Rate Decision No. 74364 compared to 2020.
Operating Expenses – The following table summarizes our operating expenses for the year ended December 31, 2021 and
thousands):
2020
(in
Operations and maintenance
General and administrative
Depreciation
Total operating expenses
For the Year Ended December 31,
2021
2020
$
$
10,299 $
15,146
9,490
34,935 $
9,539
12,722
9,031
31,292
Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily
chemicals and purchased electrical power), maintenance costs, and property tax, increased $0.8 million, or 8.0%, for the year
ended December 31, 2021 compared to the year ended December 31, 2020.
Total personnel expenses increased $0.5 million, or 16.2%, to $3.4 million for the year ended December 31, 2021 compared to
$3.0 million for the year ended December 31, 2020. The increase in personnel expenses was primarily related to an increase in
medical expenses, employee hiring costs and salary and wage increases.
Repairs and maintenance expense increased $0.1 million, or 37.3%, to $0.4 million for the year ended December 31, 2021
compared to $0.3 million for the year ended December 31, 2020. The increase was primarily due to increased plant equipment
maintenance costs.
Property tax expense increased $0.1 million, or 4.3%, to $2.5 million for the year ended December 31, 2021 compared to $2.4
million for the year ended December 31, 2020. Property taxes are calculated using a centrally valued property calculation,
which derives property values based upon three-year historical average revenues, which have been increasing.
General and Administrative – General and administrative costs include the day-to-day expenses of office operations, personnel
costs, legal and other professional fees, insurance, rent, and regulatory fees. These costs increased $2.4 million, or 19.1%, for
the year ended December 31, 2021 compared to the year ended December 31, 2020.
Personnel related costs increased $0.7 million, or 13.3%, to $5.9 million for the year ended December 31, 2021 compared to
$5.2 million for the year ended December 31, 2020. The increase was primarily related to an increase in medical expenses,
employee hiring costs and salary and wage increases for the year ended December 31, 2021 compared to the year ended
December 31, 2020.
Deferred compensation expense increased $0.5 million, or 26.9%, to $2.6 million for the year ended December 31, 2021
compared to $2.0 million for the year ended December 31, 2020. The increase was primarily due to the year over year change
in our stock price, which increased $2.69 for the year ended December 31, 2021 compared to an increase of $1.26 for the year
ended December 31, 2020. Refer to Note 14 — “Deferred Compensation Awards” of the Notes to the Consolidated Financial
Statements included in Part II, Item 8 of this Form 10-K for additional information.
Depreciation and amortization - Depreciation and amortization expense increased $0.5 million, or 5.1%, to $9.5 million for the
year ended December 31, 2021, from $9.0 million for the year ended December 31, 2020. The increase was primarily driven by
increased depreciation due to the increase in fixed assets, offset by a reduction in amortization of intangible assets.
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Other Expense – Other expense totaled $2.2 million for the year ended December 31, 2021 compared to $5.5 million for the
year ended December 31, 2020. The improvement of $3.2 million in other expense was primarily attributable to the $1.5
million gain from the sale of a wireless communication tower and related easement rights, $1.2 million increase in Buckeye
growth premiums, and a lower loss in 2021 compared to 2020 of $0.5 million on disposal of assets.
Income Tax Expense – Income tax expense of $1.2 million was recorded for the year ended December 31, 2021 compared to
$0.8 million for the year ended December 31, 2020. The increase was primarily driven by an increase in pre-tax net income for
the year ended December 31, 2021.
Net Income – Our net income totaled $3.6 million for the year ended December 31, 2021 compared to net income of $1.1
million for the year ended December 31, 2020. The $2.5 million increase was primarily attributable to organic growth, the $1.5
million gain on the sale of a wireless communications tower and related easement rights, $1.2 million increase in growth
premiums, offset by a $0.5 million loss on disposal of assets for the year ended December 31, 2021 compared to the year ended
December 31, 2020.
Outstanding Share Data
As of March 10, 2022, there were 22,649,242 shares of our common stock outstanding and stock based awards to acquire an
additional 520,481 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;
fund acquisitions;
• 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, 2021, other than expenditures within the normal course of business, we have no notable near-term cash
expenditures, other than the two principal payments for our Series B senior secured notes in the amount of $1.9 million due in
each of June and December of 2022. While specific facts and circumstances could change, we believe that we have sufficient
cash on hand, the ability to draw on our $10.0 million revolving credit line, and the ability 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. However, our near term cash flow may be impacted by the COVID-19 pandemic.
Refer to “Risk Factors” included in Part I, Item 1A of this Form 10-K for additional risks we face due to the COVID-19
pandemic.
In March 2014, we initiated a dividend program to declare and pay a monthly dividend. On November 30, 2021, we announced
a monthly dividend increase from $0.02434 per share ($0.29208 per share annually) to $0.02458 per share ($0.29496 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 (refer to “—Senior Secured Notes" and "—Revolving Credit Line").
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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, 2021, our net cash provided by operating activities totaled $20.4 million compared to $14.6
million for the year ended December 31, 2020. The $5.8 million increase in cash from operating activities was primarily driven
by the increase in net income of $2.5 million for the year ended December 31, 2021 over the year ended December 31, 2020
coupled with a $2.5 million increase in other non-current liabilities for the year ended December 31, 2021 over the year ended
December 31, 2020.
Cash from Investing Activities
Our net cash used in investing activities totaled $20.3 million for the year ended December 31, 2021 compared to $9.4 million
for the year ended December 31, 2020. The $10.9 million change in cash used in investing activities was driven by the increases
in capital expenditures of $9.1 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.
The increase in capital expenditures is tied to our capital expenditure program which is causing us to spend more on capex
compared to the prior year.
We continue to invest capital prudently in our existing, core service areas where we are able to deploy our Total Water
Management model as this includes any required maintenance capital expenditures and the construction of new water and
wastewater treatment and delivery facilities. Our projected capital expenditures and other investments are subject to periodic
review and revision to reflect changes in economic conditions and other factors. In particular, we continue to monitor the
rapidly evolving COVID-19 pandemic. We may reduce capital expenditures in the future, but will, in any event, continue to
invest in maintenance related capital expenditures and perform those projects that are necessary to continue providing services.
Cash from Financing Activities
Our net cash used in financing activities totaled $7.9 million for the year ended December 31, 2021, a $15.0 million change as
compared to the $7.1 million in cash provided by financing activities for the year ended December 31, 2020. This change was
primarily driven by the $11.5 million in net proceeds received from our public offering of stock in January 2020, coupled with
an increase of $0.5 million in AIAC cash payments received from developers for their portion of the taxes due for conveyances
(refer to "—Corporate Transactions—ACC Tax Docket" for more information) for the year ended December 31, 2020. Cash
used in financing activities was slightly higher due to an an increase in dividends paid of $0.1 million for the year ended
December 31, 2021, compared to the year ended December 31, 2020
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 beginning December 2021. The proceeds of the senior secured notes were primarily used to
refinance our long-term tax exempt bonds, pursuant to an early redemption option at 103%, plus accrued interest, as a result of
the initial public offering of our common stock in May 2016.
The senior secured notes require the Company to maintain a debt service coverage ratio of consolidated EBITDA to
consolidated debt service of at least 1.10 to 1.00. Consolidated debt service is calculated as interest expense, principal
payments, and dividend or stock repurchases. The senior secured notes also contain a provision limiting the payment of
dividends if the Company falls below a debt service ratio of 1.25. However, for the quarter ended June 30, 2021 through the
quarter ending March 31, 2024, the ratio drops to 1.20. The debt service ratio increases to 1.25 for any fiscal quarter during the
period from and after June 30, 2024. As of December 31, 2021, the Company was in compliance with its financial debt
covenants.
Debt issuance costs as of both December 31, 2021 and 2020 were $0.5 million and $0.6 million, respectively.
-54-
Revolving Credit Line
On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation
(the “Northern Trust Loan Agreement”), for a two-year revolving line of credit up to $10.0 million with a maturity date of April
30, 2022. This credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand
the Company’s business, and for general corporate purposes, bears an interest rate equal to LIBOR plus 2.00% and has no
unused line fee. This credit facility replaced the previous revolving line of credit with MidFirst Bank, which was terminated in
April 2020. On April 30, 2021, the Northern Trust Loan Agreement was amended to, among other things, extend the maturity
date from April 30, 2022 to April 30, 2024.
Similar to the senior secured notes, the Northern Trust Loan Agreement requires the Company to maintain a debt service
coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. The Northern Trust Loan
Agreement also contains a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25.
However, for the quarter ending June 30, 2021 through the quarter ending March 31, 2024, the ratio drops to 1.20. Additionally,
the Northern Trust Loan Agreement contains certain restrictive covenants that limit, among other things, the Company’s ability
to: create liens and other encumbrances; incur additional indebtedness; merge, liquidate or consolidate with another entity;
dispose of or transfer assets; make distributions or other restricted payments (including dividends); engage in certain affiliate
transactions; and change the nature of the business. The foregoing covenants were subject to various qualifications and
limitations as set forth in the Northern Trust Loan Agreement. Pursuant to the Northern Trust Loan Agreement, the revolving
credit facility is subject to certain customary events of default after which the revolving credit facility could be declared due and
payable if not cured within the grace period or, in certain circumstances, could be declared due and payable immediately. Refer
to Note 11 — "Debt" of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for
additional information. As of December 31, 2021, the Company was in compliance with its financial debt covenants.
As of December 31, 2021, the Company had no outstanding borrowings under this credit line with The Northern Trust
Company. The company incurred $95,000 and $73,000 in debt issuance costs relating to the Northern Trust Loan Agreement as
of December 31, 2021 and December 31, 2020, respectively.
Contractual Obligations
In the course of normal business activities, the Company enters into a variety of contractual obligations and commitments.
Some result in direct obligations on the Company's balance sheet while others are commitments, some firm and some based on
uncertainties and undetermined execution times.
The following table summarizes our contractual cash obligations as of December 31, 2021 (in thousands):
Payments Due By Period
Total
Less than 1 Year
2 - 3
Years
3 - 5
Years
More
than 5
Years
$ 113,084 $
3,833 $ 7,667 $ 7,667 $ 93,917
$ 46,371
$
$
341
22
$ 1,432
5,078
9,629
8,927
22,737
142
12
268
165
10
570
34
—
428
—
—
166
$ 161,250 $
9,333 $ 18,041 $ 17,056 $ 116,820
Long term debt obligations
Interest on long-term debt (1)
Capital lease obligation
Interest on capital lease
Operating lease obligation
Total (2)
(1) Interest on the long-term debt is based on the fixed rates of the Company’s senior secured notes.
