Global Water Resources Inc

Previous wording

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 three months ended March 31, 2024 and should be read together with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this report.

Current wording

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 three and six months ended June 30, 2024 and should be read together with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this report.

Previous wording

Certain statements in this Quarterly Report on Form 10-Q 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 future estimates described in “Business Outlook”, “Factors Affecting our Results of Operations”, and “Liquidity and Capital Resources”. These forward-looking statements include, but are not limited to, statements about our strategies; expectations about future business plans, prospective performance, growth, and opportunities; future financial performance; regulatory and Arizona Corporation Commission (“ACC”) proceedings, decisions, and approvals, such as the anticipated benefits resulting from rate decisions, including any collective revenue increases due to new water and wastewater rates, our beliefs and expectations pertaining to ACC actions relating to our Southwest Plant, as well as the outcome and timing of our rate case and other applications with the ACC, including our applications for the approval of an accounting order and the approval of an annual bill credit, in each case, relating to the Southwest Plant; our plans relating to future filings of our rate cases with the ACC; acquisition plans and our ability to complete additional acquisitions, including the anticipated acquisition of seven public water systems from the City of Tucson and the expected increase in active water service connections resulting from such acquisition; population and growth projections; technologies, including expected benefits from implementing such technologies; revenues; metrics; operating expenses; trends relating to our industry, market, population and job growth, and housing permits; the adequacy of our water supply to service our current demand and growth for the foreseeable future; liquidity and capital resources; plans and expectations for capital expenditures; cash flows and uses of cash; dividends; depreciation and amortization; tax payments; our ability to repay indebtedness and invest in initiatives; the anticipated impact and resolutions of legal matters; the anticipated impact of new or proposed laws, including regulatory requirements, tax changes, and judicial decisions; and the anticipated impact of accounting changes and other pronouncements.

Current wording

Certain statements in this Quarterly Report on Form 10-Q 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 future estimates described in “Business Outlook”, “Factors Affecting our Results of Operations”, and “Liquidity and Capital Resources”. These forward-looking statements include, but are not limited to, statements about our strategies; expectations about future business plans, prospective performance, growth, and opportunities; future financial performance; regulatory and Arizona Corporation Commission (“ACC”) proceedings, decisions, and approvals, such as the anticipated benefits resulting from rate decisions, including any collective revenue increases due to new water and wastewater rates, our beliefs and expectations pertaining to ACC actions relating to our Southwest Plant, as well as the outcome and timing of our rate case and other applications with the ACC; our plans relating to future filings of our rate cases with the ACC; acquisition plans and our ability to complete additional acquisitions, including the anticipated acquisition of seven public water systems from the City of Tucson and the expected increase in active water service connections resulting from such acquisition; population and growth projections; technologies, including expected benefits from implementing such technologies; revenues; metrics; operating expenses; trends relating to our industry, market, population and job growth, and housing permits; the adequacy of our water supply to service our current demand and growth for the foreseeable future; liquidity and capital resources; plans and expectations for capital expenditures; cash flows and uses of cash; dividends; depreciation and amortization; tax payments; our ability to repay indebtedness and invest in initiatives; the anticipated impact and resolutions of legal matters; the anticipated impact of new or proposed laws, including regulatory requirements, tax changes, and judicial decisions; and the anticipated impact of accounting changes and other pronouncements.

Previous wording

•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 the Total Water Management approach; and

Current wording

•Leading outreach and educational initiatives to ensure all stakeholders including customers, development partners, municipalities, regulators, and utility staff are knowledgeable on the principles and practices of the Total Water Management approach; and

Previous wording

During the second half of 2023, we experienced an increase in the rate of connection growth, which has continued into the first three months of 2024. According to the most recent U.S. Census estimates, the Phoenix metropolitan statistical area (“MSA”) is the 10th largest MSA in the U.S. and had an estimated population of 5.1 million, an increase of 4.6% over the 4.8 million people reported in the 2020 Census. Metropolitan Phoenix continues to grow due to its comparatively affordable 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 5.8 million people by 2030 and 6.5 million by 2040. Arizona’s job growth increased by 2.2% during the first three months of 2024 as compared to the same period for the prior year, ranking the state in the top ten nationally as of March 31, 2024.

