Global Water Resources, Inc. (GWRS) Q3 2017 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Global Water Resources, Inc. 2017 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. [Operator Instructions] I would like to remind everyone that this call is being recorded on November 9, 2017 at 1:00 PM Eastern time. I would now like to turn the conference over to Jeff Risenmay, Controller. Please go ahead.

Good morning everyone. Thank you for joining us on our call today. Today, we issued our 2017 third quarter financial results by press release, a copy of which is available on our website at www.gwresources.com. Speaking today is Ron Fleming, President and Chief Executive Officer; and Mike Liebman, Chief Financial Officer. Mr. Fleming will summarize the key events of the third quarter, following which Mr. Liebman will review the financial results for the three and nine months ended September 30, 2017. Mr. Liebman and Mr. Fleming will be available for questions at the end of the call. Before we begin, I’d like to remind you that certain information presented today may include forward-looking statements. Such statements reflect the Company’s current expectations, estimates, projections and assumptions regarding future events. These forward-looking statements involve a number of assumptions, risks, uncertainty, estimate and other factors that could cause actual results to differ materially from those contained in the forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on any forward-looking statements, which reflect management’s view as of to-date hereof and are not guarantees of future performance. For additional information regarding factors that may affect future results, please read the sections Risk Factor and Management’s Discussion and Analysis of financial conditions and results of operation included within our latest Form 10-K filed with the SEC. Such filings are also available at www.sec.gov. Certain non-GAAP measures maybe included within today’s call. For a reconciliation of these measures the comparable GAAP financial measure, please see the tables included in today’s earnings release, which is available on our website. Unless otherwise stated, all amounts discussed are in U.S. dollars. And now I’ll turn the call over to Mr. Ron Fleming.

Thank you, Jeff. Good morning, everyone, and thank you for joining us today. We are very pleased to report our third quarter and year-to-date 2017 result. Highlights include, year-to-date total adjusted revenue, a non-GAAP metric increased $1.1 million or 5.1%. Growth was driven by an increase in active connections and approved rate increases, combined with an increase in water consumption compared to prior year. Our total active connections increased to 38,536 at September 30, 2017, which is an increase of 1,149 active connections since December 31, 2016. This represents a 4.1% annualized growth rate. Net income totaled $1.2 million, or $0.06 per share, and $1.8 million, or $0.09 per share, for the three and nine months ended September 30, 2017, respectively. Adjusted EBITDA, a non-GAAP metric was up $1.4 million, or 13.2% to end of the third quarter. Cash and cash equivalents totaled $7.8 million at the end of the quarter. And finally, this morning, Global Water announced a dividend increase of nearly 2.5%. The first dividend at the new monthly rate will be paid on December 29, 2017 to holders of record on December 15, 2017. Moving on, I wanted to highlight our progress on our accelerated capital improvement plan. In the third quarter, Global Water invested an additional $3.8 million of cash flow into the capital improvement program bringing the annual total capital improvement invested to $16.6 million. As a reminder, these specific investments go towards deferring the Valencia condemnation tax liability by approximately 37% for each offsetting investment in similar or related in use asset within our existing utility. Additionally in the third quarter, we received approval from the IRS of an extension to the end of 2018 of the time period in which such investments can be made. Although, most of the accelerated capital improvements will be completed by the end of 2017, this means we will also receive a deferral for any capital improvement completed in 2018. Further these expenditures represent investments that we expect to increase revenue, reduce expenses, and build our rate base, and importantly, these prudent capital investments into our existing utilities enhance the level of service that we provide to our customers and supports the growth of the communities we have the privilege to serve. Now I wanted to highlight this growth further, in addition to the annual phasing of new rates, our utilities have seen steady, consistent, organic growth since January of 2009. As noted earlier, we are currently realizing an annualized growth rate of 4.1%. Metro Phoenix single-family permit data remained very strong after coming in at 18,456 for 2016. The W.P. Carey School of Business, Greater Phoenix, Blue Chip Real Estate Consensus panel projects nearly 22,000 permits for 2017, an increase of approximately 19%. Permits for 2018 are forecasted to increase nearly 25,000 permit and Permits for 2019 are forecasted to increase to 26,000. Year-to-date permit data for the City of Maricopa sub market continues to be strong as well. As a reminder, 2016 saw 56% year-over-year increase in permits. Year-to-date for 2017, we’ve realized a 77% increase in permits over 2016. This data suggests that we could see organic growth in excess of 4% for the foreseeable future. Before turning the call over to Mike to review our Q3 2017 financial performance, I want to again, lay out our primary objective. Moving forward global water will continue to meet our primary mandate to provide safe, reliable and sustainable service to our customers and partners while taking a disciplined approach to growth and value creation through the following mean. We will work to grow recurring EBITDA by driving top line revenue growth, while creating operational efficiencies and managing controllable expenses. With the completion of the accelerated capital improvement plan in 2017, which is intended to greatly reduce the Valencia condemnation tax liability, we intend to minimize CapEx in our existing utilities will only use of small portion of our cash flow to make targeted capital improvement as necessary. We will however look primarily to defer the remainder of the Valencia condemnation tax liability by replacing assets through accretive acquisitions with consolidation benefit. And finally, we will routinely analyze our dividend policy with the commitment to grow our reoccurring dividend as we execute this plan, this was demonstrated again, this quarter. I will now turn the call over to Mike.