(2) In addition to these obligations, the Company pays annual refunds on AIAC 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 CIAC.
-55-
Insurance Coverage
We carry various property, casualty, and financial insurance policies with limits, deductibles, and exclusions consistent with
industry standards. However, insurance coverage may not be adequate or available to cover unanticipated losses or claims. We
are self-insured to the extent that losses are within the policy deductible or exceed the amount of insurance maintained. Such
losses could have a material adverse effect on our short-term and long-term financial condition and the results of operations and
cash flows.
Critical Accounting Policies, Judgments, and Estimates
The application of critical accounting policies is particularly important to our financial condition and results of operations and
provides a framework for management to make significant estimates, assumptions, and other judgments. Additionally, our
financial condition, results of operations, and cash flow are impacted by the methods, assumptions, and estimates used in the
application of critical accounting policies. Although our management believes that these estimates, assumptions, and other
judgments are appropriate, they relate to matters that are inherently uncertain and that may change in subsequent periods.
Accordingly, changes in the estimates, assumptions, and other judgments applied to these accounting policies could have a
significant impact on our financial condition and results of operations as reflected in our financial statements.
Accounting for Rate Regulation
Because the Company’s subsidiaries are regulated businesses, the Company is subject to the authoritative guidance for
accounting for the effects of certain types of regulation. Application of this guidance requires accounting for certain
transactions in accordance with regulations adopted by the ACC. Utility companies defer costs and credits on the balance sheet
as regulatory assets and liabilities when it is probable that those costs and credits will be recognized in the ratemaking process
in a period different from the period in which they would have been reflected in income by an unregulated company. These
deferred regulatory assets and liabilities are then reflected in the income statement in the period in which the same amounts are
reflected in the rates charged for service.
When our regulated subsidiaries file rate cases, their capital assets, operating costs and other matters are subject to review, and
disallowances may occur, and the Company may be required to write-off related regulatory assets that are not specifically
recoverable and determine if other assets might be impaired. See Note 2 to our Financial Statements for more information
regarding our rate proceedings. Management continually evaluates the anticipated recovery, settlement or refund of regulatory
assets, liabilities, and revenues subject to refund and provides for allowances and/or reserves that it believes to be necessary. In
the event that management’s assessment as to the probability of the inclusion in the ratemaking process is incorrect, the
associated regulatory asset or liability will be adjusted to reflect the change in assessment or the impact of regulatory approval
of rates.
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 it 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 issued and recently issued but not yet adopted accounting pronouncements is included footnote 1 to the
consolidated financial statements contained in Part II, Item 8 of this Form 10-K and is incorporated herein by reference.
Off Balance Sheet Arrangements
As of December 31, 2021 and 2020, we did not have any off-balance sheet arrangements.
-56-
Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
-57-
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the Years ended December 31, 2021 and 2020
Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the Years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
59
61
62
63
64
66
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, 2021 and 2020, the related consolidated statements of operations, shareholders' equity, and
cash flows, for each of the two years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 2021, 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Impact of Rate Regulation on the Financial Statements — Refer to Notes 1 and 2 to the financial statements
Critical Audit Matter Description
The Company’s regulated utilities are subject to rate regulation by the Arizona Corporation Commission (the “ACC”), and are
therefore subject to Accounting Standards Codification Topic 980, Regulated Operations (“ASC 980”). In accordance with
ASC 980, rates charged to water and wastewater service customers in Arizona are intended to recover the costs of the provision
of service plus a reasonable return in the same period. Management has determined it meets the requirements under accounting
principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules
to account for the effects of cost-based rate regulation. Accounting for the economics of rate regulation impacts multiple
financial statement line items and disclosures, such as property, plant, and equipment; regulatory assets and liabilities; operating
revenues; operation and maintenance expense; and depreciation expense.
-59-
The ACC establishes rates that are designed to permit the recovery of the cost of service and a return on investment. The
Company’s rates are subject to regulatory rate-setting processes. Decisions made by the ACC in the future will impact the
accounting for regulated operations, including decisions about the amount of allowable costs and return on invested capital
included in rates and any refunds that may be required. While the Company has indicated it expects to recover costs from
customers through regulated rates, there is a risk that the ACC will not approve: (1) full recovery of the costs of providing
utility service, or (2) full recovery of all amounts invested in the utility business and a reasonable return on that investment.
We identified the impact of rate regulation as a critical audit matter due to the significant judgments that underlie the
Company’s regulatory account balances and disclosures and the high degree of subjectivity involved in assessing the impact of
future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in
future rates of incurred costs, and (2) a refund to customers. Given that management’s accounting judgements are based on
assumptions about the outcome of future regulatory decisions and interpretation of new or revised regulatory decisions, auditing
these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent
complexities and pervasive impact on the financial statements.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of future decisions by the ACC included the following, among others:
We read relevant regulatory orders and settlements issued by the ACC for the Company and other public
•
utilities in Arizona, regulatory statutes, interpretations, procedural memorandums, filings made by interveners and
utilities, and other publicly available information to assess the likelihood of recovery in future rates or of a future
reduction in rates based on precedents of the ACC’s treatment of similar costs under similar circumstances.
We obtained supporting documentation from management, as appropriate, regarding probability of recovery
•
for regulatory assets or refund or future reduction in rates for regulatory liabilities not yet addressed in a regulatory
order to assess management’s assertion that amounts are probable of recovery or a future reduction in rates.
•
recorded and regulatory developments.
We evaluated the Company’s disclosures related to the impacts of rate regulation, including the balances
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 10, 2022
We have served as the Company's auditor since 2003.
-60-
GLOBAL WATER RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
UTILITY PLAN:
Land
Depreciable property, plant and equipment
Other
Construction work-in-progress
Less accumulated depreciation
Net utility plan
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable — net
Customer payments in-transit
Unbilled revenue
Prepaid expenses and other current assets
Total current assets
OTHER ASSETS:
Goodwill
Intangible assets — net
Regulatory asset
Deposits
Restricted cash
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 revenue - 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 (Refer to Note 15)
SHAREHOLDERS' EQUITY:
December 31, 2021
December 31, 2020
1,338
313,700
697
53,511
(113,380)
255,866
1,159
297,458
699
40,877
(101,302)
238,891
12,637
1,994
201
2,510
1,645
18,987
5,730
10,339
2,336
10
806
19,221
294,074
2,120
9,191
—
1,646
3,975
16,932
108,933
19,035
7,421
84,578
21,326
3,269
1,773
778
247,113
264,045
18,033
2,147
306
2,304
665
23,455
4,600
11,185
2,036
9
3,272
21,102
283,448
531
8,261
4
1,558
2,035
12,389
112,659
17,843
7,986
76,384
14,632
3,652
1,773
3,942
238,871
251,260
Common stock, $0.01 par value, 60,000,000 shares authorized; 22,832,013 and 22,690,477
shares issued as of December 31, 2021 and December 31, 2020, respectively.
Treasury stock, 182,445 and 102,711 shares at December 31, 2021 and December 31, 2020,
respectively.
Paid in capital
Retained earnings
$
Total shareholders' equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
228
227
(2)
29,803 $
—
30,029
294,074
(1)
31,962
—
32,188
283,448
See accompanying notes to the consolidated financial statements
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GLOBAL WATER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Year Ended December 31,
2021
2020
REVENUES:
Water services
Wastewater and recycled water services
Unregulated revenues
Total revenues
OPERATING EXPENSES:
Operations and maintenance
General and administrative
Depreciation and amortization
Total operating expenses
OPERATING INCOME
OTHER INCOME (EXPENSE):
Interest income
Interest expense
Other
Total other expense
INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE
NET INCOME
Basic earnings per common share
Diluted earnings per common share
Dividends declared per common share
$
$
$
$
$
18,944 $
22,241
729
41,914
10,299
15,146
9,490
34,935
6,979
19
(5,201)
2,962
(2,220)
4,759
(1,150)
3,609 $
0.16 $
0.16 $
0.29 $
18,072
20,394
161
38,627
9,539
12,722
9,031
31,292
7,335
93
(5,377)
(175)
(5,459)
1,876
(771)
1,105
0.05
0.05
0.29
Weighted average number of common shares used in the determination of:
Basic
Diluted
22,619,469
22,902,970
22,518,636
22,574,093
See accompanying notes to the consolidated financial statements
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GLOBAL WATER RESOURCES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands, except share and per share amounts)
BALANCE - December 31, 2019
21,636,420 $
216
(99,039) $
(1) $ 24,457 $ — $ 24,672
Common Stock
Shares
Common
Stock
Treasury
Stock Shares
Treasury
Stock
Paid-in
Capital
Retained
Earnings
Total
Equity
Dividend declared $0.29 per share
Issuance of Common Stock
—
1,049,163
Treasury stock
Stock option exercise
Stock compensation
Net income
—
4,894
—
—
BALANCE - December 31, 2020
22,690,477 $
Dividend declared $0.29 per share
Issuance of Common Stock
Treasury stock
Stock option exercise
Stock compensation
Net income
—
54,163
—
87,373
—
—
—
11
—
—
—
—
227
—
—
—
1
—
—
—
—
(3,672)
—
—
—
(102,711) $
—
—
—
—
—
(5,434)
11,508
(1,105)
—
(6,539)
11,519
(1)
—
1,432
—
—
—
(1)
—
1,432
1,105
—
(1) $ 31,962 $ — $ 32,188
1,105
—
—
—
—
—
(3,000)
—
(3,609)
—
(6,609)
—
(79,734)
(1)
—
—
—
—
—
—
3
—
838
—
—
—
—
3,609
2
1
838
3,609
BALANCE - December 31, 2021
22,832,013 $
228
(182,445) $
(2) $ 29,803 $ — $ 30,029
See accompanying notes to the consolidated financial statements
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GLOBAL WATER RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred compensation
Depreciation and amortization
Amortization of deferred debt issuance costs and discounts
Other gains
Provision for doubtful accounts receivable
Deferred income tax expense
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
Cash paid for acquisitions, net of cash acquired
Other cash flows from investing activities
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid
Advances in aid of construction
Refunds of advances for construction
Refunds of developer taxes
Proceeds from stock option exercise
Principal payments under capital lease
Loan repayments
Repayments of bond debt
Proceeds from sale of stock
Payments for taxes related to net shares settlement of equity awards
Debt issuance costs paid
Payments of offering costs for sale of stock
Net cash provided by (used in) financing activities
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED
CASH
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – End of period
See accompanying notes to the consolidated financial statements
-64-
Year Ended December 31,
2021
2020
3,609 $
1,105
2,884
9,490
90
18
86
(307)
82
(1,076)
415
(300)
5,395
20,386
(18,250)
(2,068)
(1)
(20,319)
(6,609)
3,817
(1,007)
(1,364)
4
(147)
(4)
(1,917)
—
(656)
(46)
—
(7,929)
(7,862)
21,305
13,443
3,286
9,031
134
552
140
(1,275)
(641)
(121)
(176)
(321)
2,852
14,566
(9,131)
(302)
(9)
(9,442)
(6,539)
3,304
(992)
—
—
(109)
(22)
—
11,738
—
(73)
(221)
7,086
12,210
9,095
21,305
Supplemental disclosure of cash flow information:
Cash and cash equivalents
Restricted Cash
Total cash, cash equivalents, and restricted cash
Year Ended December 31,
2021
2020
$
$
12,637 $
806
13,443 $
18,033
3,272
21,305
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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".