Current wording

We continue to experience an increasing rate of organic growth, exclusive of acquisition related growth, evidenced by our year over year increase in active connections of 4.9% as compared to 1.9% for the same period in 2023. According to the most recent U.S. Census estimates, the Phoenix metropolitan statistical area (“MSA”) is the 10th largest MSA in the U.S. and had an estimated population of 5.1 million, an increase of 4.6% over the 4.8 million people reported in the 2020 Census. Metropolitan Phoenix continues to grow due to its favorable employment opportunities, 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 5.8 million people by 2030 and 6.5 million by 2040. Arizona’s job growth increased by 2.2% during the first six months of 2024 as compared to the same period for the prior year, ranking the state in the top ten nationally as of June 30, 2024.

Previous wording

While we saw an overall weakness in the market for single-family housing during the first half of 2023, according to the W.P. Carey School of Business Greater Phoenix Blue Chip Real Estate Consensus Panel the outlook is improving. They anticipate permitting to increase in 2024 due to the improvement that started in the second half of 2023 combined with the expectations of modestly declining mortgage rates in 2024. Further, single family permits in the City of Maricopa increased 131% for the three months ended March 31, 2024 as compared to the same period in the prior year. Management believes that we are well-positioned to benefit from the growth expected in the Phoenix metropolitan area due to the availability of lots, existing infrastructure in place within our services areas, and increased activity related to multi-family developments.

Current wording

According to the W.P. Carey School of Business Greater Phoenix Blue Chip Real Estate Consensus Panel (the “Greater Phoenix Blue Chip Panel”), interest rate shock negatively impacted permit activity in the Phoenix metropolitan area, particularly between July 2022 and June 2023. Further, the Greater Phoenix Blue Chip Panel concluded that the recovery from that interest rate shock resulted in permit activity increasing by more than 44% in the first five months of 2024. The Greater Phoenix Blue Chip Panel anticipates single family permit growth by more than 27% for 2024 as a whole. Further, single family permits in the City of Maricopa increased 43% for the first half of 2024 as compared to the same period in the prior year. Management believes that we are well-positioned to benefit from the growth expected in the Phoenix metropolitan area due to the availability of lots, existing infrastructure in place within our services areas, and increased activity related to multi-family developments.

Previous wording

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. As of March 31, 2024, active service connections increased 2,642, or 4.4%, to 62,451 compared to 59,809 active service connections as of March 31, 2023, primarily due to organic growth in our service areas. Approximately 89.4% of the 62,451 active service connections are serviced by our Global Water - Santa Cruz Water Company, Inc. (“GW-Santa Cruz”) and Global Water - Palo Verde Utilities Company, Inc. (“GW-Palo Verde”) utilities as of March 31, 2024.

Current wording

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. As of June 30, 2024, active service connections increased 2,965, or 4.9%, to 63,256 compared to 60,291 active service connections as of June 30, 2023, primarily due to organic growth in our service areas. Approximately 89.5% of the 63,256 active service connections are serviced by our Global Water - Santa Cruz Water Company, Inc.

Previous wording

On April 10, 2024, the U.S. Environmental Protection Agency (“EPA”) finalized the National Primary Drinking Water Regulation (“NPDWR”) establishing legally enforceable levels, called maximum contaminant levels (“MCLs”), for six per- and polyfluoroalkyl substances or compounds (“ PFAS”) in drinking water. The EPA also finalized health-based, non-enforceable maximum contaminant level goals for these PFAS. The final rule requires: that public water systems, such as the Company, must monitor for these PFAS and have three years to complete initial monitoring, followed by ongoing compliance monitoring. Public water systems must also provide the public with information on the levels of these PFAS in their drinking water beginning in 2027. Public water systems have five years to implement solutions that reduce these PFAS if monitoring shows that drinking water levels exceed the MCLs applicable. Beginning in five years, public water systems that have PFAS in drinking water which violate one or more of these MCLs must take action to reduce levels of these PFAS in their drinking water and must provide notification to the public of the violation.

