Global Water Resources, Inc.

Greetings, ladies and gentlemen. Thank you for standing by. Welcome to the Global Water Resources 2021 second quarter conference call. At this time, all participants are in 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. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would like to remind everyone that this call is being recorded on August 6, 2021, at 1 p.m. 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 2021 second quarter financial results by press releases. a copy of which is available on our website at www.gwresources.com. Speaking today is Ron Fleming, President and Chief Executive Officer, Mike Liebman, Chief Financial Officer, and Chris Krieger, Chief Strategy Officer. Mr. Fleming will summarize the key operational events of the quarter, Mr. Liebman will review the financial results for the quarter, and Mr. Krieger will review strategic initiatives and business development for the quarter. Mr. Fleming, Mr. Liebman, and Mr. Krieger 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, 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-Q 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. 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 second quarter of 2021. Before handing the call over to Mike to review financial highlights, I will review a few operational highlights for the quarter. In accordance with our top priority, we continue to perform at an extremely high level on employee safety and regulatory compliance non-recordable incidents. Within the quarter, we experienced no recordable events, injuries, or expenses related to employee safety. And as of today, our staff has only experienced two minor OSHA recordable incidents in 1,436 days. We have incurred only $2,500 in nearly five years on OSHA recordable related incidents. This results in extremely low loss ratio and experience modifier, or EMOD, which is 0.62 today. As a reminder, an EMOD of one is considered to be an industry average. So said another way, we are performing 38% better than the industry average, which results in lower actual costs and workers' insurance costs and most importantly, a safer work environment. Also, having incurred no significant compliance violations in the quarter, it has now been 1,951 days since our last significant compliance violation for over five years. These impressive track records clearly demonstrate our performance on our top mandate, customer and employee safety. I now want to highlight customer growth. On the organic growth front, total active service connections increased 10.2% as compared to the end of Q2 2020, bringing total connections to 51,314. Development and housing activity remain very strong in Metro Phoenix and our service areas. As a reminder, single family dwelling permits for Metro Phoenix totaled 28,704 in 2020. and that was up 18% over 2019. According to local real estate consensus, single-family permits increased by another 40% in 2021 through Q2 year-over-year. Local real estate consensus projections also indicate that growth will continue throughout 2021 and 2022. Specific to our largest service area, the City of Maricopa, It has already issued 1,150 housing permits through June in 2021, a 183% increase over the same period the prior year. Beyond housing growth and our core existing utilities, as noted in our earnings release, which we also are making excellent progress on the engineering, permitting, and construction of new service areas, including the Nikola Motocorp project and the surrounding Inland Port, Arizona industrial project, amongst other areas within our large service areas. In fact, we began initial service to Nikola Motocorp in the quarter. It is important to note that we have accelerated capital investments as required to prudently manage this type of growth, including the new areas requiring service. As such, we've invested $3.1 million on infrastructure projects to support our existing utilities as well as the continued growth. And this brings the year-to-date total capital investments to $6.4 million. Those of you who 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 growth throughout the large service areas in Pinal and Maricopa County. Chris Krieger will discuss acquisitions and our in-process rate application later 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 second quarter of 2021 was 10.9 million, which was up 1.1 million, or 10.7%, compared to Q2 of 2020. This increase is primarily driven by the organic connection growth, increased consumption, and our approved rate increase. Operating expenses for Q2 of 2021 were 8.6 million, compared to $8.2 million in Q2 of 2020. This is an increase of $440,000, or 5.4%. Notable changes in operating expenses include increased operating and maintenance costs by $140,000, which was primarily driven by those costs that increase as revenue increases. Second, increased depreciation and amortization expense by $211,000, primarily due to the increases in our fixed assets associated with our capital expenditures plan, as well as increased amortization of intangibles. Lastly, we had increased G&A expense by $92,000. Now to discuss other income and expense. Other income for Q2 of 2021 was $284,000 compared to $1.8 million of expense in Q1 of 2020. This improvement of 2.1 million was primarily due to a one-time other income of 1.5 million for cell tower leases we sold. Additionally, we incurred 532,000 of expense in Q2 of 2020 for loss on disposal of assets versus only 16,000 in Q2 of 2021. Turning to net income, Global Water had net income of 2 million or nine cents per diluted share in Q2 of 2021. Now to talk about adjusted EBITDA, which adjusts for non-recurring and non-cash items. Adjusted EBITDA was 5.3 million in Q2 of 2021, which was up 550,000 or 11.5% compared to Q2 of 2020. Before turning the call over to Chris, I'd like to touch on our liquidity position. When combining our unused $10 million line of credit with our existing cash on hand of $19.3 million, we have over $29 million of liquidity to support our ongoing operations and our growth strategy. It's also worth reminding folks that we have $100 million shelf registration in the event we need to access the capital markets to execute our growth strategy. This concludes our update on the second quarter 2021 financial results. I'll now pass the call to Chris to review our rate case and strategic initiatives for the quarter.