Total Water Management is a comprehensive approach to water utility management that reduces demand on scarce non-
renewable water sources and costly renewable water supplies, in a manner that ensures sustainability and greatly benefits
communities both environmentally and economically. This approach employs a series of principles and practices that can be
tailored to each community:
•
•
•
•
•
•
Reuse of recycled water, either directly or to non-potable uses, through aquifer recharge, or direct potable reuse;
Regional planning;
Use of advanced technology and data;
Employing respected subject matter experts and retaining thought and application leaders;
Leading outreach and educational initiatives to ensure all stakeholders including customers, development partners,
regulators, and utility staff are knowledgeable on the principles and practices of our Total Water Management
approach; and
Establishing partnerships with communities, developers, and industry stakeholders to gain support of our Total Water
Management principles and practices.
GWRI currently owns and operates twenty-five water and wastewater systems in strategically targeted communities principally
in metropolitan Phoenix. GWRI currently serves more than 74,048 people in approximately 27,630 homes within our 376
square miles of certificated service areas, which are serviced by twenty-two wholly-owned regulated operating subsidiaries as
of December 31, 2021. Approximately 90.9% of the Company’s active service connections are customers of its Global Water -
Santa Cruz Water Company, Inc. (“Santa Cruz”) and Global Water - Palo Verde Utilities Company, Inc. (“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 $41.9 million in 2021, and total service connections increasing from 8,113 as
of December 31, 2004 to 54,182 as of December 31, 2021, 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 ("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 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.
Corporate Transactions
Stipulated Condemnation of the Operations and Assets of Valencia Water Company, Inc.
On July 14, 2015, the Company closed the stipulated condemnation to transfer the operations and assets of Valencia Water
Company, Inc. ("Valencia") to the City of Buckeye. Terms of the condemnation were agreed upon through a settlement
agreement and stipulated final judgment of condemnation wherein the City of Buckeye acquired all the operations and assets of
Valencia and assumed operation of the utility upon close. The City of Buckeye is obligated to pay the Company a growth
premium equal to $3,000 for each new water meter installed within Valencia’s prior service areas in the City of Buckeye, for a
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20-year period ending December 31, 2034, subject to a maximum payout of $45.0 million over the term of the agreement. The
Company received growth premiums of $1.4 million and $0.2 million for the years ended December 31, 2021 and 2020,
respectively. The increase in growth premiums was driven by the receipt of a lump sum payment of $0.4 million from the City
of Buckeye during the twelve months ended December 31, 2021, due to an internal audit of premiums that resulted in findings
of past growth premiums that had not been remitted to the Company. The increase was due to increased meter connections in
the area over the prior year period.
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. The Company fully deferred the remaining tax liability during the year ended December 31, 2020.
Arizona Corporation Commission (the “ACC”) Tax Docket
The Company had a regulatory asset of $2.3 million and $2.0 million at December 31, 2021 and December 31, 2020,
respectively, and regulatory liabilities of $0.8 million and $0.7 million at December 31, 2021 and 2020, respectively, related to
the Federal Tax Cuts and Jobs Act (the "TCJA") signed into law on December 22, 2017. Under ASC 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.
On December 20, 2017, the ACC opened a docket to address the utility ratemaking implications of the TCJA. The ACC
subsequently approved an order in February 2018 requiring Arizona utilities 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.
On September 20, 2018, the ACC issued Rate Decision No. 76901, which set forth the reductions in revenue for our Santa
Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities due to the lower corporate tax rates under the TCJA. Rate
Decision No. 76901 adopted a phase-in approach for the reductions to match the phase-in of our revenue requirement under
Rate Decision No. 74364 enacted in February 2014. In 2020, the aggregate annual reductions in revenue for our Santa Cruz,
Palo Verde, Greater Tonopah, and Northern Scottsdale utilities was approximately $1.0 million. In 2021, the final year of the
phase-in, the aggregate annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale
utilities were approximately $415,000, $669,000, $16,000, and $5,000, respectively. The ACC also approved a carrying cost of
4.25% on regulatory liabilities resulting from the difference of the fully phased-in rates to be applied in 2021 versus the years
leading up to 2021 (i.e., 2018 through 2020).
Rate Decision No. 76901, however, did not address the impacts of the TCJA on accumulated deferred income taxes (“ADIT”),
including excess ADIT (“EADIT”). Following the ACC's request for a proposal, the Company made its proposal in filings on
December 19, 2018 and July 1, 2019. ACC Staff reviewed the Company's filing and requested that the Company defer tariff
revisions until such revisions can be considered in the next rate case. ACC Staff also requested that the Company defer
consideration of the regulatory assets and regulatory liabilities associated with 2018 EADIT amortization. On July 18, 2019,
the Company made a filing proposing these items be deferred to the next rate case. Refer to " — Corporate Transactions —
ACC Rate Case" for additional information regarding the Company's next rate case.
On November 27, 2018, February 20, 2019, February 28, 2019, and January 23, 2020, the ACC adopted orders relating to the
funding for income taxes on contributions in aid of construction ("CIAC") and advances in aid of construction ("AIAC") (which
became taxable for our regulated utilities under the TCJA). Those orders 1) require that under the hybrid sharing method, a
contributor will pay a gross-up to the utility consisting of 55% of the income tax expense with the utility covering the remaining
45% of the income tax expense; 2) remove the full gross-up method option for Class A and B utilities and their affiliates (which
includes all of our utilities); 3) ensure proper ratemaking treatment of a utility using the self-pay method; 4) clarify that pass-
through entities that are owned by a “C” corporation can recover tax expense according to methods allowed; and 5) require
Class A and B utilities to self-pay the taxes associated with hook-up fee contributions but permit using a portion of the hook-up
fees to fund these taxes. The Company's utilities have adopted the hybrid sharing method for income tax on CIAC and AIAC.
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Effective January 1, 2021, CIAC and AIAC for regulated water and sewage disposal facility companies will be excluded from
income under IRC Section 118.
ACC Rate Case
On August 28, 2020, 12 of our 18 regulated utilities each filed a rate case application with the ACC for water, wastewater, and
recycled water rates, which proposed a collective revenue requirement increase of $4.6 million (relative to expected revenues
in 2021, which is the final year of the rate phase-in from the last rate case) based on a 2019 test year. On August 2, 2021, we
filed rejoinder testimony with the ACC updating our collective revenue increase to approximately $3.0 million. An evidentiary
hearing was conducted beginning August 9, 2021. Certain of our utilities, including Santa Cruz and Palo Verde, have also
requested that the rate increases be phased in over three years, beginning January 1, 2022. A final decision is not expected until
the second quarter of 2022; therefore, any phase-in will not begin as requested on January 1, 2022 and may be shorter or longer
than three years, if a revenue increase is approved.
We also requested the consolidation of water and/or wastewater rates for our Red Rock, Santa Cruz, Palo Verde, Picacho
Water, and Picacho Utilities located in Pinal County. Of our utilities filing a rate case, these utilities make up approximately
96% of the Company's active service connections; provide or will provide water, wastewater, and recycled water services; and
are expected to create economies of scale that are beneficial to all customers if consolidated.
There can be no assurance, however, that the ACC will approve the requested rate increase or any increase or the consolidation
of water and wastewater rates described above, and the ACC could take other actions as a result of the rate case. Further, it is
possible that the ACC may determine to decrease future rates. There can also be no assurance as to the timing of when an
approved rate increase (if any) would go into effect.
2020 Common Stock Offering
On January 21, 2020, the Company completed a public offering of 870,000 shares of common stock at a public offering price
per share of $12.50, for gross proceeds of $10.9 million. On January 30, 2020, an additional 130,000 shares of common stock
were issued at the public offering price of $12.50 per share, for gross proceeds of $1.6 million, resulting in total proceeds from
the offering of approximately $12.5 million. The issuance of the additional shares was completed pursuant to the exercise in full
of the underwriter's over-allotment option. Net proceeds of approximately $11.5 million were received after deducting
underwriting discounts and commissions and offering expenses paid by us, which collectively totaled approximately
$1.0 million.
Acquisition of Las Quintas Serenas Water Company, Inc.
On November 3, 2021, the Company completed the acquisition of Las Quintas Serenas Water Company, Inc. ("Las Quintas"),
an operator of a water utility with service area in Pima County, Arizona. The acquisition added over 1,100 connections with
approximately 2.5 square miles of service area.
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 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 5 –
“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.
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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.
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, 2021 and 2020, the Company recognized $0.3 million and $0.2 million
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. 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 and recycled water services 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 revenues resulting from certain infrastructure coordination and financing agreement
arrangements ("ICFAs").
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 6 –
“Accounts Receivable”).
Infrastructure Coordination and Financing Fees
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.
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 for ICFAs are usually received in advance and are recorded as deferred
revenue until earned. 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”).
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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 relating to HUF tariffs, asset retirement obligations, and pending legal matters. The
thousands):
following
the restricted cash balance as of December 31, 2021 and 2020 (in
table summarizes
HUF funds
Certificate of deposits
Customer Payments In-Transit
December 31,
2021
December 31,
2020
$
$
$
16 $
790
806 $
2,482
790
3,272
Customer payments in-transit represent funds received by our third-party payment processor related to customer payments, a
majority of which were paid for with debit cards, credit cards, and checks, to which the Company does not have immediate
access but settles within a few days of the payment transaction.
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. The Company’s
valuation allowance totaled zero as of December 31, 2021 and 2020 (see Note 12 – “Income Taxes”).
We evaluate uncertain tax positions using a two-step approach. Recognition (step one) occurs when we conclude that a tax
position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two)
determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that
was previously recognized would occur when we subsequently determine that a tax position no longer meets the more-likely-
than-not threshold of being sustained. The use of a valuation allowance as a substitute for derecognition of tax positions is
prohibited, and to the extent that uncertain tax positions exist, we provide expanded disclosures.