Current wording

On April 10, 2024, the U.S. Environmental Protection Agency (“EPA”) finalized the National Primary Drinking Water Regulation (“NPDWR”) establishing legally enforceable levels, called maximum contaminant levels (“MCLs”), for six per- and polyfluoroalkyl substances or compounds (“PFAS”) in drinking water. The EPA also finalized health-based, non-enforceable maximum contaminant level goals for these PFAS. The final rule requires that public water systems, such as the Company, must monitor for these PFAS and have three years to complete initial monitoring, followed by ongoing compliance monitoring. Public water systems must also provide the public with information on the levels of these PFAS in their drinking water beginning in 2027. Public water systems have five years to implement solutions that reduce these PFAS if monitoring shows that drinking water levels exceed the applicable MCLs. Beginning in five years, public water systems that have PFAS in drinking water which violate one or more of these MCLs must take action to reduce levels of these PFAS in their drinking water and must provide notification to the public of the violation.

Previous wording

Refer to Note 11 — “Debt” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information regarding the Senior Secured Notes and the Company’s revolving line of credit.

Current wording

Below is a summary of rate case and regulatory activity. Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information regarding the Company’s rate case and regulatory activity.

Previous wording

During the fourth quarter of 2023, the Company notified the ACC of its intention to file a rate case for Global Water-Farmers Water Company, Inc. (“GW-Farmers”) during 2024. Also during the fourth quarter of 2023, the Company notified the ACC of its intention to file a rate case for GW-Santa Cruz and GW-Palo Verde in 2025.

Current wording

During the fourth quarter of 2023, the Company notified the ACC of its intention to file a rate case for Global Water-Santa Cruz Water Company, Inc. (“GW-Santa Cruz”) and Global Water-Palo Verde Utilities Company, Inc. (“GW-Palo Verde”) in 2025. The GW-Santa Cruz and GW-Palo Verde rate case is anticipated to be based on a test year ending December 31, 2024 with updates for changes in post-test year plant.

Previous wording

On July 3, 2023, the Company’s GW-Palo Verde and GW-Santa Cruz utilities filed an application with the ACC for approval of an accounting order to defer and record as a regulatory asset the depreciation expense recorded for the Company’s Southwest Plant, plus the carrying cost at the authorized rate of return set in GW-Palo Verde’s and GW-Santa Cruz’s most recent rate order, until the plant is considered for recovery in the next GW-Palo Verde and GW-Santa Cruz rate case. In January 2024, the Company discovered that approximately $7.8 million of construction costs for the Southwest Plant had been prematurely included as “plant in service” for rate making purposes in 2007 and were reflected in the calculation of customer rates in Rate Decision No. 71878 (September 15, 2010). Those costs were also included as “plant in service” in Rate Decision No. 74364 (February 26, 2014) and Rate Decision No. 78644 (July 27, 2022). The Company disclosed this circumstance to the ACC on March 1, 2024 and on April 25, 2024, GW-Palo Verde filed an application with the ACC requesting a monthly bill credit for customers that would be in place until the conclusion of the next GW-Palo Verde rate case. If approved as filed, the impact of the bill credit would reduce revenue earned subsequent to the order by approximately $570,000 annually. There can be no assurance, however, that the ACC will approve the application as submitted and the ACC could take other actions regarding the application. In addition, further action may be taken by the ACC during the next GW-Palo Verde rate case.

