Global Water Resources, Inc. (GWRS) Q4 2020 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen. Thank you for standing by. Welcome to the Global Water Resources 2020 Year-End Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this call is being recorded on March 4, 2021, at 1:00 PM Eastern Time. I would now like to turn the conference over to Heather Krupa, Vice President and Controller. Please go ahead.

Welcome, everyone, and thank you for joining us on today's call. Yesterday, we issued our 2020 year-end 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; and Chris Krygier, Chief Strategy Officer. Mr. Fleming will summarize the key operational events of the year. Mr. Liebman will review the financial results for the year. And, Mr. Krygier will review strategic initiatives and business development for the year. Mr. Fleming, Mr. Liebman and Mr. Krygier will be available for questions at the end of the call. Before we begin, I would 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, uncertainties, estimates 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 views as of the date hereof and are not guarantees of future performance. For additional information regarding factors that may affect future results, please read the sections Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations, included within our latest Form 10-K filed with the SEC. Such filings are available at www.SEC.gov. Certain non-GAAP measures may be included within today's call. For a reconciliation of these measures to the comparable GAAP financial measures, please see the tables included in yesterday's earnings release, which is available on our website. Unless otherwise stated, all amounts discussed are in U.S. dollars. I will now turn the call over to Mr. Ron Fleming.

Thank you, Heather. Good morning, everyone, and thank you for joining us today. We are very pleased to report the results for the fourth quarter and year-end 2020. 2020 was both a challenging and exciting year for Global Water. And I'm very proud of the company and our employees for delivering strong company performance during a global pandemic. We will talk about growth throughout our commentary today. But I will start where I always do by discussing our top priority, which is the health and safety of our employees and our customers, including how we continue to navigate COVID-19. As an essential utility, whose services are vital during a pandemic, our company moved quickly and early to implement all national, local and industry-specific guidance to maximize social distancing, and other measures to protect the health and safety of our employees and customers, and safeguard our operations. These measures continue to be modified as guidance and the situation on the ground changes. But generally all measures remain in place and have gone well. And we have not incurred any significant disruptions resulting from the pandemic, either operationally or financially. Further in the event that customers had difficulty paying their utility bills due to COVID-19, we work with them to set up payment plans and offer other options. For example, in March of 2020, we rolled out an expanded customer assistance program. I can report today that this assistance is being utilized. And in 2020 alone through our program partners, we distributed over $100,000 to customers in need of help to pay their utility bill. Based on overall progress on these fronts over the last 12 months and based on the improving overall environment in Arizona and our areas, I will not be addressing COVID-19 again during our quarterly calls, unless any develops. Moving back to our typical operational highlights, I am very pleased to announce in accordance with our top priority, we continue to perform at an extremely high level on employee safety and regulatory compliance on non-recordable incidents. As of today, our staff has only experienced 2 minor OSHA recordable incidents in 1,282 days. We have incurred only $2,500 in nearly 5 years on OSHA recordable related incidents, resulting in an extremely low loss ratio and experience modifier or EMOD, which is at 0.61 today. As a reminder, an EMOD of 1 is considered to be industry average. So I said another way, we are performing 39% better than the industry average, which results in lower actual costs and workers comp insurance costs. Also, it has been 1,805 days since our last significant compliance violation, or nearly 5 years. In fact, in late 2020, we received unsolicited recognition from the Arizona Department of Environmental Quality as part of their voluntary environmental stewardship program, Bronze level. Bronze level recognizes companies that demonstrate strong environmental compliance for the past 3 years, and demonstrate environmental excellence and leadership in providing customers with safe drinking water. This recognition is a nice addition to the utility of the future today national award that we also received in 2020 for the company's transformational work and community engagement, watershed stewardship and resources recovery. On a related note, in 2020, we delivered a record volume of recycled water, 1.16 billion gallons, which is an increase of 11% over the year prior. Maximum reuse of recycled water is a primary element of our total water management approach for growing communities that allows us to achieve meaningful conservation. I now want to highlight customer growth. On the organic growth front, total active service connections increased 6.7% to 48,899 at year end. Development and housing activity remained very strong in metro Phoenix and our service areas. According to local real estate consensus, single family permits increased by 36.3% in Q4 2020, and the Home Builders Association of Central Arizona reported that permits grew 18% year-over-year to 28,704. All projections indicate that growth will continue throughout 2021 and 2022. Specific to our largest service area, the City of Maricopa, they issued 1,514 single family home permits in 2020, 53% over the prior year. This represents the single best year since before the Great Recession. Those of you that have been following our company for a while know this is what we have been preparing for and speaking about as a company really since the beginning. This was the strategy to buy or build utilities in the path of growth along growth corridors. This is again accelerating and, in short, we are well positioned to benefit from rapid growth throughout our large service areas in Pinal and Maricopa Counties. 2020 also brought the addition of Chris Krygier, as Chief Strategy Officer. And he has allowed for continuous focus on growth through acquisitions and new business opportunities. Based on 2020 and to date announcements, you can see we are starting to achieve some success and are building a nice pipeline of opportunities. Chris will speak about this and the rate case we filed in 2020 later on in the call. Putting all these elements together, Global Water is well positioned from an operational, safety, compliance and financial perspective with notable growth in the years to come. I will now turn the call over to Mike for financial highlights.