Basic and Diluted Earnings per Common Share
Diluted EPS is based upon the weighted average number of common shares, including both outstanding shares and shares
potentially issuable in connection with stock options and restricted stock awards granted.
As of December 31, 2021, the Company had 520,481 options outstanding to acquire an equivalent number of shares of GWRI
common stock. The 320,321 options outstanding from the 2017 option grant equated to 164,444 common share equivalents,
which were included within the calculation of diluted earnings per share for the year ended December 31, 2021. The remaining
200,160 options outstanding from the 2019 option grant, which equated to 60,789 common share equivalents, were also
included within the calculation of diluted earnings per share for the year ended December 31, 2021. As of December 31, 2021,
the 74,164 restricted stock awards outstanding from the 2020 grant equated to 55,450 common share equivalents, which were
included within the calculation of diluted earnings per share for the year ended December 31, 2021. As of December 31, 2021,
there were 151,500 restricted stock awards outstanding from the 2021 grant, which equated to 2,819 common share equivalents,
which were included within the calculation of diluted earnings per share for the year ended December 31, 2021.
As of December 31, 2020, the Company had 625,913 options outstanding to acquire an equivalent number of shares of GWRI
common stock. The 382,771 options outstanding from the 2017 option grant equated to 48,094 common share equivalents,
which were included within the calculation of diluted earnings per share for the year ended December 31, 2020. The remaining
243,142 options outstanding from the 2019 option grant were not included within the calculation of diluted earnings per share
as to do so would be antidilutive. As of December 31, 2020, the 128,327 restricted stock awards outstanding from the 2020
grant equated to 7,363 common share equivalents, which were included within the calculation of diluted earnings per share for
the year ended December 31, 2020.
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Goodwill
Goodwill represents the excess purchase price over the fair value of net tangible and identifiable intangible assets acquired
through acquisitions. Goodwill is not amortized, it is instead tested for impairment annually, or more often, if circumstances
indicate a possible impairment may exist. As required, we evaluate goodwill for impairment annually, and do so as of
November 1 of each year, and at an interim date if indications of impairment exist. When testing goodwill for impairment, we
may assess qualitative factors, including macroeconomic conditions, industry and market considerations, overall financial
performance, and entity specific events to determine whether it is more likely than not that the fair value of an operating and
reportable segment is less than its carrying amount. We utilize internally developed discounted future cash flow models, third-
party appraisals, or broker valuations to determine the fair value of the reporting unit. Under the discounted cash flow approach,
we utilize various assumptions requiring judgment, including projected future cash flows, discount rates, and capitalization
rates. Our estimated future cash flows are based on historical data, internal estimates, and external sources. We then compare
the estimated fair value to the carrying value. If the carrying value is in excess of the fair value, an impairment charge is
recorded to asset impairments within our consolidated statement of operations in the amount by which the reporting unit's
carrying value exceeds its fair value, limited to the carrying value of goodwill. Refer to Note 7 — "Goodwill and Intangible
Assets" for additional information about goodwill.
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. Refer to Note 2 – "Regulatory Decision and Related Accounting and
Policy Changes” for additional information about ICFAs.
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 $0.1 million for both years ended December 31, 2021 and 2020.
Impairment of Long-Lived Assets
Management evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. If an indicator of possible impairment exists, an
undiscounted cash flow analysis would be prepared to determine whether there is an actual impairment. Measurement of the
impairment loss is based on the fair value of the asset. Generally, fair value will be determined using appraisals or valuation
techniques such as the present value of expected future cash flows.
Advances and Contributions in Aid of Construction
The Company has various agreements with developers and builders, whereby funds, water line extensions, or wastewater line
extensions are provided to us by the developers and are considered refundable advances for construction. These 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 AIAC or CIAC are excluded from rate base.
There was no AIAC balance transferred to CIAC for the year ended December 31, 2021 compared to $0.1 million for the year
ended December 31, 2020.
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 11 – “Debt” for information as to the fair value of our long-term debt. Our refundable
AIAC have a carrying value of $84.6 million and $76.4 million as of December 31, 2021 and 2020, 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
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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.
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.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842) (“ASU
2016-02”, or "ASC 842"). ASC 842 requires lessees to record a right-of-use asset and corresponding lease obligation for lease
arrangements with a term of greater than twelve months and requires additional disclosures about leasing arrangements. The
Company implemented Topic 842 on January 1, 2021. The implementation did not result in material changes to our
consolidated financial statements. Refer to Note 4 — "Leases" for additional information.
In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service Contract (Topic 350) ("ASU 2018-15"). ASU 2018-15 amends ASC 350 to include
in its scope implementation costs of a Cloud Computing Arrangement ("CCA") that is a service contract and clarifies that a
customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered
a service contract. The Company implemented Topic 350 on January 1, 2021. The implementation did not result in material
changes to our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 eliminates Step 2 from the impairment test which requires entities to
determine the implied fair value of goodwill to measure if any impairment expense is necessary. Instead, entities will record
impairment expenses based on the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the
carrying amount of goodwill. The Company implemented ASU 2017-04 on January 1, 2021. The implementation did not result
in material changes to our 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 980, Regulated Operations.
In accordance with ASC 980, rates charged to utility customers are intended to recover the costs of the provision of service plus
a reasonable return in the same period. Changes to the rates are made through formal rate applications with the ACC, which 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 and sale of Willow
Valley Water Co., Inc. ("Willow Valley"), which occurred in 2015 and 2016, respectively, 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, not updated for the TCJA, refer to Note 1 — "Basis of Presentation,
Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate
details):
Transactions
Docket"
further
ACC
Tax
for
—
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 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.
•
•
•
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.
On September 20, 2018, the ACC issued Rate Decision No. 76901, which set forth the reductions in revenue for our Santa
Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities due to the TCJA. Rate Decision No. 76901 adopted a
phase-in approach for the reductions to match the phase-in of our revenue requirements under Rate Decision No. 74364. Refer
to Note 1 — "Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting
Pronouncements — Corporate Transactions — ACC Tax Docket" for details regarding Rate Decision No. 76901.
On August 28, 2020, 12 of our 18 regulated utilities each filed a rate case application with the ACC for water, wastewater, and
recycled water rates, as well as the consolidation of water and/or wastewater rates for certain of the utilities using the twelve
months ending December 31, 2019 as the test year for the rate case. Refer to Note 1 — “Basis of Presentation, Corporate
Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions — ACC
Rate Case” for additional information.
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.
In February 2014, the ACC issued Rate Decision No. 74364, and concluded ICFA funds already received would no longer be
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deemed CIAC for rate making purposes. ICFA funds already received or which had become due prior to the date of Rate
Decision No. 74364 were 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, including construction of sufficient operating capacity to serve the customers for which revenue was
deferred.
As of December 31, 2021 and 2020, ICFA deferred revenue recorded on the consolidated balance sheet totaled $19.0 million
and $17.8 million, respectively, which represents deferred revenue recorded for ICFA funds received on contracts. The
Company recorded $0.7 million in ICFA fees in the current year under unregulated revenues.
Intangible assets / Regulatory liability – 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.
The intangible assets 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.
As of December 31, 2021, regulatory liability recorded on the consolidated balance sheet totaled $7.4 million, of which
$5.9 million relates to the offset of intangible assets related to ICFA contracts obtained in connection with our Santa Cruz, Palo
Verde, and Sonoran acquisitions, and the remaining $1.5 million relates to the TCJA rate reduction mandated by the ACC
pursuant to Rate Decision No. 76901.
3. REVENUE RECOGNITION
Regulated Revenue
The Company's operating revenues are primarily attributable to regulated services based upon tariff rates approved by the ACC.
Regulated service revenues consist of amounts billed to customers based on approved fixed monthly fees and consumption fees,
as well as unbilled revenues estimated from the last meter reading date to the end of the accounting period utilizing historical
customer data recorded as accrued revenue. The measurement of sales to customers is generally based on the reading of their
meters, which occurs on a systematic basis throughout the month. At the end of each month, the Company estimates
consumption since the date of the last meter reading and a corresponding unbilled revenue is recognized. The unbilled revenue
estimate is based upon the number of unbilled days that month and the average daily customer billing rate from the previous
month (which fluctuates based upon customer usage). The Company applies the invoice practical expedient and recognizes
revenue from contracts with customers in the amount for which the Company has a right to invoice. The Company has the right
to invoice for the volume of consumption, service charge, and other authorized charges.
The Company satisfies its performance obligation to provide water, wastewater, and recycled water services over time as the
services are rendered. Regulated services may be terminated by the customers at will, and, as a result, no separate financing
component is recognized for the Company's collections from customers, which generally require payment within 15 days of
billing. The Company applies judgment, based principally on historical payment experience, in estimating its customers' ability
to pay.
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The Company has elected to present sales taxes on a net basis and such, sales taxes are included in Accounts Payable and
Accrued Liabilities until remitted to the taxing authorities.
Unregulated Revenue
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 a portion of ICFA funds received. ICFAs are agreements with
developers and homebuilders where the Company provides services to plan, coordinate, and finance the water and wastewater
infrastructure that would otherwise be required to be performed or subcontracted by the developer or homebuilder. In return, the
developers and homebuilders pay the Company an agreed-upon amount per dwelling unit for the specified development or
portion of land. In addition, under ICFA agreements, the Company has a contractual obligation to ensure physical capacity
exists through its regulated utilities for water and wastewater to the developer when needed. This obligation persists regardless
of connection growth.
The Company believes that these services are not distinct in the context of the contract because they are highly interdependent
with the Company’s ability to provide fitted capacity for water and wastewater services. The Company concluded that the
goods and services provided under ICFA contracts constitute a single performance obligation.
ICFA revenue is recognized at a point in time when the Company has the necessary capacity in place within its infrastructure to
provide water/wastewater services to the developer. The Company exercises judgment when estimating the number of
equivalent dwelling units that the Company has capacity to serve.
Disaggregated Revenues
For the years ended December 31, 2021 and 2020, disaggregated revenues from contracts with customers by major source and
thousands):
customer
follows
class
are
(in
as
$
REGULATED REVENUE
Water Services
Residential
Irrigation
Commercial
Construction
Other water revenues
Total water revenues
Wastewater and recycled water services
Residential
Commercial
Recycled water revenues
Other wastewater revenues
Total wastewater and recycled water revenues
TOTAL REGULATED REVENUE
UNREGULATED REVENUE
ICFA revenues
Other Miscellaneous revenues
Rental revenues
TOTAL UNREGULATED REVENUE
Year Ended December 31,
2021
2020
13,697 $
2,917
868
691
771
18,944
19,743
1,020
1,132
346
22,241
41,185
683
—
46
729
12,818
3,309
836
540
569
18,072
18,056
933
1,181
224
20,394
38,466
—
1
160
161
TOTAL REVENUE
$
41,914 $
38,627
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Contract Balances
Our
contract
assets
and
liabilities
consist
of
the
following
(in
thousands):
December 31, 2021
December 31, 2020
CONTRACT ASSETS
Accounts receivable
Water services
Wastewater and recycled water services
Total contract assets(1)
CONTRACT LIABILITIES
Deferred revenue - ICFA
Refund liability - regulated(2)
Deferred revenue - other
Total contract liabilities
$
$
$
$
1,139 $
988
2,126 $
19,035 $
762
—
19,797 $
1,203
1,149
2,352
17,843
733
4
18,580
(1) The decrease in accounts receivable was primarily due to the reimplementation of disconnection notices and disconnections
during 2021, which had previously been temporarily suspended due to the COVID-19 pandemic in 2020, coupled with timely
collection in billings.