Current wording

On July 3, 2023, the Company’s GW-Palo Verde and GW-Santa Cruz utilities filed an application with the ACC for approval of an accounting order to defer and record as a regulatory asset the depreciation expense recorded for the Company’s Southwest Plant, plus the carrying cost at the authorized rate of return set in GW-Palo Verde’s and GW-Santa Cruz’s most recent rate order, until the plant is considered for recovery in the next GW-Palo Verde and GW-Santa Cruz rate case. In January 2024, the Company discovered that approximately $7.8 million of construction costs for the Southwest Plant had been prematurely included as “plant in service” for rate making purposes in 2007 and were reflected in the calculation of customer rates in Decision No. 71878 (September 15, 2010). Those costs were also included as “plant in service” in Decision No. 74364 (February 26, 2014) and Decision No. 78644 (July 27, 2022). The Company disclosed this circumstance to the ACC on March 1, 2024, and on April 25, 2024, GW-Palo Verde filed an application with the ACC requesting a monthly bill credit for customers that would be in place until the conclusion of the next GW-Palo Verde rate case. The ACC issued Decision No. 79424 on July 18, 2024 approving the bill credit with an effective date of August 1, 2024, which will reduce revenue earned subsequent to the order by approximately $570,000 annually. The bill credit will be in place until the conclusion of the next GW-Palo Verde rate case, which Decision No. 79424 requires GW-Palo Verde to file no later than December 31, 2025.

Previous wording

The ACC also approved: (i) the consolidation of water and/or wastewater rates to create economies of scale that are beneficial to all customers when rates are consolidated; (ii) acquisition premiums relating to the Company’s acquisitions of its GW-Red Rock and Global Water - Turner Ranches Irrigation, Inc. utilities, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement included in the table above; (iii) the Company’s ability to annually adjust rates to flow through certain changes in tax expense, primarily related to income taxes, without the necessity of a rate case proceeding; and (iv) a sustainable water surcharge, which will allow semiannual surcharges to be added to customer bills based on verified costs of new water resources.

Current wording

The ACC also approved: (i) the consolidation of water rates to one single rate for these utilities; (ii) acquisition premiums relating to the Company’s acquisitions of its Global Water-Mirabell Water Company, Inc. (“GW-Mirabell”), Global Water-Lyn Lee Water Company, Inc. (“GW-Lyn Lee”), Global Water-Francesca Water Company, Inc. (“GW-Francesca”), Global Water-Tortolita Water Company, Inc. (“GW-Tortolita”), Global Water-Rincon Water Company, Inc. (“GW-Rincon”), and Global Water-Las Quintas Serenas Water Company, Inc. (“GW-Las Quintas Serenas”) utilities, each located in Pima County, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement; (iii) the Company’s ability to annually adjust rates to flow through certain changes in tax expense, primarily related to income taxes, without the necessity of a rate case proceeding; (iv) a sustainable water surcharge, which will allow semiannual surcharges to be added to customer bills based on verified costs of new water resources; (v) a capital structure matching the Company’s previous rate case of 55% equity with a 9.6% return on equity; and (vi) a depreciation expense accounting deferral for GW-Rincon.

Previous wording

On July 27, 2022, the ACC issued Rate Decision No. 78644 relating to the Company’s previous rate case involving 12 of the Company’s regulated utilities, which consisted of approximately 96% of the Company’s active service connections at the time of the rate case application filing. Pursuant to Rate Decision No. 78644, the ACC approved, among other things, a collective annual revenue requirement increase of approximately $2.2 million (including the acquisition premiums discussed below) based on 2019 test year service connections, and phased-in over approximately two years, as follows:

Current wording

On July 27, 2022, the ACC issued Decision No. 78644 pursuant to which the ACC approved, among other things, a collective annual revenue requirement increase of approximately $2.2 million (including acquisition premiums) based on 2019 test year service connections, and phased-in over approximately two years. The effective date of the final phase was January 1, 2024.

Previous wording

On February 1, 2023, the Company acquired all of the equity of Farmers Water Co., an operator of a water utility with service area in Pima County, Arizona. The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles of service area in Sahuarita, Arizona and the surrounding unincorporated area of Pima County at the time of the acquisition. Refer to Note 15 - “Acquisitions” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional details.

Current wording

On February 1, 2023, the Company acquired all of the equity of Farmers Water Co., an operator of a water utility with service area in Pima County, Arizona. The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles of service area in Sahuarita, Arizona and the surrounding unincorporated area of Pima County at the time of the acquisition.

Previous wording

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.3 million, or 8.0%, to $3.4 million for the three months ended March 31, 2024 compared to $3.1 million for the three months ended March 31, 2023. The increase was primarily due to growth in active service connections.