Thank you, Ron. Hello everyone. Our discussion today refers to the consolidated financial information of the U.S. Company, Global Water Resources, Inc. and all amounts discussed are in U.S. dollars. Total revenues for Q3 2017 were $8.5 million, which was up $292,000, or 3.6%, compared to Q3 of 2016. It’s also worth noting, this increase is due to a 4.1% organic connection growth, increased rates pursuant to the 2014 rate order. This offset by decreased consumption, which can be attributed to the higher precipitation in Q3 of 2017, compared to Q3 of 2016. Year-to-date total revenues through Q3 of 2017 were $23.4 million, which was up $823,000, or 3.6% compared to the same period in 2016. Adjusted revenue which removes Willow Valley was up $1.1 million, or 5.1%, compared to the same period in 2016. Operating expenses in Q3 2017 were $5.7 million compared to $5.3 million in Q3 2016. This is an increase of $369,000 or 7%. Notable changes in operating expenses included increased depreciation expense by $186,000 primarily due to increased capital investments made over the last year. Increased general and administrative expenses by $271,000 which is primarily attributed to deferred compensation, professional fees, and public company related expenses. These increases were offset by reduced on O&M expense of $88,000 primarily due to a reduction in related party contract fees. Year-to-date through Q3 of 2017, operating expenses were $17.8 million compared to $17.7 million in the same period of 2016. This is an increase of $74,000 or 0.4%. Notable changes in operating expenses included reduced related party contract fees by $312,000, reduced operating and maintenance costs by $270,000 thousand primarily driven by a reduction in personal and chemical costs. Increased general and administrative costs by $243,000 driven by higher professional fees and public companies related expenses offset by a lower deferred compensation expense, and increased depreciation expense by $413,000 again driven by capital investments made over the last year. Turning to net income, Global Water had net income in Q3 of 2017 of $1.2 million or $0.06 per share compared to $1.3 million or $0.07 per share in Q3 of 2016. Year-to-date through Q3 of 2017 net income was $1.8 million compared to a net loss of $2.6 million in 2016. This $4.4 million improvement is primarily due to a $6.7 million reduction in interest expense, $749,000 improvement in operating income, $282,000 increased in earnings from the growth premium related to our Valencia disposition and $239,000 improvement in related party losses. These improvements were offset by a $954,000 one-time gain from the early payoff of our Sonoran acquisition liability in 2016 and the $2.6 million increase in income tax expense for 2017. Adjusted EBITDA, which adjust for non-recurring event, option expense and our equity investment in FATHOM was $5.1 million in Q3 of 2017, which is up $157,000 or 3.2% compared to Q3 of 2016. Year-to-date through Q3 of 2017, adjusted EBITDA was $12.4 million compared to $10.9 million in the same period of 2016. This is an improvement of $1.45 million or 13.2%, which is driven by the top line increases and operating expense reductions previously mentioned as well as the $282,000 increase in the Valencia earn out. This concludes our update on Q3 2017 results. I’ll now pass the call back to Ron.

Thank you, Mike. I wanted to conclude today’s call by highlighting Global Water’s large service areas that surround our existing utility infrastructure and are strategically located along Metro Phoenix growth corridors. We do not talk about these large generally contiguous service areas often, but due to recent major announcement for Phoenix, Arizona, I wanted to do so today. As a reminder Global Water secured hundreds of square miles of future service area along growth corridors and in doing so, put in place regional master plans and permitting that will allow us to provide our integrated service model for water, wastewater, and recycle water to this area. While the return of organic growth and accelerating housing permits within the footprint of our existing infrastructure has been the focus during the housing recovery with the overall economic climate in Arizona improving significantly on all fronts, we have seen growth across all industries and job markets that are starting to push new development plans further out into these areas. And just two days ago, it was reported that The Bill & Melinda Gates Investment Group through an investment vehicle acquired 20,000 acres of a development called Belmont, which is located 45 minutes west of downtown Phoenix. Belmont is a massive mixed-use master plan community located in one of Global Waters’ utilities subsidiary service area. In a statement the property owners said, Belmont would create a forward thinking community with a communication and infrastructure spine that embraces cutting edge technology designed around high speed digital networks, data centers, new manufacturing technologies, and distribution model, autonomous vehicles and autonomous logistics. This very fresh news and there’s not a lot of additional information available or that we can disclose at this point. But it is worth highlighting the land deal and they were reported purchaser as it validates our long term belief in the potential of these areas that we’ve secured prior to the global financial crisis. That highlight concludes our prepared remarks. Thank you. Mike and I are now available to answer your questions.

