Jeff Risenmay - Controller Ron Fleming - President & CEO Mike Liebman - CFO.

Analysts:.

Welcome to the Global Water Resources, Inc 2016 Fourth Quarter and Year-End Conference Call. [Operator Instructions]. I would now like to turn the conference over to Jeff Risenmay, Controller. Please go ahead. .

Good morning everyone, and thank you for joining us on today's call. Today we issued our 2016 fourth quarter and 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 fourth quarter and year ended 2016 and the subsequent highlights for post quarter both. Next Mr. Liebman will review the financial results for the three months and the year ended December 31, 2016. Mr. Fleming and Mr. Liebman will be available for questions at the end of the call.

Before we begin I'd 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, uncertainty, estimate 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 view as of to-date here off and are not guarantees of future performance.

For additional information regarding factors that may affect future results please read the sections risk factor and management's discussion and analysis of financial conditions and results of operation which are included within the Form 10-K filed with the SEC earlier today. Such fillings are available at www.sec.gov.

Certain non-GAAP measures maybe included within today's call. For a reconciliation of these measures to the comparable GAAP financial measure please see the tables included in today's earnings release which is available on the website. Unless otherwise stated all amounts discussed are in U.S. dollars. I will now turn the call over to Mr. Ron Fleming..

Thank you, Jeff. Good morning everyone and thank you for joining us today and we're very pleased to report the results of our fourth quarter and year-end 2016 which was a milestone year for Global Water after the successful conclusion to our multi-year strategic plan to return Global Water to a place of strength and opportunity.

Before Mike reviews the financial highlights for the last time I will once again review the importance of the strategic initiatives completed this year.

As previously announced earlier this year we completed a series of transactions that resulted in the merger of GWR, Global Water Resources Corp, the entity publicly traded on the Toronto Stock Exchange with and into Global Water Resources, Inc. and a concurrent IPO on NASDAQ.

The transaction was part of our overall plan to simplify the corporate structure by eliminating one level of holding company ownership, refinance our outstanding tax exempt bond on more favorable terms, improve liquidity for shareholders and have a single governing jurisdiction in the U.S.

for all of our assets, operation and employees of the business are located. Subsequent to the successful merger and IPO we announced the execution of a no purchase agreement to refinance our existing long term tax exempt bonds, improve free cash flow and provide additional liquidity to the company. This transaction closed on June 24, 2016.

Further with a portion of the proceeds from the debt refinancing we negotiated an early payment option for a remaining payment due under the Sonoran utilities purchase agreement which was a competitor within the City of Maricopa service area that we acquired in 2006.

The final payment was due to Sonoran in October of 2018, however making this early payment resulted in a $950,000 reduction to the payment cut.

Moving on as you will recall another key component of the overall strategic plan was to sell non-core assets and focus the company back on our large service areas and business model where we are an integrated service provider for waste water and recycled water.

This was the driver behind our agreement to settle the Valencia condemnation on attractive terms in 2015 and sell the assets of Willow Valley Water Company [ph] which closed and funded on May 9th.

Further we were successful in receiving a very meaningful private letter ruling from the IRS, specifically as it pertains to the proceeds they mean from the Valencia condemnation the IRS role that we can make capital investment in our existing utilities both water and wastewater which would qualify under IRC Section 1033 reinvestment requirement for deferral of income tax on the gain realized.

For Global Water, we look at the ruling the following way. Generally, our Valencia tax rate on the approximate 52 million dollar gain currently stands at roughly 38% so to the extent we make qualifying capital investments that will allow us to defer the gain and reduce the associated tax payment by approximately 38%.

The time horizon to make these capital investments is two years from the end of the tax year and which the gain was realized. The event occurred in July 2015 so the tax year of the gain is 2015 allowing for such investments through the end of calendar year 2017.

We will request a single one year extension from the IRS although an approval is not certain.

We have made significant capital investment in our territories within the last 13 years and because its infrastructure is relatively new, we do not expect comparable capital investments to be required in the near term either for growth or to maintain the existing infrastructure.

Nevertheless like all utilities we have an established five year capital improvement plan to make targeted capital investment to repair and replace existing infrastructure as needed, address operating redundancy requirements and improve the overall financial performance of the company by a lowering expenses, increasing revenue and recognizing a portion of a deferred ICFA [ph] revenue.

Considering the favorable private letter ruling it makes sense to accelerate as much of the five year capital improvement program as possible which we have done for items that qualify under the IRC Section 1033 reinvestment criteria and will defer the tax liability to the maximum extent possible.