Current wording

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.2 million, or 7.1%, to $3.4 million for the three months ended June 30, 2024 compared to $3.2 million for the three months ended June 30, 2023. The increase was primarily due to the 4.6% growth in active water connections.

Previous wording

Active water connections increased 4.4% to 34,715 as of March 31, 2024 from 33,298 as of March 31, 2023, primarily due to organic growth in our service areas.

Current wording

Active water connections increased 4.6% to 35,128 as of June 30, 2024 from 33,580 as of June 30, 2023, primarily due to organic growth in our service areas.

Previous wording

Water services revenue based on consumption increased $0.1 million, or 9.5%, to $1.7 million for the three months ended March 31, 2024 compared to $1.6 million for the three months ended March 31, 2023. The moderate increase was primarily driven by organic growth.

Current wording

Water services revenue based on consumption decreased $0.1 million, or 2.9%, to $3.1 million for the three months ended June 30, 2024 compared to $3.2 million for the three months ended June 30, 2023. The slight decrease was primarily driven by reduced consumption.

Previous wording

Wastewater and Recycled Water Services– Wastewater and recycled water services revenue increased $0.4 million, or 6.0%, to $6.4 million for the three months ended March 31, 2024 compared to $6.0 million for the three months ended March 31, 2023. The increase in wastewater and recycled water services revenue was primarily driven by a $0.4 million increase in wastewater services revenue, which reflects a 4.6% increase in active wastewater connections from 26,511 as of March 31, 2023 to 27,736 as of March 31, 2024.

Current wording

Wastewater and Recycled Water Services– Wastewater and recycled water services revenue increased $0.4 million, or 6.2%, to $6.8 million for the three months ended June 30, 2024 compared to $6.4 million for the three months ended June 30, 2023. The increase in wastewater and recycled water services revenue was primarily driven by a $0.5 million increase in wastewater services revenue, which reflects a 5.3% increase in active wastewater connections from 26,711 as of June 30, 2023 to 28,128 as of June 30, 2024, partially offset by a $0.1 million decrease in recycled water services revenue.

Previous wording

Recycled water services revenue, which is based on the volume of recycled gallons delivered, was $0.1 million for both the three months ended March 31, 2024 and March 31, 2023. Consumption of recycled water was consistent for both periods.

Current wording

Recycled water services revenue, which is based on the volume of recycled gallons delivered, decreased $0.1 million, or 14.3%, to $0.4 million for the three months ended June 30, 2024 compared to $0.5 million for the three months ended June 30, 2023. The decrease was primarily driven by reduced consumption during the period.

Previous wording

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 $0.5 million, or 17.7%, to $3.3 million for the three months ended March 31, 2024 compared to $2.8 million for the three months ended March 31, 2023.

Current wording

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 $0.3 million, or 9.6%, to $3.5 million for the three months ended June 30, 2024 compared to $3.2 million for the three months ended June 30, 2023.

Previous wording

Total personnel expenses increased $0.3 million, or 36.7%, to $1.3 million for the three months ended March 31, 2024 compared to $0.9 million for the three months ended March 31, 2023. The increase in personnel expenses was primarily related to an increase of $0.1 million in salary and wages, higher medical insurance expenses of $0.2 million, and an additional month of personnel expenses attributable to GW-Farmers for the three months ended March 31, 2024 as compared to the same period for the prior year.

Current wording

Total personnel expenses increased $0.1 million, or 7.8%, to $1.2 million for the three months ended June 30, 2024 compared to $1.1 million for the three months ended June 30, 2023. The increase in personnel expenses was primarily related to a 5.5% increase in salary and wages and a increase of 38.1% in medical insurance expenses.

Previous wording

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 $0.2 million, or 5.6%, to $4.1 million for the three months ended March 31, 2024 compared to $3.9 million for the three months ended March 31, 2023.

Current wording

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 $0.1 million, or 3.1%, to $4.2 million for the three months ended June 30, 2024 compared to $4.1 million for the three months ended June 30, 2023.

Previous wording

Total personnel expenses increased $0.2 million, or 11.5%, to $1.9 million for the three months ended March 31, 2024 compared to $1.7 million for the three months ended March 31, 2023. The increase was primarily related to higher medical insurance expenses and increased salaries and wages as a result of an increase in employee headcount.