[Operator Instructions] The first question comes from Gerry Sweeney from Roth Capital.

Good morning Ron and Mike, how are you doing?

Good morning Gerry, how are you?

I’m doing well. I want to circle back just about the last comment, I know you can’t talk much about it or there’s not a whole lot of information, but not being locate at Phoenix, I want to get maybe a little bit more clarity. So The Bill & Melinda Gates made an investment in Belmont, which is west of Phoenix, is Belmont an existing development or is it a development that they want to build out?

Yes. No, good question. So, currently there are no – there is no infrastructure, no residents, no customers of ours in this development. But it is an existing master planned community as far as entitlements go. So it’s one of the few areas frankly in the country Belmont is one of the largest master planned communities in the country has been put together over a few decades out there. We reported that in the past obviously we’ve done the general regional planning and permitting work on the water and wastewater side. That project was a little bit shelved obviously with the Great Recession. But it is fully entitled, it is very large contiguous piece of land and a majority portion of it was sold to reportedly The Bill & Melinda Gates Foundation.

So, if I think about it Belmont is an existing master planned community is quite large and you have some land that you have a franchise and that hasn’t been developed yet, but near or part of that eventual master planned community expansion?

Yes. I’ll just clarify one more lifetime. So the Belmont certainly has a whole, it doesn’t have any infrastructure or customers. It’s all only entitle, but basically means from a land development process, it’s got the necessary permits from the county et cetera is master plan for this mixed-use purposes in the future. We have put together our servicing plan for the development. But today there’s currently no infrastructure and no customers. We have some of our smaller public water systems that are adjacent to these developments down that area, but currently don’t have any customers inside of it.

And another thing to point out Gerry, the entire Belmont is all within our service area.

Right. Okay, got it. Okay. And then jumping over to the Private Letter Ruling obviously you got the extension on the investment components, but there is also components of the Private Letter Ruling that allows you to make acquisitions in like kind assets et cetera. When does that expire and if you can – how may remember is there an option for an extension on that as well?

Yes. Great question Gerry. And as Ron mentioned, we did get the one year extension only on the investments in our existing utilities, which had a two year cap and we got an extension for an additional year to make it three years total from the year of the sale. On the acquisition front, we get three years, which would take us through the end of 2018 with the ability for one year extensions thereafter, which we would obviously seek in our prior experience we’ve gotten five years on that front. And so, we believe with our continued search out for an additional acquisition we would get something along the lines of five years if not more.

Got it. How is the acquisition hence going several hundred opportunities in Arizona, just as much as you consider, comment on that front?

Yes, this is Ron, I’ll take that. So, it’s a little bit difficult to talk about that in too much detail, but generally you’re right. There are 100 and think the number is actually 270 water companies in the state of Arizona. They’re spread out through multiple classes or sizes, the Class A is the largest, through Class Bs, Cs, Ds and Es by time you get the Es is fairly small. So we always have said and I think that there’s an opportunity from really the Class B level down to consolidate those utilities and bring them under one professional umbrella. As we’ve also noted before this is the number one policy objective of the Arizona Corporation Commission, they’ve stated that for – frankly decades now. But ultimately just last year it was evidence that this was their number one policy objective by a very specific policy ruling that the commissioners put out and that policy statement basically put several measures in place to incent utilities to finally consolidate those utilities at the Class B, C, D and E levels. So the timing is good, we have obviously the deferred tax liability driver. The regulatory climate is kind of in the best place it’s been we think with the policy statements that were made on that front. And we’re very active on it today since we’re kind of bringing the accelerated CapEx plan to a close here this year. That will be our number one primary focus moving forward, always forward for Mike and me.

And then Mike, did you mentioned how much the Valencia payment generated in a quarter? For the couple…

Yes. The specific dollar amount I can go in – I’ll get that for you right now. One second, it was royalties for Buckeye for the quarter order specifically were $450,000 and that compares about $414,000 over the prior year, so $36,000 or 8.7% increase.

8.7%. Got it. And that’s essentially, that’s organic growth within Valencia, right?

Yes. Moving on the year-to-date front, we’re at about $1.1 million over the $58,000, so the $283,000 increase over last year’s a 32.9% increase. So while the quarter was up, it wasn’t up as substantially as the entire year-to-date so.