(2) The increase in refund liability is due to the phase-in approach approved in Rate Decision No. 76901. Refer to Note 1
—"Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements —
Corporate Transactions — ACC Tax Docket" for further details.
Remaining Performance Obligations
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which
includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted revenue
expected to be recognized in future periods was approximately $19.0 million at December 31, 2021 and approximately
$17.8 million at December 31, 2020. Deferred revenue - ICFA is recognized as revenue once the obligations specified within
the applicable ICFA are met, including construction of sufficient operating capacity to serve the customers for which revenue
was deferred. Due to the uncertainty of future events, the Company is unable to estimate when to expect recognition of deferred
revenue - ICFA. Deferred revenue - other is recognized as revenue once the obligations specified within the rental contract are
met. The Company has recognized the full amount of deferred revenue - other as of December 31, 2021.
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4. LEASES
On January 1, 2021, the Company adopted ASC 842 using the modified retrospective method. The Company elected the
practical expedient package when scoping and identifying leases. As such, the Company has not reassessed: 1) whether any
expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) the initial
direct costs for any existing leases. The Company notes that this practical expedient applies to all expired or existing contracts
as of the effective date of the Company's adoption. The Company elected this practical expedient package for all lessee and
lessor arrangements. In addition, the Company’s leases do not provide an implicit borrowing rate (“IBR”), and as such, we
applied judgment when estimating our IBR. We assessed and reviewed factors related to our credit risk, recent debt issuances,
and publicly available data for instruments with similar characteristics. The Company elected to use the portfolio approach and
applied a single discount rate of approximately 5% to the portfolio. This election was based on the fact that all leases are of
similar terms and our credit rating and interest rate environment are stable.
ASC 842 requires the Company to record a right-of-use asset (“ROU”) and a corresponding lease obligation for all operating
leases with a term greater than twelve months. The current portion of the ROU asset is included in the “Prepaid expenses and
other current assets” line item on the Company’s consolidated balance sheet. The remaining noncurrent balance of the ROU
asset is included in the line item “Other noncurrent assets” on the Company’s consolidated balance sheet. In addition, the
corresponding lease liabilities current and noncurrent portion are included on the Company’s consolidated balance sheet line
items “Other current liabilities” and “Other noncurrent liabilities,” respectively.
The adoption of ASC 842 resulted in the initial recognition of ROU assets of $189,000 and related lease liabilities of $210,000.
As of December 31, 2021, ROU assets and liabilities totaled $81,288 and $102,143, respectively, which primarily relates to
office rent.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment at December 31, 2021 and 2020 consist of the following (in thousands):
Plant, equipment, and water and sewer lines
Computers, office equipment and software
Total property, plant and equipment
Year Ended December 31,
2021
2020
311,041
2,659
$
313,700 $
294,459
2,999
297,458
Depreciation of property, plant and equipment is computed based on the estimated useful lives as follows:
Plant, equipment, and water and sewer lines
Computers, office equipment and software
Useful Lives
5 to 50 years
3 to 15 years
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6. ACCOUNTS RECEIVABLE
Accounts
receivable
as of December 31, 2021
and 2020
consist of
the
following
(in
thousands):
Billed receivables
Less allowance for doubtful accounts
Accounts receivable – net
December 31, 2021
$
$
$
2,126 $
(132)
1,994 $
December 31, 2020
2,352
(205)
2,147
The following table summarizes the allowance for doubtful accounts activity as of and for the years ended December 31, 2021
thousands).
and
2020
(in
Balance at
Beginning of
Period
Additions
Charged to
Expense
Charged to
Other
Accounts
Write-offs
Balance at End
of Period
$
$
(205) $
(87) $
(27) $
(169) $
(10) $
(7) $
110 $
58 $
(132)
(205)
Allowance for doubtful accounts:
Year Ended December 31, 2021
Year Ended December 31, 2020
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill
As of December 31, 2021, the goodwill balance of $5.7 million is related to the Turner, Red Rock, Mirabell, Francesca,
Tortolita, Lyn Lee, and Las Quintas acquisitions. There were no indicators of impairment identified as a result of the
Company's review of events and circumstances related to its goodwill subsequent to the acquisitions. Based on our annual
impairment testing performed on November 1st, no impairment was recorded.
Intangible Assets
As of December 31, 2021
and 2020
intangible
assets
consisted of
the
following
(in
thousands):
December 31, 2021
December 31, 2020
Gross
Amount
Accumulated
Amortization
Net
Amount
Gross
Amount
Accumulated
Amortization
Net
Amount
INDEFINITE LIVED INTANGIBLE ASSETS:
CP Water Certificate of Convenience
& Necessity service area
1,532
$
1,532 $
1,532
$
1,532
Intangible trademark
Franchise contract rights
Organizational costs
13
130
68
1,743
13
130
68
13
129
67
1,743
1,741
13
129
67
1,741
DEFINITE LIVED INTANGIBLE ASSETS:
Acquired ICFAs
Sonoran contract rights
Total intangible assets
$
17,978
7,407
25,385
27,128 $
(14,565)
(2,224)
(16,789)
(16,789) $
3,413
5,183
8,596
10,339 $
17,978
7,406
25,384
27,125 $
(13,718)
(2,222)
(15,940)
(15,940) $
4,260
5,184
9,444
11,185
A Certificate of Convenience & Necessity ("CC&N") is a permit issued by the ACC allowing a public service corporation to
serve a specified area, and preventing other public service corporations from offering the same services within the specified
area. The CP Water CC&N intangible asset was acquired through the acquisition of CP Water Company in 2006. This CC&N
permit has no outstanding conditions that would require renewal.
Franchise contract rights and organizational costs relate to our 2018 acquisition of Red Rock. Franchise contract rights are
agreements with Pima and Pinal counties that allow the Company to place infrastructure in public right-of-way and permits
expected to be renewable indefinitely. The organizational costs represent fees paid to federal or state governments for the
privilege of incorporation and expenditures incident to organizing the corporation and preparing it to conduct business.
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Acquired ICFAs and contract rights related to our 2005 acquisition of Sonoran Utility Services, LLC assets are amortized when
cash is received in proportion to the amount of total cash expected to be received under the underlying agreements. Due to the
uncertainty of the timing of when cash will be received under ICFA agreements and contract rights, we cannot reliably estimate
when the remaining intangible assets' amortization will be recorded. Amortization in the amount of $0.8 million and
$1.4 million was recorded for these balances for the years ended December 31, 2021 and 2020, respectively.
8. TRANSACTIONS WITH RELATED PARTIES
The Company provides medical benefits to our employees through our participation in a pooled plan sponsored by an affiliate
of a significant shareholder and director of the Company. Medical claims paid to the plan were approximately $1.8 million and
$0.9 million for the years ended December 31, 2021 and 2020, respectively.
9. ACCRUED EXPENSES
Accrued
thousands):
expenses
at
December
31,
2021
and
2020
consist
of
the
following
(in
Deferred compensation
Property taxes
Interest
Dividend payable
Asset retirement obligation
Accrued bonus
Customer prepayments
Other accrued liabilities
Total accrued expenses
10. FAIR VALUE
Fair Value of Financial Instruments
December 31, 2021
$
December 31, 2020
1,399
1,191
472
550
697
569
356
3,027
8,261
1,211 $
1,238
492
547
697
478
438
4,090
9,191 $
$
FASB ASC 820, Fair Value Measurement, establishes a fair value hierarchy that distinguishes between assumptions based on
market data (observable inputs) and the Company's assumptions (unobservable inputs). The hierarchy consists of three levels,
as follows:
•
•
•
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are either directly or indirectly observable.
Level 3 - Unobservable inputs developed using the Company's estimates and assumptions, which reflect those that the
Company believes market participants would use.
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Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020 were as follows (in
thousands):
December 31, 2021
December 31, 2020
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Asset/Liability Type:
HUF Funds - restricted
cash(1)
Demand Deposit(2)
Certificate of Deposit -
Restricted(1)
Long-term debt(3)
Acquisition Liability(4)
Total
$
$
16 $
135
— $
—
— $
—
16 $
— $
135
2,135
2,482 $
—
— $
—
2,482
2,135
—
—
790
125,650
—
—
790
125,650
—
151 $ 126,440 $
—
838
838 $ 127,429 $
838
—
—
—
790
127,724
—
2,135 $ 130,996 $
—
—
790
127,724
838
838
838 $ 133,969
(1) HUF Funds - restricted cash and Certificate of Deposit - Restricted are presented on the Restricted cash line item of the Company's consolidated balance
sheets. They are valued at amortized cost, which approximates fair value.
(2) Demand Deposit is presented on the Cash and cash equivalents line item of the Company's consolidated balance sheets and is valued at amortized cost,
which approximates fair value.
(3) The fair value of our debt was estimated based on interest rates considered available for instruments of similar terms and remaining maturities.
(4) As part of the Red Rock acquisition, the Company is required to pay to the seller a growth premium equal to $750 (not in thousands) for each new account
established within three specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten
years after such first installation date, or twenty years from the acquisition date. The fair value of the acquisition liability was calculated using a discounted cash
flow technique which utilized unobservable inputs developed using the Company's estimates and assumptions. Significant inputs used in the fair value
calculation are as follows: year of the first meter installation, total new accounts per year, years to complete full build out, and discount rate.
11. DEBT
The outstanding balances and maturity dates for short-term (including the current portion of long-term debt) and long-term debt
as of December 31, 2021 and 2020 are as follows (in thousands):
BONDS AND NOTES PAYABLE -
4.38% Series A 2016, maturing June 2028
4.58% Series B 2016, maturing June 2036
4.65% Harquahala Loan, maturing January 2021 (1)
OTHER
Capital lease obligations
Debt issuance costs
Total debt
December 31, 2021
December 31, 2020
Short-term
Long-term
Short-term
Long-term
—
3,833
—
3,833
28,750 $
80,500
—
109,250
— $
1,917
3
1,920
28,750
84,333
—
113,083
142
—
3,975 $
199
(516)
108,933 $
115
—
2,035 $
136
(560)
112,659
$
(1) Represents a loan that was payable to Harquahala Valley Community Benefits Foundation, which was assumed in connection with the Company's
acquisition of Eagletail Water Company in May 2017. The loan was paid off in January 2021.