Current wording

Total personnel expenses increased $0.2 million, or 10.9%, to $1.9 million for the three months ended June 30, 2024 compared to $1.7 million for the three months ended June 30, 2023. The increase was primarily related to higher salaries and wages and moving expenses.

Previous wording

Depreciation and amortization - Depreciation and amortization expense increased $0.2 million, or 10.5%, to $2.9 million for the three months ended March 31, 2024, compared to $2.7 million for the three months ended March 31, 2023. The increase was primarily driven by additional depreciation expense recorded as a direct result of the increase in fixed assets, which includes certain assets related to the Southwest Plant put into service July 2023.

Current wording

Depreciation and amortization - Depreciation and amortization expense increased $0.3 million, or 10.8%, to $3.0 million for the three months ended June 30, 2024, compared to $2.7 million for the three months ended June 30, 2023. The increase was primarily driven by additional depreciation expense recorded as a direct result of the increase in fixed assets, which includes certain assets related to the Southwest Plant put into service July 2023, and $80,000 of amortization of an intangible asset related to acquired ICFAs that did not occur in the same period in 2023.

Previous wording

Other Expense – Other expense decreased $0.1 million, or 26.9%, to $0.3 million for three months ended March 31, 2024 from $0.4 million for the three months ended March 31, 2023, which was primarily attributable an increase of $0.4 million in Buckeye growth premiums and a $0.2 million increase in interest income, which was partially offset by an increase of $0.4 million in interest expense primarily related to the senior secured notes issued in January 2024 (refer to “—Corporation Transactions” above for additional information) and a decrease of $0.1 million in the equity portion of the allowance for funds used during construction (“AFUDC”).

Current wording

Other Expense – Other expense was $0.5 million for both the three months ended June 30, 2024 and June 30, 2023. For the the three months ended June 30, 2024, interest income increased $0.3 million compared to the three months ended June 30, 2023, which was mostly offset by an increase in interest expense primarily related to the senior secured notes issued in January 2024 (refer to “—Corporation Transactions” above for additional information).

Previous wording

Income Tax Expense –Income tax expense of $0.3 million was recorded for the three months ended March 31, 2024 compared to income tax expense of $0.9 million for the three months ended March 31, 2023. The primary driver for the change was due to the decrease in pre-tax income for three months ended March 31, 2024.

Current wording

Income Tax Expense –Income tax expense of $0.6 million was recorded for the three months ended June 30, 2024 compared to income tax expense of $0.7 million for the three months ended June 30, 2023. The primary driver for the change was due to the decrease in pre-tax income for three months ended June 30, 2024.

Previous wording

Total revenues decreased $1.5 million, or 11.6%, to $11.6 million for the three months ended March 31, 2024 compared to $13.1 million for the three months ended March 31, 2023. The decrease in revenue was primarily attributable to the recognition of $2.3 million in unregulated revenue related to infrastructure coordination and financing agreements (“ICFA”) during the three months ended March 31, 2023 that did not occur in the current period, partially offset by an increase of $0.8 million in regulated revenue primarily from organic connection growth and one additional month of revenue resulting from the February 2023 acquisition of GW-Farmers for the three months ended March 31, 2024 as compared to the same period for the prior year.

Current wording

Total revenues decreased $1.0 million, or 3.9%, to $25.1 million for the six months ended June 30, 2024 compared to $26.1 million for the six months ended June 30, 2023. The decrease in revenue was primarily attributable to the recognition of infrastructure coordination and financing agreement (“ICFA”) related revenue during the six months ended June 30, 2023 that did not recur in the current period, partially offset by an increase of $1.3 million in regulated revenue primarily from organic connection growth.

Previous wording

Water Services– Water services revenue increased $0.4 million, or 8.0%, to $5.2 million for the three months ended March 31, 2024 compared to $4.8 million for the three months ended March 31, 2023. The increase in water services revenue was primarily related to the organic connection growth of 4.4%.

