Global Water Resources (GWRS) Q4 2019 Earnings Call Transcript

Global Water Resources (GWRS -2.87%)
Q4 2019 Earnings Call
Mar 05, 2020, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, ladies and gentlemen. Thank you for standing by. Welcome to the Global Water Resources, Inc. 2019 year-end conference call.

[Operator instructions] I would like to remind everyone that this call is being recorded on March 5, 2020, at 1:00 p.m. Eastern Time. I would now like to turn the conference over to Heather Krupa, vice president and controller. Please, go ahead.

Heather Krupa -- Vice President and Controller

Welcome, everyone, and thank you for joining us on today's call. Yesterday, we issued our 2019 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.

Mr. Fleming will summarize the key events of the quarter; following which, Mr. Liebman will review the financial results for the year ended December 31, 2019. Mr.

Fleming and Mr. Liebman 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.

Ron Fleming -- President and Chief Executive Officer

Thank you, Heather. Good morning, everyone, and thank you for joining us today. We are very pleased to report the results for the year-end 2019. 2019 was another wonderful year for our company, and there are many highlights worth mentioning.

But first, I want to thank all of our employees, partners, and shareholders for their efforts and support that, together, produced these results. Foremost, the health and safety of our employees and our customers is our top priority. Throughout 2019 and even through today, we extended our employee safety and regulatory compliance nonrecordable incident streaks as our staff has now achieved over 950 consecutive days without a recordable safety accident. Also, it has been 1,437 days since our last significant compliance violation or nearly four years.

These streaks continue while we also manage rapid expansion and customer growth. Total active connections increased 4.9% to 45,823 at December 31, 2019. Regulated revenue increased by 7.3% to 35.5 million, and adjusted EBITDA increased approximately 700,000 or nearly 5%. We increased our dividend in the year to $0.2892 per share on an annualized basis.

We received an extension from the internal revenue service to defer the remaining gain realized from the combination of our operations and assets of Valencia Water Company in 2015 and the extension goes through the end of 2020. We are partnered with the City Of Coolidge and Saint Holdings to bring an integrated utility solution to Southern Coolidge and Inland Port Arizona. We appointed David Rousseau to the company's board of directors, adding exceptional senior level experience in water and utility policy. At the end of the year, we brought customer service and billing operations in-house, including all related technologies, allowing the company to provide a greater focus and control over our utility back office and our customers' experience, as well as support its plans for growth and expanding.

We extended the availability of the company's 8 million revolving line of credit by an additional tiers, which now goes through April 30, 2022, and the full amount remains available to date on that line. And subsequent to year-end in January 2020, we raised net proceeds of approximately 11.6 million and an equity offering to fund our growth and acquisitions and provide funds for working capital and general corporate purposes. These achievements show the dedication and care of our employees as we deliver exceptional performance, both financially and operationally. I wanted to now highlight permit growth.

For 2018, single-family dwelling permits in Maricopa and Pinal counties were up to 22,437 units or 13% over the prior year. In 2019, we realized another 14% increase as permits grew to 25,127. It's projected that 2020 will see an increase to 26,000 permits. Specifically, the city of Maricopa submarket continues to be strong.

As a reminder, in 2018, permit growth was up 18% over the prior year with 1,022 permits issued. 2019 finished with 989 permits, resulting in a two-year average of over 1,000 permits per year. This multiyear trend supports our long-stated position that, as sustained growth continues in and around Metro-Phoenix, we will get a larger and larger market share of new homes based on the amount of lot and infrastructure capacity that exists. Before turning the call over to Mike to review the year-end financial performance in greater detail, I want to, again, lay out our primary objectives.

Global Water will continue to meet our primary mandates to provide safe, reliable and sustainable service to our customers and partners while taking a disciplined approach to growth and long-term value creation. We'll do it through the following means. We will work to grow earnings by driving top-line revenue growth in creating operational efficiencies and managing controllable expenses. We will make prudent capital improvements as necessary, ensuring we have appropriate capacity and redundancy to be reliable utility partners.