Thanks, Mike. Hello, everyone. I will briefly highlight three items for you before passing the call back to Ron. First, our pending rate case before the Arizona Corporation Commission continues as expected. In the quarter, all written pre-filed testimony was completed and the hearing starts next week. The latest rounds of testimony reflect our current position requesting an approximately $3 million revenue increase with staff and RUCO both recommending an approximately $1 million revenue increase. As I mentioned earlier, the hearing before the administrative law judge starts next week and is expected to conclude on or around August 20th. From that point, The parties file sets of legal briefs summarizing the case, and the administrative law judge drafts what is called a recommended opinion and order, or RU, as it is sometimes abbreviated. The commissioners will then review the judge's recommendation and issue a final order. We estimate the commissioners to review the RU in Q4 with new rates to be implemented on or around January 1, 2022. Finally, as we previously stated, 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. Next, turning to expansion of current service areas and establishment of new service areas. As you read in our press release and heard Ron reference, we began providing potable water service to Nikola Motor Corp.' 's new manufacturing facility in the City of Coolidge. This is an impressive achievement as it reflects the ability of our team to execute key projects with short turnarounds. We originally signed a master utility agreement with Nikola in December 2020 and provided potable water service less than seven months later, a reflection of hard work by our engineering and operations team. Now, our efforts turn to initial discussions on details surrounding the provision of wastewater service to Nikola. As a result of marketing efforts by the developer, St. Holdings, and our ability to quickly deliver for our customers, we expect the inland port Arizona industrial area to continue receiving interest from new prospective customers. Returning to our core City of Maricopa utility, starting next week, anticipate delivering water service to our first construction customer in an area we refer to as the Southwest Plant Area. This is approximately six miles south, as the crow flies, from the center of the city of Maricopa. The customer, a national home builder, recently purchased 600 residential lots and plans to begin constructing homes by the end of 2022. This development has two positive implications for our company. It opens another geographic area for future growth. Second, it is the first step in us unlocking the $32 million of infrastructure that is on our balance sheet but not currently in rates. We will provide updates over the next year as the project progresses. Finally, the last element of our revenue growth drivers relates to acquisition activity. We are in advanced discussions on several opportunities and hope to have an announcement before our next earnings conference call. 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. It is clear we are well positioned with a strong balance sheet and discipline strategy that continues to accelerate. In fact, from an operational and financial perspective, we have never been stronger, and we have more than ample liquidity and access to capital to be great utility partners for the communities 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 total water management 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. These highlights conclude our prepared remarks. Thank you. We are now available to answer your questions.

We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any key. To withdraw your question, please press star then two.

We will pause for a moment as callers join the queue. Once again, if you have a question, please press star then one. There are no questionnaires from the telephone lines.

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

Great. Thank you, Operator. We'd just like to thank everyone for participating on the call today and for your ongoing interest in global water resources. Thanks, and we look forward to speaking with you again soon.

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