Current wording

Water Services– Water services revenue increased $0.5 million, or 4.4%, to $11.9 million for the six months ended June 30, 2024 compared to $11.4 million for the six months ended June 30, 2023. The increase in water services revenue was primarily related to the organic connection growth in active water connections of 4.6%.

Previous wording

Net Income –Net income totaled $0.7 million for the three months ended March 31, 2024 compared to net income of $2.5 million for the three months ended March 31, 2023. The $1.8 million decrease was primarily attributable to the recognition of $2.3 million of ICFA related revenue during the three months ended March 31, 2023 that did not occur in the current period and an increase in operating expenses of approximately $1.0 million, partially offset by an increase in regulated revenue of $0.8 million and decreased tax expense of $0.6 million.

Current wording

Net Income –Net income totaled $2.4 million for the six months ended June 30, 2024 compared to net income of $4.2 million for the six months ended June 30, 2023. The $1.8 million decrease was primarily attributable to the recognition of $2.3 million of ICFA related revenue and an increase in operating expenses of approximately $1.7 million, partially offset by a $1.3 million increase in regulated revenue and lower tax expense of $0.7 million.

Previous wording

As of May 8, 2024, there were 24,176,113 shares of the Company’s common stock outstanding and stock-based awards outstanding to acquire an additional 395,607 shares of the Company’s common stock.

Current wording

As of August 7, 2024, there were 24,217,410 shares of the Company’s common stock outstanding and stock-based awards outstanding to acquire an additional 399,811 shares of the Company’s common stock.

Previous wording

For the three months ended March 31, 2024, net cash provided by operating activities totaled approximately $8.1 million compared to $6.5 million for the three months ended March 31, 2023. The $1.6 million increase in cash from operating activities was primarily driven by an increase in noncurrent liabilities for the three months ended March 31, 2024 as a result of funds received related to ICFA payments during the first three months in 2024 compared to an overall decrease in noncurrent liabilities for three months ended March 31, 2023 largely attributable to the recognition of ICFA related revenue, partially offset by a decrease in net income for the three months ended March 31, 2024 compared to the prior year period. In addition, there were other notable fluctuations in working capital accounts.

Current wording

For the six months ended June 30, 2024, net cash provided by operating activities totaled approximately $13.6 million compared to $12.7 million for the six months ended June 30, 2023. The $0.9 million increase in cash from operating activities was primarily driven by an increase in noncurrent liabilities for the six months ended June 30, 2024 as a result of funds received related to ICFA payments and other developer contributions during the first six months in 2024 compared to the six months ended June 30, 2023. In addition, there were other notable fluctuations in working capital accounts.

Previous wording

The net cash used in investing activities totaled approximately $5.8 million for the three months ended March 31, 2024 compared to $12.8 million for the three months ended March 31, 2023. The $7.0 million decrease in cash used in investing activities was primarily driven by the $6.2 million cash paid for the acquisition of GW-Farmers (net of cash acquired) in February 2023 and a decrease in capital expenditures of $0.8 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Current wording

The net cash used in investing activities totaled approximately $12.2 million for the six months ended June 30, 2024 compared to $19.9 million for the six months ended June 30, 2023. The $7.7 million decrease in cash used in investing activities was primarily driven by the $6.2 million cash paid for the acquisition of GW-Farmers (net of cash acquired) in February 2023 and a decrease in capital expenditures of $1.5 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Previous wording

The Company continues to invest capital prudently in existing, core service areas where the Company is able to deploy the Total Water Management model as this includes any required maintenance capital expenditures and the construction of new water and wastewater treatment and delivery facilities. The projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors. As a result, the Company may adjust capital expenditures to correspond with any substantial changes in demand for housing in service areas.

Current wording

The Company continues to invest capital prudently in existing, core service areas where the Company is able to deploy the Total Water Management model as this includes any required maintenance capital expenditures and the construction of new water and wastewater treatment and delivery facilities. The projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors. As a result, the Company may adjust capital expenditures to correspond with any substantial changes in demand for new development in its service areas.