Thanks, Ron. Hello, everyone. Total revenue for the year was $38.6 million, which was up $3.2 million or 8.9% compared to 2019. This increase is primarily driven by the organic connection growth, increased consumption and our approved rate increase. Operating expenses for 2020 were $31.3 million compared to $28.5 million in 2019. This is an increase of $2.8 million or 9.8%. Notable changes in operating expenses include: one, increased operating and maintenance costs by $624,000, which was primarily driven by increased revenue; two, increased depreciation and amortization expense by $678,000, primarily due to the increases in our fixed assets associated with our capital expenditures planned and amortization of intangible assets; and thirdly, increased G&A expense by $1.5 million, primarily due to non-cash equity awards, increases in IT expense as well as bad debt and medical expenses. Now to discuss other expense. Other expense for 2020 was $5.5 million compared to $3.6 million in 2019. The $1.9 million increase was primarily due to the nonrecurring $1 million of other income received in 2019 from the Loop 303 contract, in addition to the non-cash asset disposal of $550,000 as well as the elimination of the FATHOM royalty of $380,000, both in 2020. Turning to net income. Global Water had net income of $1.1 million or $0.05 per diluted share in 2020. This is a decrease of $1.1 million compared to 2019. This decrease was primarily attributed to the final payout of the Loop 303 contract in 2019 combined with the non-cash loss on asset disposal and non-cash restricted stock expense booked in 2020, which after tax affected equals $1.1 million. After adjusting for all the non-cash expenses just mentioned, adjusted net income in 2020 was $2.2 million or $0.09 per diluted share, whereas 2019 net income after adjusting for the nonrecurring 303 proceeds was $1.5 million or $0.06 per diluted share. Now to talk about adjusted EBITDA, which adjust for nonrecurring events such as Loop 303 proceeds, and also adjust for non-cash items like deferred compensation expense related to equity awards and asset disposals. Adjusted EBITDA was $18 million in 2020, which is up $1.7 million or 10.1% compared to 2019. Lastly, I'd like to touch on our liquidity position. With the existing cash on hand of $18 million and our $10 million unused line of credit, we have approximately $28 million of liquidity available to support ongoing operations and our growth strategy. This concludes our update on the 2020 financial results. I'll now pass the call to Chris to review our strategic initiatives and business development activities.