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2016 Senior Secured Notes
On June 24, 2016, the Company issued two series of senior secured notes with an aggregate total principal balance of $115.0
million at a blended interest rate of 4.55%. Series A carries a principal balance of $28.8 million and bears an interest rate of
4.38% over a twelve-year term, with the principal payment due on June 15, 2028. Series B carries a principal balance of $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 beginning December 2021. 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 Company's initial public offering in the United States. 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. Debt issuance costs as of
December 31, 2021 and 2020 were $0.5 million and $0.6 million, respectively.
The senior secured notes require the Company to maintain a debt service coverage ratio of consolidated EBITDA to
consolidated debt service of at least 1.10 to 1.00. Consolidated EBITDA is calculated as net income plus depreciation and
amortization, taxes, interest and other non-cash charges net of non-cash income. Consolidated debt service is calculated as
interest expense, principal payments, and dividend or stock repurchases. The senior secured notes also contain a provision
limiting the payment of dividends if the Company falls below a debt service ratio of 1.25. However, for the quarter ending June
30, 2021 through the quarter ending March 31, 2024, the ratio drops to 1.20. The debt service ratio increases to 1.25 for any
fiscal quarter during the period from and after June 30, 2024. As of December 31, 2021, the Company was in compliance with
its financial debt covenants.
Revolving Credit Line
On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation
(the “Northern Trust Loan Agreement”), for a two-year revolving line of credit up to $10.0 million with a maturity date of April
30, 2022. This credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand
the Company’s business, and for general corporate purposes, bears an interest rate equal to LIBOR plus 2.00% and has no
unused line fee. This credit facility replaced the previous revolving line of credit with MidFirst Bank, which was terminated in
April 2020. On April 30, 2021, the Company and The Northern Trust Company entered into an amendment to the Northern
Trust Loan Agreement which pursuant to, among other things, the maturity date for the Company's revolving credit line was
extended from April 30, 2022 to April 30, 2024. As of December 31, 2021, the Company had no outstanding borrowings under
this credit line. There were $17,191 and $46,000 unamortized debt issuance costs as of December 31, 2021 and December 31,
2020, respectively.
The Northern Trust Loan Agreement requires the Company to maintain a debt service coverage ratio of consolidated EBITDA
to consolidated debt service of at least 1.10 to 1.00. The Northern Trust Loan Agreement also contains a provision limiting the
payment of dividends if the Company falls below a debt service ratio of 1.25. However, for the quarter ending June 30, 2021
through the quarter ending March 31, 2024, the ratio drops to 1.20. As of December 31, 2021, the Company was in compliance
with its financial debt covenants.
At December 31, 2021, the remaining aggregate annual maturities of debt and minimum lease payments under capital lease
obligations are as follows (in thousands):
2022
2023
2024
2025
2026
Thereafter
Subtotal
Less: amount representing interest
Total
-81-
Debt
Capital Lease
Obligations
$
$
3,833 $
3,833
3,833
3,833
3,833
93,918
113,083
—
113,083 $
142
106
59
34
—
—
341
(21)
320
12.
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, 2021 and December 31, 2020, the Company did not have any valuation allowances or unrecognized tax benefits.
The income tax expense from continuing operations for the years ended December 31, 2021 and 2020 is comprised of the
thousands):
(in
following
Current income tax expense
Deferred income tax expense (benefit)
Income tax expense
Current income tax expense
Deferred income tax expense (benefit)
Income tax expense
Federal
1,142 $
(215) $
927 $
Federal
1,710 $
(1,086)
624 $
$
$
$
$
$
2021
State
2020
State
257 $
(34) $
223 $
270 $
(123) $
147 $
Total
1,399
(249)
1,150
Total
1,980
(1,209)
771
ASC 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, 2021 and 2020, the Company recorded no valuation
allowance.
The following table summarizes the Company’s temporary differences between book and tax accounting that give rise to the
thousands):
deferred
liabilities, as of December 31, 2021 and 2020
tax assets and deferred
tax
(in
DEFERRED TAX ASSETS:
Taxable meter deposits
Balterra intangible asset acquisition
Deferred gain on ICFA funds received
AIAC
Other
Total deferred tax assets
Net deferred tax asset
DEFERRED TAX LIABILITIES:
Regulatory liability
CP Water intangible asset acquisition
ICFA intangible asset
Property, plant and equipment
Gain on condemnation of Valencia
Other Liabilities
Total deferred tax liabilities
Net deferred tax liability
December 31,
2021
December 31,
2020
19 $
224
4,734
3,899
1,231
10,107
10,107
(257)
(381)
(641)
(10,962)
(222)
(913)
(13,376)
(3,269) $
22
224
4,438
3,706
1,311
9,701
9,701
(272)
(381)
(705)
(11,127)
8
(877)
(13,354)
(3,653)
$
As of December 31, 2021, we have approximately no remaining net operating loss (“NOL”) carry forwards.
The effective tax rates for the years ended December 31, 2021 and 2020 were 24.2% and 41.1%, respectively. The effective tax
rate for the year ended December 31, 2021 was greater than the federal statutory rate of 21% primarily due to the impact of the
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regulatory liability recorded as a result of Rate Decision No. 76901, state income taxes, share based compensation, and IRC
Section 4534 interest.
13. DEFERRED COMPENSATION AWARDS
Stock option awards
Stock 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.
2017 stock option grant
In August 2017, GWRI's Board of Directors granted stock options to acquire 465,000 shares of GWRI's common stock to
employees throughout the Company. The options were granted with an exercise price of $9.40, the market price of the
Company's common shares on the NASDAQ Global Market at the close of business on August 10, 2017. The options vested
over a four-year period, with 25% having vested in August 2018, 25% having vested in August 2019, 25% having vested in
August 2020, and 25% vesting in August 2021. The options have a 10-year life. The Company expensed the $1.1 million fair
value of the stock option grant ratably over the four-year vesting period. Stock-based compensation expense of $0.2 million and
$0.3 million was recorded for years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, 44,370
options have been exercised and 100,309 options have been forfeited with 320,321 outstanding.
2019 stock option grant
In August 2019, GWRI's Board of directors granted stock options to acquire 250,000 shares of GWRI's common stock to
employees throughout the Company. The options were granted with an exercise price of $11.26, the market price of the
Company's common shares on the NASDAQ Global Market at the close of business on August 13, 2019. The options vest over
a four-year period, with 25% having vested in August 2020, 25% vesting in August 2021, 25% vesting in August 2022, and
25% vesting in August 2023. The options have a 10-year life. The Company will expense the $0.8 million fair value of the
stock option grant ratably over the four-year vesting period. Stock-based compensation expense of $0.2 million was recorded
for both years ended December 31, 2021 and 2020. As of December 31, 2021, 11,001 options have been exercised and 38,839
options have been forfeited with 200,160 outstanding.
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A
summary of
stock option activity
is as
follows
(in
thousands, except option prices and years):
Number of Options
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Life
Aggregate Intrinsic
Value
Options Outstanding at December 31, 2019
Options Vested at December 31, 2019
Granted
Exercised
Forfeited
Cancelled
Options Outstanding at December 31, 2020
Options Vested at December 31, 2020
Granted
Exercised
Forfeited
Cancelled
Options Outstanding at December 31, 2021
Options Vested at December 31, 2021
Phantom stock/Restricted stock units compensation
633 $
193 $
—
(5) $
(2) $
—
626 $
348 $
—
(87) $
(18) $
—
520 $
420 $
10.12
9.40
9.83
10.85
10.12
9.72
9.95
11.17
10.12
9.84
8.4 $
9.6 $
1,915.1
725.4
7.3 $
7.0 $
2,683.6
1,629.7
6.6 $
6.2 $
3,635.4
3,050.9
The following table details total awards granted and the number of units outstanding as of December 31, 2021 along with the
amounts paid to holders of the phantom stock units ("PSUs") and/or restricted stock units ("RSUs") for the years ended
amounts):
December
thousands,
except
2021
2020
unit
and
31,
(in
Grant Date
Units Granted
Units Outstanding
2021
2020
Amounts Paid For the Year Ended
December 31,
22,712
30,907
32,190
22,481
27,403
— $
— $
—
2,683
9,122
20,080
39
180
125
118
135,693
31,885 $
462 $
24
113
118
58
—
313
Q1 2017
Q1 2018
Q1 2019
Q1 2020
Q1 2021(1)
Total
(1) Pursuant to the Global Water Resources, Inc. 2020 Omnibus Incentive Plan, effective May 7, 2020, long-term incentive
awards are no longer granted in the form of PSUs and are granted as RSUs instead.
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Stock appreciation rights compensation
The following table details the recipients of the stock appreciation rights ("SARs") awards, the grant date, units granted,
exercise price, outstanding units as of December 31, 2021 and amounts paid during the years ended December 31, 2021 and
amounts):
2020
thousands,
except
unit
unit
and
per
(in
Recipients
Members of Management (1)(3)
Key Executives (2)(4)
Members of Management (1)(5)
Members of Management (1)(6)
Total
Amounts Paid For the Year
Ended December 31,
Grant
Date
Units
Granted
Exercise
Price
Units
Outstanding
2021
2020
Q1 2015
Q2 2015
Q3 2017
Q1 2018
299,000 $ 4.26
300,000 $ 5.13
103,000 $ 9.40
33,000 $ 8.99
735,000
70,500 $
—
17,000
8,250
95,750 $
269 $
—
321
189
779 $
208
623
37
—
868
(1) The SARs vest ratably over 16 quarters from the grant date.
(2) The SARs vest over 16 quarters, vesting 20% per year for the first three years, with the remainder, 40%, vesting in year four.
(3) 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.
(4) 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.
(5) 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.
(6) The exercise price was determined to be the fair market value of one share of GWRI stock on the grant date of March 12, 2018.