Got it. Got it. Okay, perfect. And then just on the S&G a little lower than my model. Sometimes – I mean the one variable that always kind of shift things around I think it’s – I believe it is the deferred comp that connected to the stock price and with the stock price was flat maybe down ahead of the quarter, so it reduced some of that impact on G&A or SG&A is that correct?

Yes, that is correct. I think we only recorded about 130,000 in deferred compensation for Q3 and so that was probably down from what you’ve projected.

Got it, perfect. Congrats – O&M, I mean – keeps getting better as far. How much do you have up – I mean two buckets you have cost improvements and then you have organic growth it just sort of where that leverage is the infrastructure. How much more do you have left on the cost control side, other than we will just say you’re always trying to get a little bit better bottling and tackling, any larger chunks of opportunity to invest?

Yes. I mean – I think we’ve got through the majority of that, to be honest Gerry, I mean we will continue to try to find ways to continue to create new efficiencies, but the team has done a great job of surfacing a lot of that value to this point.

Yes. I will now add to that. I think Mike is right, we’re not claiming that there are some major step function decreases that we can achieve moving forward. But we do think that just from an economies scale perspective and because of a lot of these capital improvements that we have just recently completed or will be completed through the remainder of this year. We do think and you connected the dots well, we do think there is the opportunity to have O&M growth VAT or if it is growing well below top line revenue growth. So we do think that proportionately of a larger amount of any new revenue will drop down to the EBITDA line.

Perfect. I really appreciate it. Congrats on great quarter guys. Thank you.

Thanks.

[Operator Instructions] Our next question comes from Brian Pow from Acumen Capital.

Good morning Ron, good morning Mike.

Good morning, Brian.

Hey, Brian.

I just want to follow-up a little bit more on the capital improvements. I’ve got the sense that sort of Q4 is going to be a lot less than Q3. But maybe you can just give us a little bit of a range of where you expect that number coming from Q3 or Q4?

Yes. I think that’s a great question, Brian. I think we’re – it’s kind of in that $2 million to $3 million range for Q4 the big junk of it has been spent year-to-date through Q3.

Okay. And then working to next year, have you got sort of base number you could give us or how you see it for next year?

Yes. So, what we always like to do with that question is point to some historical numbers. So prior to launching this accelerated CapEx plan 2014 and 2015 we had two years our CapEx average really $2 million to $3 million about $2.5 million. So having brought forward, our five-year CapEx plan within this accelerated window just to be interact we don’t have a lot of other stated capital improvements that we need to make in these utilities for the coming years. Maintenance CapEx has always historically been in these utilities less than $1 million and that’s a function of the fact that these utilities are new, the assets are still relatively young and – they’re in good condition. So put maintenance CapEx together with just a few targeted capital improvements, and I think will be near that historical number prior to the accelerated plan to $2.5 million, $3 million bucks is I think a good a good guess for the next few years.

Okay, great. Thank you. And then with your discussion about Belmont, is there an opportunity there for you to spend some monies in the next couple of years that would help you to put some of the Valencia number or what kind of things could be – do you do that differing it other than acquisitions?

Yes. I think the two buckets are pretty clear cut, they know this – we actually wait and got a Private Letter Ruling to really clarify what type of investments into our existing plant or existing utilities would qualify and that PLR, which is a very specific is also specific to a timeframe and that timeframe in the rules was two years as Mike noted with the ability to extend for one year which we just got. So we believe that three years is the cap on that. I suppose, I never say never about anything, and if there’s grounds and the ability to make an argument to extend that even further, we will make that and we’ve been fairly successful in the past. So I wouldn’t say never, but we really are thinking about it at the end of this coming years 2018, will be the end of that opportunity. As Mike noted on the acquisition side, we have several more years and that will bit more open about the number of extensions that you can get. So we feel good there. So we don’t believe circling back down to Belmont – this is a long-term project, we don’t know. But we also don’t believe that there will be major capital requirements in the next few years, because it just takes longer than that to reposition the project, which is what I think the new owners are trying to do based on the articles that are written. So we’ll be working with them to change master plans and address permitting and all those things, but both are relatively soft capital cost, before they require a hard infrastructure in the ground, all that’s going to have to be sorted out. So I think it’ll be several years even if they move for rapidly, if they delay the project at all it’ll be three to five years, right. So nothing in the coming years other than our efforts in activity to reposition the project make sure we’re ready to go when they are, and that’s the way I would look at it.

Okay, thanks. Appreciate it.

This concludes the question-and-answer session. I would like to turn the conference back over to Ron for closing remarks.

Thank you, operator. I’d like to thank all of those who participating in this call and for your continued interest in Global Water. Thanks, and we look forward to speaking with you again.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.