Previous wording

The net cash provided by financing activities totaled $15.8 million for the three months ended March 31, 2024, a $14.0 million increase, as compared to the $1.8 million in cash provided by financing activities for the three months ended March 31, 2023. This increase was primarily driven by the $20 million received from the senior secured notes issuance in January 2024, partially offset by $2.3 million of repayments on the Company’s revolving line of credit in the three months ended March 31, 2024 as compared to $3.5 million of net borrowings against the line of credit in the three months ended March 31, 2023.

Current wording

The net cash provided by financing activities totaled $13.6 million for the six months ended June 30, 2024, a $9.5 million increase, as compared to the $4.1 million in cash provided by financing activities for the six months ended June 30, 2023. This increase was primarily driven by the $20 million received from the senior secured notes issuance in January 2024, partially offset by $2.3 million of repayments on the Company’s revolving line of credit in the six months ended June 30, 2024 as compared to $9.1 million of net borrowings against the line of credit in the six months ended June 30, 2023.

Previous wording

The Series A Notes and the Series B 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 Series A Notes and the Series B 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 debt service ratio drops to 1.20. The debt service ratio increases to 1.25 for any fiscal quarter ending during the period from and after June 30, 2024. As of March 31, 2024, the Company was in compliance with its financial debt covenants relating to the Series A Notes and the Series B Notes.

Current wording

The Series A Notes and the Series B 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 Series A Notes and the Series B Notes also contain a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25. As of June 30, 2024, the Company was in compliance with its financial debt covenants relating to the Series A Notes and the Series B Notes.

Previous wording

The 6.91% 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. The 6.91% Notes also contain a provision limiting the payment of dividends if the Company falls below a debt service coverage ratio of 1.20 for any fiscal quarter ended on or before June 15, 2024 and 1.25 for any fiscal quarter ended during the period from and after June 16, 2024. As of March 31, 2024, the Company was in compliance with its financial debt covenants relating to 6.91% Notes.

Current wording

The 6.91% 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. The 6.91% Notes also contain a provision limiting the payment of dividends if the Company falls below a debt service coverage ratio of 1.25. As of June 30, 2024, the Company was in compliance with its financial debt covenants relating to 6.91% Notes.

Previous wording

The Company and Northern Trust have subsequently amended the credit facility agreement on multiple occasions (as amended, the “Northern Trust Loan Agreement”) to, among other things, (i) extend the scheduled maturity date to July 1, 2025; (ii) increase the maximum principal amount available for borrowing to $15.0 million; (iii) replace the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR); and (iv) add a quarterly facility fee equal to 0.35% of the average daily unused amount of the revolving line of credit.

Current wording

The Company and Northern Trust subsequently amended the credit facility agreement on multiple occasions (as amended, the “Northern Trust Loan Agreement”) to, among other things, (i) extend the scheduled maturity date to July 1, 2025; (ii) increase the maximum principal amount available for borrowing to $15.0 million; (iii) replace the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR); and (iv) add a quarterly facility fee equal to 0.35% of the average daily unused amount of the revolving line of credit.

Previous wording

1.25. However, for the quarter ended June 30, 2021 through the quarter ending March 31, 2024, the debt service 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 are 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. As of March 31, 2024, the Company was in compliance with its financial debt covenants under the Northern Trust Loan Agreement.

Current wording

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. 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 are 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. As of June 30, 2024, the Company was in compliance with its financial debt covenants under the Northern Trust Loan Agreement.

Previous wording

As of March 31, 2024, the Company had no outstanding borrowings under the revolving line of credit with Northern Trust. There were approximately $16,000 and $25,000 unamortized debt issuance costs as of March 31, 2024 and December 31, 2023, respectively.

Current wording

As of June 30, 2024, the Company had no outstanding borrowings under the revolving line of credit with Northern Trust. There were approximately $12,000 and $25,000 unamortized debt issuance costs as of June 30, 2024 and December 31, 2023, respectively.

Previous wording

There have been no significant changes to our critical accounting policies from those disclosed under “Managements’ Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” in the 2023 10-K.

Current wording

There have been no significant changes to our critical accounting estimates from those disclosed under “Managements’ Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” in the 2023 10-K.