Executive Summary / Key Takeaways

• Global Water Resources ($GWRS) operates as a pure-play water resource management company in Arizona, leveraging its Total Water Management (TWM) approach and strategic positioning in high-growth corridors around Phoenix and Tucson.
• The company's growth strategy is multifaceted, combining organic connection growth (4.3% year-over-year as of Q1 2025), strategic acquisitions (like the pending Tucson acquisition expected mid-2025), and regulatory rate cases to increase rate base and revenue.
• Recent financial performance reflects the impact of organic growth and initial benefits from approved rate cases, although operating expenses have risen due to increased consumption, capital investments, and inflationary pressures.
• Significant regulatory catalysts are in play, including the recently approved GW-Farmers rate increase and the filing of a major rate case for the largest utilities (Santa Cruz and Palo Verde) seeking a $6.5 million net annual revenue increase and proposing innovative Formula Rates to mitigate regulatory lag.
• Strong liquidity, bolstered by a recent equity raise and expanded credit facility, supports the company's elevated capital expenditure plan for 2025 and its acquisition pipeline, positioning it to capitalize on continued population growth and the unprecedented industrial boom in Arizona.

Setting the Scene: A Water Utility Focused on Growth and Efficiency in the Arid Southwest

Global Water Resources, Inc. ($GWRS) is more than just a traditional water utility; it positions itself as a water resource management company operating primarily in the rapidly expanding corridors of metropolitan Phoenix and Tucson, Arizona. In a region defined by water scarcity and burgeoning population growth, GWRS employs an integrated approach known as Total Water Management (TWM). This strategy involves owning and operating water, wastewater, and recycled water utilities within the same geographic areas. The core principle is to maximize the beneficial reuse of recycled water, promote regional planning, and leverage advanced technology to ensure sustainability and efficiency.

The Arizona water utility landscape is notably fragmented, with hundreds of individual systems. GWRS's strategy is built upon consolidating these systems, achieving economies of scale, and applying its TWM model across a broader service territory. This growth is pursued through four key avenues: organic growth within existing service areas driven by new housing and commercial development, establishing new greenfield utilities, acquiring existing water and wastewater systems, and securing necessary rate adjustments through the regulatory process.

Central to GWRS's operational model is its technological differentiation, particularly its emphasis on recycled water. The company recycles over 1 billion gallons of water annually, having recycled 17.7 billion gallons since 2004. This practice is a cornerstone of TWM, reducing reliance on scarce non-renewable water sources and costly renewable supplies. While specific quantitative metrics comparing the efficiency gains of GWRS's recycling technology versus traditional methods or competitors are not precisely detailed, the strategic intent is clear: to enhance water supply sustainability and potentially lower long-term operational costs in an arid environment. The company also utilizes advanced technology and data, including remote metering infrastructure (AMI), as evidenced by the WIFA grant awarded to GW-Farmers to replace manual meters with smart meters. This technology aims to improve operational efficiency, enable smart water management programs, and support conservation efforts. The strategic "so what" for investors is that this focus on TWM and technology provides a competitive moat, particularly in water-stressed regions, potentially leading to more resilient operations and a stronger value proposition for communities and regulators compared to utilities relying solely on traditional water sources.

In the competitive arena, GWRS, while smaller in scale compared to national giants like American Water Works (AWK) or Essential Utilities (WTRG), carves out its niche through its focused regional strategy and TWM expertise. Larger peers like AWK and WTRG benefit from extensive asset bases and diversified operations across multiple states, offering greater scale and often more stable financial profiles with higher profitability margins (e.g., AWK's 22% net margin, WTRG's 29% net margin in 2024, compared to GWRS's 10.63% TTM net margin). However, GWRS's concentrated presence in Arizona's high-growth corridors and its specialized TWM approach allow it to capitalize on regional dynamics and potentially achieve higher organic growth rates within its specific service areas. Companies like California Water Service Group (CWT) and SJW Group (SJW) also operate in Western growth markets but may not have the same integrated water cycle focus as GWRS. GWRS's competitive positioning is thus defined by its regional concentration, its differentiated TWM technology aimed at sustainability, and its active pursuit of consolidation within Arizona, contrasting with the broader geographic and strategic approaches of larger national players.