We will expand our utility platform via new greenfield opportunities. And finally, we will pursue accretive acquisitions with consolidation benefits. Accretive tuck-ins, such as this, will complement the strong position and growth of our core regional assets, and we are committed to continue to pursue similar opportunities, both big and small. Additionally, as proven by our recent acquisitions, the consolidation can help improve our industry as a whole and provide many benefits to the customers and communities we have the privilege to serve.

I'll now turn the call over to Mike.

Mike Liebman -- Chief Financial Officer

Thank you, Ron. Hello, everyone. Total revenue for the year was 35.5 million, which is flat compared to 2018. This same year-over-year revenue is primarily driven by the ICFA revenue recognized in Q2 of 2018 that was nonrecurring in 2019.

Excluding this ICFA revenue, 2019 revenue was actually up 2.4 million or 7.3%, and this increase is primarily driven by the 4.9% organic connection growth, acquisition connection growth from both Turner Ranches and Red Rock, as well as approved rate increases. Operating expenses in 2019 were 28.5 million, compared to 26.2 million in 2018. This is an increase of 2.3 million or 8.6%. Notable changes in operating expenses include increased depreciation and amortization expense of 884,000, primarily due to the acquisition of Turner Ranches and Red Rock, as well as increases in our fixed assets associated with our capital expenditures plan.

Additionally, we have increased the operating and maintenance cost by 686,000. This increase was primarily driven by the additional cost associated with the Turner Ranches and Red Rock acquisitions of 476,000, as well as an increase in contract services from related parties of 78,000 and an increase in maintenance expense of $69,000. Lastly, we had an increase in G&A expense by 694,000, which can be attributed to the increase in personnel expense of 433,000 and an increase in deferred compensation of 219,000. Now to discuss other expense, other expense for 2019 was 3.6 million, compared to 4.4 million in 2018.

The 809,000 improvement was primarily due to the $1 million of other income received in Q1 of 2019 from the Loop 303 contract, offset by a decrease in the Valencia earn-out of 240,000. Turning to net income, global Water had net income of 2.2 million or $0.10 per share. Adjusted EBITDA, which adjusts for nonrecurring events, such as ICFA revenue, Loop 303 proceeds and also adjust for options expense and our equity investment in FATHOM, was 16.4 million in 2019, which is up 700,000 or 4.5% compared to 2018. Adjusted EBITDA was up primarily due to the increases in organic growth, as well as the acquisition growth from Turner Ranches and Red Rock.

This concludes our update on 2019 results. I'll now pass the call back to Ron.

Ron Fleming -- President and Chief Executive Officer

Thank you, Mike. It is clear, excluding onetime revenue recognition events from ICFA's, Global Water's top line and connection growth rates continue to be very strong. 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 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. And Mike and I are now available to answer your questions.

Questions & Answers:

Operator

[Operator instructions] The next question comes from Gerry Sweeney from ROTH Capital.

Gerard Sweeney -- ROTH Capital Partners -- Analyst

Good morning, Heather, Ron, and Mike.

Ron Fleming -- President and Chief Executive Officer

Hi, Gerry.

Gerard Sweeney -- ROTH Capital Partners -- Analyst

Just a couple of quick questions. I just wanted to start on the growth side. Obviously, Maricopa going very well, connections growing. I wanted to see if you could give a little update just on Coolidge/Saint Holdings.

How do we look at that? How does that sort of develop and emerge over the next couple of years?

Ron Fleming -- President and Chief Executive Officer

Yes. Yes. We always like to talk about growth, Gerry. Yes.

Look, before I switch just to the Coolidge and Nikola project you're talking about, I mean, look, Arizona has the most inbound transports right now than any other state. Maricopa County has added more jobs than any other county in the country. And this is the absolute values, not percentages. So Arizona is doing very well.

And really for the first time, this long sustained recovery in the way our governor has got about it and our communities here, we've really seen industrial and manufacturing and healthcare and lots of other sectors really come in strong and be thriving. And it's not as much just construction-based is what it's been historically. And so we feel really good about where the states at. And that leads us to the Nikola project because in these larger kinds of industrial ports that are starting to pop up around Metro-Phoenix is because of that greater job climate and the cost to develop these types of projects and the cost of labor and all those things.