It is important to note that the projected change in cash flow from the debt refinance roughly 20 million over five years would itself be almost efficient to cover the accelerated capital improvement plan.

Although not part of the PLR in addition to making capital investments we can also make acquisitions of other like kind property such as water and waste water utilities that would qualify under IRC Section 1033 to similarly defer the game and the taxes.

The time horizon to make these qualifying acquisition is three years from the end of the tax year in which the gain is realized with the ability to apply to IRS for extension and one year increment.

Based on experience we believe we have up to five years to defer the gain in this regard taking the time line for these opportunities through 2020, because it is unlikely that our accelerated capital improvement program tend to defer the tax liability fully and because there are potentially acquisition opportunities that can be accreted to our core business we have begun to analyse such opportunities.

On an important related note in 2016 there was significant positive development for the water industry within the State of Arizona as it pertains to Arizona Corporation Commission and the regulatory climate in which we operate.

On July 25, 2016 after a series of water workshops that Global Water and many other utilities participated in, the commission issued an order recommending numerous policy reforms. These reforms are intended to establish improved policies and procedures in the following areas.

Small water company rate cases, improved rate design, cost of capital reform and finally water utility acquisition process and consolidation of small water utility.

On this last item the specific purpose of the reforms pertains to elimination of unnecessary regulatory burden on certain types of transaction and establish a policy for rate consolidation and direct incentive for acquisition.

On August 8, 2016 the Arizona Supreme Court also issued a critical opinion pertaining to a case about the scope of the commission's power and specifically about the constitutionality of the commission's adopted System Improvement Benefits Surcharge Mechanism or SIB for short.

Preferred to in most other states and generally within the industry as a disk or distribution system improvement charge, Arizona's residential utility consumer's office or RUCO had challenge the legality of the SIB, the case ultimately made its way to the Arizona Supreme Court which ruled that establishing a SIB was within the powers of the commission and in the opinion made it clear that the commission has brought a constitutional powers in setting rates.

While not all of these items are applicable to Global Water today the importance of the water workshop and the subsequent commission order on policy reforms and the reaffirming of the SIB clearly indicates that the State of Arizona is dedicated to improving the regulatory climate and encouraging common sense progressive reforms that will assist in consolidation, reduction of regulatory lag and providing a fair opportunity for utilities of all sizes to earn their authorized rate of return.

To summarize the private letter ruling in the company's overall progress combined with improving economic conditions and regulatory climate in Arizona means that we are well positioned to capitalize on strategic acquisition opportunity.

Thus by Global Waters immediate growth strategy for its regulated water, wastewater and recycled water business will remain driven by increased service connections, continued operating efficiencies and utility rate increases approved by the Arizona Corporate Commission.

Global Water now has returned to its original mission to also aggregate water and waste water utility allowing our customers and the company to realize the benefits of consolidation, regionalization and environmental stewardship which we will pursue as the opportunities arise.

Before turning the call over to Mike to review our 2016 financial performance I want to highlight a few additional items. I would like to remind everyone that our approved rate order for our operating utility allows for rate increases to be based in every year on January 1st of each year until the year 2021.

The second rate increase took effect on January 1, 2016 which provided approximately 1 million of additional revenue in 2016. In addition to the annual phasing of new rates, our utilities have seen steady, consistent and organic growth since January of 2009.

Excluding the impact of Valencia and [indiscernible] operation Global Water experienced positive growth in new connection and reestablishing service on previously vacant [ph] homes. As of December 31, 2016 active service connection increased by 1115 to 37,387 compared to 36,272 as of December 31, 2015. This represents an annualized increase of 3.1%.

The company's vacancy rate is now at 1.7% after reaching a peak of 11.2% in February of 2009. Metro Phoenix Single Family permit data remains very strong. Approximately 18,456 permits were issued in 2016 more than a 10% increase over last year.

Experts project more than 22,000 permits for 2017 and nearly 25,000 permits for 2018 representing an additional 40% of growth over the next two years. For the City of Maricopa sub market it continues to grow faster than Metro Phoenix as the year-end permit total stand at a 56% year over year increase.

Additionally finished lot [ph] activity is up substantially in our utility as more and more home builders are acquiring the finished lot inventory from developers and investors and putting new parcels into home construction.

All of this confirms our long held position that if Metro Phoenix returns to more normalized permit volume which historically have been north of 30,000 permits per year this will quickly consume finished lot inventory in the major suburbs and we will continue to see more of a market share of this activity based on our significant available lot inventory.