Performance Reflecting Growth and Investment

Global Water Resources' recent financial performance underscores the impact of its growth strategy and the ongoing need to align rates with investments and rising costs. For the three months ended March 31, 2025, total revenue increased by 7.3% to $12.5 million compared to $11.6 million in the same period of 2024. This growth was primarily fueled by a 4.3% year-over-year increase in active service connections, increased water and recycled water consumption (water consumption up 24.2%, recycled water consumption up 59.6%), and the initial impact of higher rates for the GW-Saguaro utility approved in July 2024.

Operating expenses rose by 8.3% to $11.2 million in Q1 2025, up from $10.3 million in Q1 2024. This increase was largely driven by higher depreciation and amortization expenses, reflecting the commissioning of new capital investments, and increased operations and maintenance costs. The latter includes higher expenditures for chemicals and power necessary to meet increased consumption demands, as well as higher contract IT and labor services. While general and administrative expenses saw only a slight increase, the overall rise in operating costs outpaced revenue growth in the quarter, leading to a slight decrease in operating income from $1.3 million in Q1 2024 to $1.3 million in Q1 2025.

Other expenses also increased, primarily due to lower income from Buckeye growth premiums, which resulted from fewer new meter connections in that specific area compared to the prior year. Consequently, net income for Q1 2025 was $0.6 million ($0.02 per diluted share), down from $0.7 million ($0.03 per diluted share) in Q1 2024. Despite the dip in net income, Adjusted EBITDA, which accounts for non-cash and non-recurring items, increased by 4.4% to $5.6 million in Q1 2025, indicating underlying operational strength.

Looking at the full year 2024, regulated revenue increased by a robust 4.9% to $52.7 million compared to 2023, primarily due to organic connection growth. Total revenue saw a slight decrease due to non-recurring ICFA revenue in 2023. Operating expenses in 2024 increased by 6.3%, driven by higher depreciation and maintenance costs, reflecting ongoing capital investments and inflationary pressures on labor, medical expenses, power, and chemicals. Adjusted EBITDA for 2024 increased by 5.2% to $26.7 million.

These results highlight a critical dynamic for GWRS: while organic growth and strategic investments are expanding the customer base and asset footprint, regulatory lag means that the associated costs and a return on the increased rate base are not immediately reflected in approved rates. Management explicitly notes that current rates for their largest utilities are based on a 2019 test year, and the impact of inflation and significant investments since then has pressured earnings growth.

Bolstered Liquidity and a Clear Growth Trajectory

Global Water Resources has significantly enhanced its liquidity position to fund its strategic growth initiatives. A key development was the completion of a public offering of 3.22 million shares of common stock on March 27, 2025, which generated approximately $30.8 million in net proceeds. Shortly thereafter, on April 14, 2025, the company amended its revolving credit facility with Northern Trust (NTRS), extending the maturity to May 2027 and increasing the borrowing capacity from $15 million to $20 million. As of May 15, 2025, the company reported over $50 million in total liquidity, combining cash on hand ($31.5 million) and the unused Revolver capacity.

This strengthened financial position is crucial as the company anticipates an elevated level of capital expenditures in 2025 relative to 2024. These investments are targeted towards infrastructure improvements in existing service areas and expanding capacity to serve growing communities. Capital expenditures are a vital component of the rate base, providing the foundation for future earnings growth once approved through the regulatory process.

The outlook for GWRS is heavily tied to the continued growth in Arizona and the company's ability to translate that growth into increased rate base and revenue through regulatory approvals. Management remains bullish on the long-term prospects, citing the persistent housing shortage in Metro Phoenix, strong net immigration, and job growth projections that support an annual housing unit run rate approaching 30,000. While single-family permits saw a temporary dip in Q1 2025, the significant shift towards large-scale multi-family, commercial, and industrial development in areas like the City of Maricopa is expected to drive substantial connection growth.