For the twelve months ended December 31, 2021 and 2020, the Company recorded approximately $1.1 million and $1.6 million
of compensation expense related to the PSUs/RSUs and SARs, respectively. Based on GWRI’s closing share price on
December 31, 2021 (the last trading date of the year), deferred compensation expense to be recognized over future periods is
thousands):
December
estimated
follows
ending
years
the
for
(in
31
as
2022
2023
2024
Total
Restricted stock compensation
PSUs
SARs
274
151
—
425
17
—
—
17
The Company assumes that forfeitures will be minimal and recognizes forfeitures as they occur, which results in a reduction in
compensation expense. On May 7, 2020, the Company's stockholders approved the Global Water Resources, Inc. 2020
Omnibus Incentive Plan which allows restricted stock awards as a form of compensation. A restricted stock award ("RSA")
represents the right to receive a share of the Company's common stock. RSAs vest over two to three years, beginning on the
date of the grant.During the year ended December 31, 2021, 172,650 RSAs were issued. The Company recorded approximately
$1.2 million of compensation expense related to the grant and partial vesting of RSAs for the year ended December 31, 2021.
During the year ended December 31, 2020, 177,490 RSAs were issued. The Company recorded approximately $1.0 million for
the year ended December 31, 2020. The following table summarizes the RSA transactions for the year ended December 31,
2021:
Nonvested RSAs at the beginning of period
Granted
Vested
Forfeited
Nonvested RSAs at the end of period
Number of RSAs
Weighted Average Fair Value
128,327 $
172,650
54,163
21,150
225,664 $
11.22
16.70
11.28
—
14.88
14. SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental cash flow information for the years ended December 31, 2021 and 2020 (in thousands):
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Supplemental cash flow information:
Cash paid for interest
Cash paid for taxes
Non-cash financing and investing activities:
Capital expenditures included in accounts payable and accrued liabilities
15. COMMITMENTS AND CONTINGENCIES
Commitments
For the Year Ended December 31,
2021
2020
$
$
$
5,226 $
1,613 $
5,224
240
— $
586
In January 2019, the Company's corporate office lease agreement was amended to extend the term of the lease, with a
commencement date of March 1, 2019 and termination date of May 31, 2022. As such, the Company's monthly rent expense
increased to approximately $16,000. Rent expense arising from the operating leases totaled approximately $197,000 and
$177,000 for the year ended December 31, 2021 and 2020, respectively.
We entered into a new corporate office lease agreement with a commencement date of May 1, 2022. The new monthly rent
expense will increase to $23,750 for each full calendar month commencing on May 1, 2022 through April 30, 2025 and $41,572
for each calendar month commencing on May 1, 2025 through April 30, 2027. On March 1, 2022 we amended the terms of the
lease to incorporate construction of tenant improvements. Should we incur additional costs in excess of the landlord
improvement allowance, we will have the option of paying the expenses at time of possession or amortized over the lease term
as additional rent at three percent cost of funds.
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.
16. SUBSEQUENT EVENT
Acquisition of Twin Hawks Utility, Inc.
On January 13, 2022, the Company completed the acquisition of Twin Hawks Utility, Inc., an operator of a water utility with
service area in Pinal County, Arizona. The acquisition added an additional 18 connections and approximately 0.5 square miles
of service area at the time of acquisition.
Acquisition of Rincon Water Company
On January 20, 2022, the Company completed the acquisition of Rincon Water Company, Inc., an operator of a water utility
with service area in Pima County, Arizona. The acquisition added an additional 73 connections and approximately 8.6 square
miles of service area at the time of acquisition.
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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 Officer 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, 2021, 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 in 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, 2021.
This Form 10-K does not include an attestation report of our registered public accounting firm because, as a smaller reporting
company and non-accelerated filer, our registered public accounting firm is not required to issue such an attestation report.
Changes in Internal Control over Financial Reporting
In August 2021 we converted our accounting platform which allowed us to implement more robust automated controls with
regards to financial reporting. There was no material change in our internal control over financial reporting during the fiscal
quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 will be included under the following captions in our definitive proxy statement
relating to our 2022 annual meeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year
ended December 31, 2021 (the "Proxy Statement") and is incorporated herein by reference: “Proposal One: Election of
Directors”, “Executive Officers”, “Other Matters—Delinquent Section 16(a) Reports”, “Other Matters—Code of Ethical
Business Conduct”, and “Corporate Governance—Board and Committee Information”.
ITEM 11.
EXECUTIVE COMPENSATION
We are a smaller reporting company as defined in the Exchange Act and are not required to provide certain disclosures
regarding executive compensation required of certain larger public companies.
The information required by this Item 11 will be included under the following captions in our Proxy Statement and is
incorporated herein by reference: “Corporate Governance—Compensation of Directors” and “Executive Compensation”.
ITEM 12.
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
The information required by this Item 12 will be included under the following captions in our Proxy Statement and is
incorporated herein by reference: “Security Ownership of Certain Beneficial Owners and Management” and “Equity
Compensation Plan Information”.
ITEM 13.
INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
The information required by this Item 13 will be included under the following captions in our Proxy Statement and is
incorporated herein by reference: “Corporate Governance—Independence of Directors” and “Certain Relationships and Related
Transactions”.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 will be included under the following caption in our Proxy Statement and is
incorporated herein by reference: “Audit Matters—Independent Auditor’s Fees”.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) 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 Securities and Exchange Commission are included in the consolidated
financial statements, including the notes thereto, or are inapplicable, and therefore have been omitted.
(b) Exhibit
See Exhibit Index.
ITEM 16.
FORM 10-K SUMMARY
None.
-88-
Exhibit
Number
Description of Exhibit
Method of Filing
EXHIBIT INDEX
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 Current
Report on 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 Current
Report on 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
4.4 Description of Company's securities
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
10.3 Employment Agreement with Ron Fleming, dated May 4, 2021*
Incorporated by reference to Exhibit 4.4 to the Company's Annual
Report on Form 10-K filed with the SEC on March 5, 2020.
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
Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly
Report on Form 10-Q filed with the SEC on May 6, 2021
10.4 Employment Agreement with Michael J. Liebman, dated May 4,
2021*
Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly
Report on Form 10-Q filed with the SEC on May 6, 2021
10.5 Employment Agreement with Christopher D. Krygier, dated May 4,
2021*
Incorporated by reference to Exhibit 10.4 of the Company’s Quarterly
Report on Form 10-Q filed with the SEC on May 6, 2021
10.6 Infrastructure Coordination Agreement with Pecan Valley
Investments, LLC, dated January 28, 2004
10.7 Infrastructure Coordination Agreement with JNAN, LLC, dated July
1, 2004
10.8 Infrastructure Coordination and Finance Agreement with Dana B.
Byron and Jamie Maccallum, dated July 21, 2006
10.9 Infrastructure Coordination and Finance Agreement with The
Orchard at Picacho, LLC, dated January 8, 2008
10.10 Infrastructure Coordination, Finance and Option Agreement with
Sierra Negra Ranch, LLC, dated July 10, 2006
10.11 Infrastructure Coordination and Finance Agreement, dated
December 20, 2007
10.12.1 GWR Global Water Resources Corp. Stock Option Plan*
10.12.2 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
-89-
Exhibit
Number
Description of Exhibit
Method of Filing
10.12.3 Second Amendment to GWR Global Water Resources Corp. Stock
Option Plan*
Incorporated by reference to Exhibit 10.1 of the Company’s Current
Report on Form 8-K filed with the SEC on May 4, 2016
10.12.4 Third Amended to Global Water Resources, Inc. Stock Option
Plan*
Incorporated by reference to Exhibit 10.2 of the Company’s Current
Report on Form 8-K filed with the SEC on March 13, 2018
10.13.1 Employment Agreement with Joanne Ellsworth, dated November 9,
Filed herewith
2021*
10.13.1 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
10.13.2 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 Current
Report on Form 8-K filed with the SEC on May 4, 2016
10.14.1 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
10.14.2 Amendment to Global Water Resources, Inc. Deferred Phantom
Stock Unit Plan*
Incorporated by reference to Exhibit 10.3 of the Company’s Current
Report on Form 8-K filed with the SEC on May 4, 2016
10.14.3 Second Amendment to Global Water Resources, Inc. Deferred
Phantom Stock Unit Plan*
Incorporated by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K filed with the SEC on August 8, 2017
10.14.4 Third Amendment to Global Water Resources, Inc. Deferred
Phantom Stock Unit Plan*
Incorporated by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K filed with the SEC on December 6, 2017
10.14.5 Fourth Amendment to Global Water Resources, Inc. Deferred
Phantom Stock Unit Plan*
Incorporated by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K filed with the SEC on March 13, 2018
10.15.1 Global Water Resources, Inc. Phantom Stock Unit Plan, dated May
1, 2015*
10.15.2 Amendment to Global Water Resources, Inc. Phantom Stock Unit
Plan*
10.16.1 GWR Global Water Resources Corp. Deferred Phantom Stock Unit
Plan, dated January 1, 2011*
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
Incorporated by reference to Exhibit 10.4 of the Company’s Current
Report on Form 8-K filed with the SEC on May 4, 2016
Incorporated by reference to Exhibit 10.21 of the Company’s
Registration Statement on Form S-1 (File No. 333-209025) filed with
the SEC on January 19, 2016
10.16.2 Amendment to GWR Global Water Resources Corp. Deferred
Phantom Stock Unit Plan*
Incorporated by reference to Exhibit 10.5 of the Company’s Current
Report on Form 8-K filed with the SEC on May 4, 2016
10.17 Securities Purchase Agreement, dated June 5, 2013
10.18 Amended and Restated Agreement, dated September 10, 2019, by
and among certain wholly-owned subsidiaries of Global Water
Resources, Inc. and Global Water Management, LLC
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 10.1 of the Company's Current
Report on Form 8-K filed with the SEC on September 12, 2019
10.19.1 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
10.19.2 Amendment No. 1 to Note Purchase Agreement, dated December
19, 2017, by and among Global Water Resources, Inc. and the
noteholders party thereto
10.19.3 Amendment No. 2 to Note Purchase Agreement dated May 20, 2016
and Amendment No. 1 to Security Agreements dated as of June 24,
2016, dated April 18, 2018, by and among Global Water Resources,
Inc., Global Water, LLC, West Maricopa Combine, LLC, U.S.