In short we think the next three to five years could be very strong organic growth. In conclusion Global is continuing to realize meaningful resolve on all of the numerous initiatives successfully completed which was very evident this year.

Our competitive advantages remain the same, large and growing service areas, strong revenue growth rate, the ability to leverage existing capacity and strong free cash flow combined with strategic capital investment opportunities we believe we will continue to provide meaningful returns to our shareholders. I will now turn the call over to Mike..

Thank you, Ron. Hello everyone. Our discussion today refers to the consolidated financial information of the U.S. Company Global Water Resources, Inc. and all amounts discussed are in U.S. dollars. As a reminder total revenues consist of both utility revenue which is water, wastewater and recycled water services as well as other unregulated revenues.

Total revenues for 2016 declined by 2.2 million or 6.7% going from 32 million in 2015 to 29.8 million in 2016. Specifically utility revenue was down by 1.6 million or 5.2% and unregulated revenue was down by 535,000. The decline in utility revenue was primarily a result of the disposition of both Valencia and Willow Valley.

Adjusting for the Valencia and Willow Valley divestitures, adjusted revenues in 2016 were 29.5 million compared to 27.9 million in 2015, this represents an increase of 1.6 million or 5.7% year over year. Adjusted utility revenue was up 2.1 million or 7.8% in 2016 versus 2015.

This increase is due to increased rates pursuant to the 2014 rate order, 3.1% organic connection growth and higher consumption in 2016.

Operating expenses in 2016 were 24.5 million compared to 25.4 million in 2015, while this reflects a 930,000 improvement the breakdown is that one, operating and maintenance expense was down 1.2 million primarily as a result of the Valencia and Willow disposition.

Two, depreciation expense was 1.9 million lower primarily due to the disposition of Valencia and Willow Valley as well and three, general and administrative expense was higher by 2.2 million primarily due to the increase in deferred and Board compensation as well as the incremental cost associated with the GWRC merger and becoming a U.S.

public company. Turning to net income, Global Water had a net loss in 2016 of 2.9 million compared to net income of 21.4 million in 2015. This decline is primarily due to the large gain on the disposition of Valencia in 2015 combined with the lost revenue associated with the disposition of Valencia.

Additionally, we incurred the higher interest costs associated with the debt refinance in Q2 of 2016 where we took a 3.2 million interest expense for the prepayment penalty of the loan and a $2.1 million interest expense for the write off of deferred financing fees.

These were offset by the previously mentioned increases in revenue from higher rates, organic connection growth and higher consumption. Additionally we generated 954,000 of other income associated with the discounted early payoff of our Sonoran acquisition liability and 585,000 in higher Buckeye royalty.

Adjusted EBITDA adjust for non-recurring events, option expense related to awards made to the Board of Directors and our equity investment in Fathom. In 2016 adjusted EBITDA was 13.9 million compared to 15.7 million in 2015.

This is a 1.8 million reduction and is primarily driven by one the last EBITDA associated with Valencia operations, two, higher stock based compensation expense and three, U.S. public company cost incurred in 2016. These were offset again by higher rates, organic connection growth, increased consumption and lower personnel costs.

Specifically it's worth pointing out that deferred compensation expense was $1.3 million higher in 2016 over 2015 primarily due to the 67% increase in stock price we received during 2016. That concludes the update for 2016 results. I will now pass the call back to Ron. .

Thank you, Mike. So in closing I want to clearly address the question of what we will focus on. Goldwater will take a disciplined approach to growth and value creation through the following means.

We will work to grow recurring EBITDA by driving top line revenue growth while creating operational efficiencies and aggressively managing controllable expenses so that revenue growth drops to the bottom line.

We intend to use cash on hand to make targeted capital improvements that increase revenue reduce expenses, build rate base and allow the recognition of deferred revenue while having the added benefit of deferring Valencia combination tax liability by approximately 38% for each offsetting investment.

We will further look to defer the Valencia condemnation tax liability by replacing assets through accretive acquisitions with consolidation benefits. Finally we will routinely analyse our dividend policy with the commitment to grow recurring dividend as we execute the plan. This commitment was demonstrated by the multiple dividend increases in 2016.

That concludes our prepared remarks. Thank you. Mike and I are now available to answer your question..

Operator:.

All right. Thank you, Operator. Just want to thank everyone for joining us today and your continued interest in Global Water. Thanks and we look forward to speaking with you again..

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