So we think this is just the beginning of these types of projects. So specifically, I think it was just yesterday or the day before, you can look it up, Nikola had a press release and announced a merger with a company that's publicly traded on NASDAQ. And what they basically said was there are lots of strategic benefits to the partnership of the merger. But basically, this capital partner is going to finance the rest of their plants to really get Nikola going on not just on the innovative design and really to creating a whole new industry, but the actual now let's get to manufacturing our first products.

So based on the information in that article, they want to start rerolling some things out of their new plant in the next 24 to 36 months or less. So they've gotten to the point they're now ready to go fast. So Nikola will be the, as we say, the steed for that new area in Coolidge because it's about a five minute -- or sorry, five-mile separation from the industrial park from the existing City Of Coolidge. But we expect -- not a lot we can share today, but we expect that with that type of project going into an industrial part with a lot of other capacities, it will bring all of the other kinds of industrial and commercial projects that locate next to a facility like that.

For us, it's the normal utility regulated process. We'll put a CC&N in place. We'll get all the construction permitting done. We'll build it, and then we'll turn it on, provide service.

That's 24 to 36 months from today. But after that, we do think that the area could grow quite nicely.

Gerard Sweeney -- ROTH Capital Partners -- Analyst

Got it. That's really helpful. And Valencia, that had a great growth trajectory for a little bit and it slowed down, I think, some of the housing stock got consumed. Any thoughts on how that is developing on a go-forward basis, specifically, as you talked about just the people in Arizona.

Mike Liebman -- Chief Financial Officer

Yes. Gerry, this is Mike. Good question. And while we did see some accelerated growth in a few years back.

This year, 2019, we had about 321,000 and we're not expecting any significant increase over that in 2020, just based on what development activities happened specifically in the areas where our former service area was. So that's kind of the part of the course. And while we do over the long term, because it's a 20-year earn-out period, expect something longer-term later on down the road in the near-term future. We're just not expecting that.

Gerard Sweeney -- ROTH Capital Partners -- Analyst

OK. Great. That's helpful. And then finally, obviously, you talked about that in your prepared remarks just brought a lot of the service infrastructure in-house that was previously performed by FATHOM.

Just update how that integration is going? Any issues and just want to get a quick update if that would be possible?

Ron Fleming -- President and Chief Executive Officer

Yes. Absolutely. Frankly, it almost couldn't have gone any better. Now the way it developed is not ideal for any company to have to move that fast.

On something so significant. We generally say, if you're going to replace some of your back-office system that's it's a six-month process, a lot alone, replacing all of your back-office systems. And our team effectively did it in 60 days. And look, the reason we were able to do that is maybe it's a little bit different than your common municipality or maybe some of the other private utilities.

We really understand the technology that they use. Obviously, you know the history, long relations with FATHOM and the people and the technology choices. And so we basically just because we liked the technology package that had been created, we just went direct to those vendors. And if you think about it, we were really just removing an integrator between us and those technology softwares and the people that sit in the seats that operate those softwares for whatever function is being provided.

We hired very capable people that we're doing this for FATHOM. Being co-located in Phoenix, that was a benefit. We know the people that were here. And they closed their doors, and we took their best people as a way to kind of look at it.

So very happy with the people we got. We're very happy to have direct relationships with these technology vendors now. And we think it actually provides us more flexibility and more opportunity moving forward. It wasn't planned, but we've definitely turned it into lemonade, and we're sitting here today, pretty happy with it.

No major issues and none expected coming at us.

Gerard Sweeney -- ROTH Capital Partners -- Analyst

OK. Great. I appreciate the update, and congratulations.

Ron Fleming -- President and Chief Executive Officer

Thanks. We appreciate it.

Operator

[Operator instructions] The next question comes from Jon Jung from Trailhead Asset Management.

Jon Jung -- Trailhead Asset Management, LLC -- Analyst

Congratulations on a good year in '19. We hope things continue in 2020. We're pretty well covered with the questions I had. Are you there?

Ron Fleming -- President and Chief Executive Officer

Yes, Jon.

Mike Liebman -- Chief Financial Officer

Yes.