Bank, National Association, as collateral agent, and the noteholders
party thereto
Incorporated by reference to Exhibit 10.1 of the Company's Current
Report Form 8-K filed with the SEC on December 22, 2017
Incorporated by reference to Exhibit 10.7 of the Company's Current
Report on Form 8-K filed with the SEC on April 25, 2018
10.20 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
10.21 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
10.22 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
-90-
Exhibit
Number
Description of Exhibit
Method of Filing
10.23 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
10.24 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
10.25 Standstill Agreement, dated March 19, 2021, by and among Global
Water Resources, Inc., Levine Investments Limited Partnerships,
William S. Levine, Jonathan L. Levine, and Andrew M. Cohn
10.26 Global Water Resources, Inc. 2018 Stock Option Plan*
10.27 Global Water Resources, Inc. 2020 Omnibus Incentive Plan*
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
Incorporated by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K filed with the SEC on March 24, 2021
Incorporated by reference to Annex A to the Company’s Definitive
Proxy Statement on Schedule 14A filed with the SEC on April 6,
2018
Incorporated by reference to Exhibit 10.10 of the Company's
Quarterly Report on Form 10-Q filed with the SEC on August 6, 2020
10.28 Loan Agreement, dated April 30, 2020, by and between Global
Water Resources, Inc. and The Northern Trust Company
Incorporated by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K filed May 6, 2020
10.29 Guaranty Agreement, dated as of April 30, 2020, by Global Water,
LLC
Incorporated by reference to Exhibit 10.2 of the Company's Current
Report on Form 8-K filed May 6, 2020
10.30 Guaranty Agreement, dated as of April 30, 2020, by West Maricopa
Combine, LLC
Incorporated by reference to Exhibit 10.3 of the Company's Current
Report on Form 8-K filed May 6, 2020
10.31 Pledge and Security Agreement, dated as of April 30, 2020, by and
between Global Water Resources, Inc. and U.S. Bank National
Association, as collateral agent
Incorporated by reference to Exhibit 10.4 of the Company's Current
Report on Form 8-K filed May 6, 2020
10.32 Pledge and Security Agreement, dated as of April 30, 2020, by and
between Global Water LLC and U.S. Bank National Association, as
collateral agent
Incorporated by reference to Exhibit 10.5 of the Company's Current
Report on Form 8-K filed May 6, 2020
10.33 Pledge and Security Agreement, dated as of April 30, 2020, by and
between West Maricopa Combine, LLC and U.S. Bank National
Association, as collateral agent
Incorporated by reference to Exhibit 10.6 of the Company's Current
Report on Form 8-K filed May 6, 2020
10.34 Restricted Stock Agreement with Ron L. Fleming, dated May 8,
2020*
Incorporated by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K filed May 8, 2020
10.35 Restricted Stock Agreement with Michael J. Liebman, dated May 8,
2020*
10.36 Form of Restricted Stock Agreement*
Incorporated by reference to Exhibit 10.2 of the Company's Current
Report on Form 8-K filed May 8, 2020
Incorporated by reference to Exhibit 10.3 of the Company's Current
Report on Form 8-K filed May 8, 2020
10.37 Modification Agreement dated April 30, 2021, by and between
Global Water Resources, Inc. and The Northern Trust Company
Incorporated by reference to Exhibit 10.5 of the Company's Quarterly
Report on Form 10-Q filed with the SEC on May 6, 2021
10.38 Guaranty Agreement, dated as of April 30, 2021, by Global Water
Holdings, Inc.
Incorporated by reference to Exhibit 10.6 of the Company's Quarterly
Report on Form 10-Q filed with the SEC on May 6, 2021
10.39 Pledge and Security Agreement, dated as of April 30, 2021, by and
between Global Water Holdings, Inc. and The Northern Trust
Company
Incorporated by reference to Exhibit 10.7 of the Company's Quarterly
Report on Form 10-Q filed with the SEC on May 6, 2021
14.1 Code of Ethics
Incorporated by reference to Exhibit 14.1 of the Company’s Current
Report on Form 8-K filed with the SEC on May 4, 2016
21.1 Subsidiaries of Global Water Resources, Inc.
Filed herewith
23.1 Consent of Deloitte & Touche LLP, Independent Registered Public
Accounting Firm
Filed herewith
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
Furnished herewith
Financial Officer
-91-
Exhibit
Number
Description of Exhibit
Method of Filing
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
Inline XBRL Instance Document - the instance document does not
appear in the Interactive Data File because its XBRL tags are
embedded within the Inline XBRL document
Filed herewith
101.SCH
Inline XBRL Taxonomy Extension Schema Document
Filed herewith
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document Filed herewith
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
Filed herewith
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
Filed herewith
101. PRE
104
Inline XBRL Taxonomy Extension Presentation Linkbase
Document
Cover Page Interactive Data File (formatted as Inline XBRL with
applicable taxonomy extension information contained in Exhibits
101)
Filed herewith
Filed herewith
*
Management contract or compensatory plan or arrangement.
-92-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this
authorized.
report
undersigned,
thereunto
signed
behalf
duly
the
on
by
its
be
to
Global Water Resources, Inc.
Date: March 10, 2022
By:
/s/ Ron L. Fleming
Ron L. Fleming
President, Chief Executive Officer and Chairman of the Board
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
indicated.
in
persons
capacities
registrant
behalf
dates
and
and
the
the
the
on
on
of
Signature
Title
Date
/s/ Ron L. Fleming
Ron L. Fleming
President, Chief Executive Officer, and
Chairman of the Board
(Principal Executive Officer)
/s/ Michael J. Liebman
Michael J. Liebman
Chief Financial Officer and Corporate Secretary
(Principal Financial and Accounting Officer)
/s/ Jonathan L. Levine
Jonathan L. Levine
Director
March 10, 2022
March 10, 2022
March 10, 2022
/s/ Richard M. Alexander
Richard M. Alexander
/s/ Andrew M. Cohn
Andrew M. Cohn
/s/ Debra Coy
Debra Coy
/s/ Brett Huckelbridge
Brett Huckelbridge
/s/ David Rousseau
David Rousseau
Lead Independent Director
March 10, 2022
Director
Director
Director
Director
-93-
March 10, 2022
March 10, 2022
March 10, 2022
March 10, 2022
REGULATED ANNUAL REVENUE GROWTH
REGULATED ANNUAL REVENUE GROWTH
$ MILLIONS
$ MILLIONS
ANNUAL WATER CONSUMPTION
ANNUAL WATER CONSUMPTION
Billions of Gallons
Billions of Gallons
38.6%
38.6%
Increase over 2016
Increase over 2016
3.2B
3.2B
Gallons of water consumed
Gallons of water consumed
~45.5%
~45.5%
Increase over 2016
Increase over 2016
41.2
41.2
38.5
38.5
35.4
35.4
33.0
33.0
31.1
31.1
29.7
29.7
2.8
2.8
2.6
2.6
2.2
2.2
2.3
2.3
3.3
3.3
3.2
3.2
16
16
17
17
18
18
19
19
20
20
21
21
2016
2016
2017
2017
2018
2018
2019
2019
2020
2020
2021
2021
ACQUISITIONS SINCE 2017
ACQUISITIONS SINCE 2017
Cumulative
Cumulative
4,450+
4,450+
~30
~30
Connections added
Connections added
Square miles of
Square miles of
service area
service area
ACTIVE & TOTAL CONNECTIONS GROWTH
ACTIVE & TOTAL CONNECTIONS GROWTH
53,882
53,882
Active Service Connections
Active Service Connections
December 31, 2021
December 31, 2021
11
11
9
9
8
8
6
6
4
4
2
2
11
11
Acquisitions
Acquisitions
Since 2017
Since 2017
7.6%
7.6%
CAGR
CAGR
2016 ‐ 2021
2016 ‐ 2021
38,026
38,026
37,387
37,387
1
1
2017
2017
Total Active
Total Active
Total Connections
Total Connections
2021
2021
At Year‐end, adjusted for Willow Valley disposition.
At Year‐end, adjusted for Willow Valley disposition.
16
16
17
17
18
18
19
19
20
20
21
21
54,182
54,182
53,882
53,882
BOARD OF DIRECTORS
BOARD OF DIRECTORS
EXECUTIVE OFFICERS & SENIOR MANAGEMENT
EXECUTIVE OFFICERS & SENIOR MANAGEMENT
Ron L. Fleming
Ron L. Fleming
Chairman of the Board,
Chairman of the Board,
President, and Chief Executive Officer
President, and Chief Executive Officer
Phoenix, Arizona, USA
Phoenix, Arizona, USA
Richard M. Alexander
Richard M. Alexander
Lead Independent Director
Lead Independent Director
Calgary, Alberta, Canada
Calgary, Alberta, Canada
Debra G. Coy
Debra G. Coy
Director
Director
Fulton, Maryland, USA
Fulton, Maryland, USA
Brett Huckelbridge
Brett Huckelbridge
Director
Director
Phoenix, Arizona, USA
Phoenix, Arizona, USA
David Rousseau
David Rousseau
Director
Director
Phoenix, Arizona, USA
Phoenix, Arizona, USA
Jonathan L. Levine
Jonathan L. Levine
Director
Director
Phoenix, Arizona, USA
Phoenix, Arizona, USA
Andrew M. Cohn
Andrew M. Cohn
Director
Director
Phoenix, Arizona, USA
Phoenix, Arizona, USA
Ron L. Fleming
Ron L. Fleming
President, Chief Executive Officer and Chairman of
President, Chief Executive Officer and Chairman of
the Board
the Board
Mike Liebman
Mike Liebman
Senior Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer
Christopher D. Krygier
Christopher D. Krygier
Chief Strategy Officer
Chief Strategy Officer
Joanne Ellsworth
Joanne Ellsworth
Executive Vice President of Corporate Affairs
Executive Vice President of Corporate Affairs
Jake Lenderking
Jake Lenderking
Senior Vice President, Water Resources
Senior Vice President, Water Resources
Steven Brill
Steven Brill
Vice President, IT Operations and Security
Vice President, IT Operations and Security
Jonathan C. Corwin
Jonathan C. Corwin
Vice President and General Manager
Vice President and General Manager
Jason Thuneman
Jason Thuneman
Vice President, Project Management Office
Vice President, Project Management Office
Suzanne (“Shelley”) Kitts
Suzanne (“Shelley”) Kitts
Controller
Controller
INVESTOR INFORMATION
INVESTOR INFORMATION
Ronald Both
Ronald Both
CMA Investor Relations
CMA Investor Relations
949.432.7566
949.432.7566
GWRS@cma.team
GWRS@cma.team
Stock Exchange Listings
Stock Exchange Listings
NASDAQ
NASDAQ
Stock symbol: GWRS
Stock symbol: GWRS
The Toronto Stock Exchange
The Toronto Stock Exchange
Stock symbol: GWR
Stock symbol: GWR
Transfer Agent & Registrar
Transfer Agent & Registrar
Continental Stock Transfer & Trust
Continental Stock Transfer & Trust
1 State Street, 30th Floor
1 State Street, 30th Floor
New York, NY 10004
New York, NY 10004
2021 Annual Report
2021 Annual Report
Global Water Resources, Inc.
Global Water Resources, Inc.
21410 N 19th Avenue, Suite 220
21410 N 19th Avenue, Suite 220
Phoenix, AZ 85027 USA
Phoenix, AZ 85027 USA
GWResources.com
GWResources.com