Thanks, Mike. Hello, everyone. I will highlight 3 items for you before passing the call back to Ron. As you will recall, in the past, we discussed 4 different elements to our revenue growth story: first, natural organic growth within our existing utilities, which you heard Ron and Mike discussed earlier; second, recurring rate case activity; third, growth due to new service area establishment or expansion; and fourth acquisitions. My remarks will focus on those last 3 elements service area expansion, recurring rate case activity and acquisitions. As it relates to revenue growth through our rate case activity, we announced our rate case filing on August 28, 2020. As filed, the case proposes an approximately 13% rate increase, equivalent to approximately $4.6 million in additional revenue, with new rates to be effective for the majority of our utilities through a 3-year phase-in starting January 1, 2022. Currently, we are in the discovery part of the case where we are answering questions asked by the parties and providing additional detail as necessary. The next major milestone is receipt of the first round of staff and intervener testimony in mid-May with the hearing scheduled for August. Overall, the case continues to proceed as anticipated, and we will continue to update you as the case progresses. It is important to note that there can be no assurance, however, on the outcome of the rate case, the requested rate increase or the timing of any increase. Now, turning to the expansion of current service areas and establishment of new service areas in the quarter, you saw our press release describing our success receiving Arizona Corporation Commission approval for a certificate of convenience and necessity for the Inland Port Arizona project being developed by Pinal Land Holdings. You will recall this project represents approximately 2,700 acres of land or 3.4 square miles and is in the City of Coolidge, Arizona. It is also directly adjacent to the Nikola site. We are starting the infrastructure design and engineering efforts while the landowner is actively marketing the property. Speaking of Nikola subsequent to the quarter on January 7, 2021, we announced that we have entered into a master utility agreement to serve Nikola's new facility. Nikola's site construction is actively underway and we are working on the first stages of implementing the water and wastewater solution for their site. While we don't anticipate Nikola's initial usage demand to be material, we are optimistic about the long-term growth prospects of the larger Inland Port Arizona area. Finally, the last element of our revenue growth drivers relates to acquisition activity. As you'll recall, on October 29, 2020, we announced the first acquisition of Mirabell Water Company that represented our first acquisition since 2018. In the quarter, we closed 3 more acquisitions, Francesca Water Company, Tortolita Water Company and Lyn Lee Water Company. Geographically, Francesca Water is in close proximity to Mirabell, and our Red Rock service area south of Tucson. Lyn Lee and Tortolita are approximately 10 miles from each other. These 4 deals, Mirabell, Francesca, Tortolita, and Lyn Lee represent approximately 230 active connections, all 4 deals were completed on favorable terms and continue our track record of successful low risk tuck-ins. Subsequent to the quarter-end, we announced our signing of 2 agreements to acquire additional utilities. On March 19, 2021, we signed asset purchase agreements to acquire Twin Hawks Utility Inc. and Rincon Water Company together representing an additional 93 water connections. Twin Hawks is a water utility - water only utility located in Pinal County, approximately 8 miles away from our current operations representing an easy operational integration. In addition to Twin Hawks, we are also acquiring Rincon Water Company's assets located in Pima County, which is the Greater Tucson area. Rincon represents another opportunity for us to deploy our operational expertise. Rincon is currently under a consent order from the Pima County Department of Environmental Quality due to high fluoride levels. Once we close the acquisition, we will resolve the fluoride issue by investing additional capital and eventually filing a rate case. We highlight this example to make a point about both the real needs and the investment opportunities that exist when consolidating smaller water utilities. These 2 acquisitions are asset purchases, which require approval by the Arizona Corporation Commission, a process that takes approximately 6 to 12 months to complete after a filing is initiated. Once approved, we anticipate closing with cash on hand. Looking prospectively, we continue to focus on water and wastewater utilities across the State of Arizona from the very small to the very large and remain optimistic about our near-term opportunities. While nothing is eminent, we continue to explore opportunities outside the state that may make sense. This concludes the update on strategic initiatives and business developments for the quarter. I'll now pass the call back to Ron.

Thank you, Chris. So it is clear, we remain well positioned with a strong balance sheet and discipline strategy. In fact, from an operational and financial perspective, we have never been stronger. And we have more than ample liquidity and capital resources to be a great utility partner for the communities where we have the privilege to serve and to pursue expansion through organic growth, acquisitions and new projects, both big and small. As we handle this high growth, we intend to remain at the forefront of the water management industry and advance our mission of achieving efficiency and consolidation. We truly believe that expanding our platform and applying our expertise throughout our regional service areas and to new utilities will be beneficial to all stakeholders involved. We appreciate your investment in and support of us as we grow Global Water to address important utility, water resource and economic development issues in Arizona and potentially beyond. This concludes our prepared remarks. Thank you. We're now available to answer your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Gerry Sweeney with ROTH Capital. Please go ahead.

Good morning, Ron, Mike and Chris. Thanks for taking my call.

Hi, Gerry.

Just a question on growth, obviously, lots of organic growth there. Arizona, great state, and are taxes, et cetera. You've always discussed about being in line with growth of Phoenix, et cetera. Is that coming to fruition? Where, I'm always hearing, more and more companies moving to Chandler Gilbert area, is growth really pushing into your operating area? And all available lots and opportunities sort of backfilled in the Phoenix region as you get closer to the city?