Jon Jung -- Trailhead Asset Management, LLC -- Analyst

Yes. I wondered if you could tell me, what does this mean with regard to the value of the original investment that's still on the books for FATHOM, is that premier gone, written off?

Mike Liebman -- Chief Financial Officer

Yes. Jon, this is Mike. Yes, actually, we've recorded that, written that down on our balance sheet to zero back in April of 2019. But you're correct, the way that we're thinking about that going forward, the value is zero.

Jon Jung -- Trailhead Asset Management, LLC -- Analyst

OK. All right. Sad to say. I hope the company is doing OK, and sorry that didn't work out better.

Yes, do you have anything else in terms of color you can give us on what's going on with some of the small water utilities around the neck of the river in Arizona. And whether you have looked beyond Arizona and any possibilities of doing acquisitions outside of the general area that you're in?

Ron Fleming -- President and Chief Executive Officer

Yes. So the way we've talked about in the past is we're really only just two years into being back in the acquisition game. We wanted to get the company back to a certain point before we did that. And so on our kind of our first initiative to go out and talk to the utilities that we thought made sense to consolidate into Global, we had some success.

As you know, we acquired four utilities now, approximately, over those two years. Turned out to be great acquisitions. So now we're expanding that, and we're talking to more. Nothing we can really announce today, but we certainly intend to keep that part of our growth portfolio moving forward, even though we have great organic growth.

And we've got new projects in their entirety like this industrial park with Nikola and Saint Holdings in the City Of Coolidge, there's more of those things even on the radar as well. We will continue to look at acquisitions, but we can be disciplined because we've got good, solid organic growth anyway. We've got lots of other good things going for the company. And where it makes sense to consolidate them in, we will do that.

Now I will also say two years in, and all of that said, because of where the company is now today, we're probably, for the first time, willing to look at opportunities outside of the state or at least further away from Metro-Phoenix as well. So, yes, to that question, we are open to that at this stage.

Jon Jung -- Trailhead Asset Management, LLC -- Analyst

That's great. OK. I'm not familiar with what has transpired with the big property that Gates bought just outside of your service area, but has there been any progress with regard to developing that plan?

Ron Fleming -- President and Chief Executive Officer

Yes. They made progress on the plan. Now we sitting here today still don't know when they're going to move to land development. And obviously, our infrastructure goes in first and provides service.

Just like we talked about earlier on the Coolidge project, that's a good 24- to 36-minute process from the time they call us and say, go for everything that we need to do. So that's not on our radar yet, to be clear. However, what they did say, and if you can go back and appreciate the article that was released at the time that announcement was made, I mean, they're not designing your normal master plan community. And there's a lot of things that they want to do on that massive project or property that they bought with just 20,000 acres to remind everybody.

So some of that required them to go back and basically reentitle the land, the original plan to no longer apply. And from what we understand, some of that is even requiring them. They want to look at different regulatory or statute changes here in the state for some of the things they want to do. So that type of work's moving forward, which gives us enough.

Obviously, we don't believe that the investment group that has Bill Gates as part of it or at least the Bill & Melinda Gates Foundation as part of it, bought the property to do nothing with it. So I'm sure there's lots of planning, lots of interesting things that they are looking at and working on. And the day that they're ready to actually engage and move forward with the planning, the utility portion of that, we'll be ready to go.

Jon Jung -- Trailhead Asset Management, LLC -- Analyst

All right. Well, I appreciate the update. Thanks very much, guys.

Ron Fleming -- President and Chief Executive Officer

Thanks, Jon.

Operator

[Operator instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Ron Fleming for any closing remarks.

Ron Fleming -- President and Chief Executive Officer

All right. Thank you, operator. I just want to thank everybody again for participating on the call and for your ongoing interest in Global Water Resources. Thanks, and look forward to speaking with you again.

Operator

[Operator signoff]

Duration: 34 minutes

Call participants:

Heather Krupa -- Vice President and Controller

Ron Fleming -- President and Chief Executive Officer

Mike Liebman -- Chief Financial Officer

Gerard Sweeney -- ROTH Capital Partners -- Analyst

Jon Jung -- Trailhead Asset Management, LLC -- Analyst

More GWRS analysis

All earnings call transcripts