The industrial manufacturing boom in Arizona is a particularly significant catalyst. Record investments, including massive expansions by TSMC (TSM) and Intel (INTC), and specific projects in GWRS's service areas like the Procter & Gamble (PG) contract in Inland Port Arizona and the planned Maricopa industrial complex, represent opportunities for substantial future demand. Management views these large-scale industrial additions as a matter of "when, not if," which could meaningfully impact the company's utility operations and revenue profile in the coming years.

Regulatory catalysts are expected to unlock significant value from past investments and rising costs. The GW-Farmers rate case, approved in April 2025, will provide an estimated $1.1 million increase in annual revenue, phased in starting May 1, 2025. More importantly, the filing of the general rate case for the largest utilities (Santa Cruz and Palo Verde) in March 2025, based on a 2024 test year, seeks a net annual revenue increase of approximately $6.5 million. This case aims to recover costs associated with inflation and significant capital investments, including the Southwest Plant. The proposed implementation in phases starting May 2026 and January 2027, if approved, would substantially boost future revenue. The inclusion of a proposal for a Cost of Service Adjustment (CSA) or Formula Rate mechanism in this case is a strategic move to potentially reduce future regulatory lag by allowing for more frequent, smaller rate adjustments based on cost inputs, a policy recently endorsed by the ACC.

Acquisitions remain a core part of the growth strategy. The planned acquisition of seven isolated public water systems from the City of Tucson, approved by the ACC in January 2025 and targeted for closure in mid-2025, will add approximately 2,200 connections and an estimated $7.8 million in rate base, further expanding the company's footprint in that region.

Risks and Challenges

Despite the compelling growth narrative, Global Water Resources faces inherent risks. Regulatory risk is paramount, as the company is subject to extensive rate regulation by the ACC. While recent decisions have been favorable, there is no guarantee that future rate case requests, including the significant Santa Cruz/Palo Verde filing and the proposed Formula Rates, will be approved as requested or within the anticipated timeframe. Regulatory lag remains a challenge, potentially delaying the recovery of increased operating costs and capital investments.

Environmental regulations are becoming more stringent, particularly concerning emerging contaminants like PFAS. The EPA's new NPDWR establishing MCLs for six PFAS compounds will require increased capital expenditures for treatment and potentially higher operating costs. While the company expects to recover these costs through rates, regulatory lag could impact profitability in the interim. The ongoing AFFF MDL lawsuit related to PFAS contamination also presents an uncertain outcome.

Operational risks include the volatility of production costs like power and chemicals, which can impact margins if not promptly recovered through rates. Weather and seasonality significantly affect water consumption, and the company's limited geographic diversity makes it sensitive to extreme weather patterns. Water supply limitations in Arizona due to drought or regulatory restrictions could also impact operations, although the company currently believes it has adequate supply for foreseeable growth.

Furthermore, as a smaller utility compared to national peers, GWRS may face higher per-unit operating costs and potentially less favorable terms for financing or insurance, although its recent equity raise and expanded credit facility have mitigated some liquidity concerns in the near term.

Conclusion

Global Water Resources presents a clear investment thesis centered on capitalizing on the robust growth dynamics in Arizona through a combination of organic expansion, strategic acquisitions, and leveraging the regulatory process. The company's differentiated Total Water Management approach, with its focus on water reuse and technological efficiency, provides a relevant competitive advantage in a water-scarce region. While recent earnings have been impacted by rising costs and regulatory lag, the significant rate case filed for the largest utilities, coupled with the recently approved Farmers rate increase and the pending Tucson acquisition, represent substantial potential catalysts for future revenue and earnings growth. The proposed Formula Rate mechanism could further improve the predictability and timeliness of cost recovery.

Investors should monitor the progress and outcome of the Santa Cruz and Palo Verde rate case, the successful integration of the Tucson acquisition, and the company's ability to execute its elevated capital expenditure plan. While risks related to regulation, environmental compliance, and cost volatility exist, GWRS's strategic positioning in high-growth corridors and its proactive approach to consolidation and rate base expansion underpin its potential for considerable growth in the years to come, building on its strong performance over the past five years.