Yeah, thanks, Gerry. So, look, I think how we've described it in the past is definitely what continues to become more and more real, which is, ultimately Phoenix grows in concentric rings, and that growth pushes down growth corridors which are, basically, are aligned with transportation, infrastructure, so highways and freeways. And really no different than anywhere else, it's just there is only so much places that growth can go. And so, when you combine that with the fact that from a land development perspective, there just hasn't been, coming out of the Great Recession, the same amount of proactive investment in dirt to bring it from dirt through the 3-year entitlement process to get it ready for lots, which is obviously what you need to build a home. What's happening right now is growth in Phoenix is going crazy basically, lots of net in-migration, we call it, so literally population. This isn't investment. This isn't people speculating. This is people moving here, both job growth and population growth. And so, there is only so many of those developments and lots that exist. And we have a lot of them in our service area. So more and more growth is coming our way and we think that's really just only going to continue to increase as metro Phoenix expands through these emerging areas that we serve. And I will make another point, that's not obviously on the housing side, but on the kind of job side. We're also getting to where these emerging areas are getting more and more of the opportunities on both commercial growth due to population growth, but also industrial growth and really job centers. You're right. The major metro communities around Phoenix, like Chandler and Gilbert, and on the other side, Buckeye, they've been getting a lot of announcements for a long time on these large facilities that have been coming into Arizona. But that's now moving further out as well. Obviously, that underpins the Nikola deal we're working on, underpins the Pinal land holdings' industrial community that we're working on. And those types of opportunities continue to increase as well.

Got it. Switching gears a little bit, I think even in the release, you mentioned, FATHOM, it's been a full year, since it's come in house. And maybe discuss, is that working out appropriately or even outperforming benefits may be anticipated?

Yeah, Gerry, this is Mike. Good question. So, it's been great, actually. I'd say specifically we've been able to, after bringing FATHOM in house to continue to expand and improve our customer service area and have a reduction in complaints from customer service. So that's been a great add having the direct oversight of it. Additionally, we continue to see a reduction in cost on a go-forward basis, as the cost that we incur are much less than what we were being charged by FATHOM. And so, we are getting those benefits. And we'll continue to get those benefits going forward. And lastly, the timing of it with the FATHOM transition, at the end of last month, we made the decision to hire an IT Director with a career in IT Security. And in light of the pandemic, it's been a great add for the team to kind of help us stay out in front of it, and with people working from home and from a security perspective. So it's really been a great add. And lastly, Gerry, you've seen our facilities were highly automated and technologically advanced. And so, we do believe this gives us a pretty good competitive advantage from an M&A perspective as well as dealing with, as you're hearing in the news, things about cybersecurity issues. So it's been a great add for us. And we're pretty happy with it.

Yeah, that I was reading the stuff about Florida and cybersecurity, so that's very pertinent. Thank you. Just one other quick question and this is for Chris, I'm not sure if you can really be in a position to discuss it. But obviously, I think you mentioned you're looking at some M&A activity outside the states. Can you highlight where you're looking? But also, how much of an opportunity is it bringing the Global Water and water reuse and some of the technology you have there in house to other states? And how much of an opportunity that that sort of affords you when you're looking at potential purchases?

Yeah, great question. Thanks, Gerry. So big picture, I can't give you too many specifics, just obviously from a competitive perspective with our peers [indiscernible]. I'll say, let me start with this high level. In terms of what's in front of us in Arizona, we really love that opportunity set a lot. And you've seen in a pretty short period of time, we've been able to bring some things together very quickly. And so, from our perspective, looking out of state, we're going to keep our eyes open to what opportunities are there and discuss those, but we can afford to be selective and really thoughtful about pursuing those. And so, obviously, you always look at them from a financial perspective. But you also want to look at them in terms of what's the market there, in terms of is there a lot of opportunity? Can you scale quickly? Can you apply what we're really good at from a total water management perspective? And so, I would say, we'll absolutely be keeping our eyes open to a wide variety of places. Nothing's eminent. We're happy with what we're seeing so far in Arizona to kind of build the company out here. And so - but we're always open to the next opportunity, at least listening and learning.

Got it. I appreciate it. I'll hand it over. Thank you.

[Operator Instructions] There are no further questions registered at this time. I would now like to turn the conference back over to Mr. Ron Fleming for any closing remarks. Please go ahead, sir.

All right, great. Thank you, operator. I just like to thank everyone for participating in the call today and your ongoing interest in Global Water. Thank you and we look forward to speaking to you again. Bye.

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