H2O America 2026 Q3 Financial Results Call - H2O AMERICA

Financial Performance:

• Reported Q3 2026 GAAP diluted EPS of $0.99 and year-to-date (YTD) diluted EPS of $2.13.
• Reported Q3 2026 Adjusted diluted EPS of $1.04 and YTD Adjusted diluted EPS of $2.30.
• Adjusted net income is up 8% YTD compared to 2025, offset by a ~20% increase in weighted average diluted shares due to ATM program usage and equity issuance.
• Trimmed 2026 standalone Adjusted diluted EPS guidance to $3.10–$3.16 (preserving $3.13 midpoint) due to higher depreciation, operating expenses, and equity dilution.
• Provided full-year 2026 Adjusted diluted EPS guidance including QuadVest acquisition impacts: $2.91–$2.97 (approx. 6% dilution from standalone midpoint, better than the initial 10-20% expectation due to October closing).
• Reduced 2026 Company-funded Capital Expenditure (CapEx) to ~$465 million (from $483 million) primarily due to increased developer-funded capital in Texas; total 5-year Texas CapEx ($766M) and consolidated 5-year budget ($2.7B) remain unchanged.
• Net liquidity position remains strong with $169 million available under $370 million credit lines; funded QuadVest closing primarily through $700 million in equity raised in 2026.

Guidance and Future Outlook:

• Reiterated long-term target of 6-8% annualized organic EPS growth (CAGR) over the 2026–2030 period.
• Expects 2027 diluted EPS dilution of 10-20% relative to the standalone plan, driven by a full year of QuadVest results and stepped-up depreciation.
• Projected rate-based Compound Annual Growth Rate (CAGR) of 13% from 2025 year-end estimated rate base of $2.8 billion.
• Plan to initiate 2027 guidance (including QuadVest and Cibolo Valley impacts) in February 2027 alongside Q1 updates.
• 80% of planned capital investments for 2026–2030 qualify for timely regulatory recovery mechanisms.

Business Segments and Product Lines:

• Closed acquisition of Houston-based QuadVest on October 1, 2026, adding ~62,200 active connections (14% growth in 2026) and ~98,300 connections under contract/pending development.
• Expected to close Cibolo Valley acquisition in early November; PUCT approval received in mid-September.
• QuadVest's customer growth and pipeline conversion are expected to increase Texas operations' share of the consolidated customer base from 8% to 26% by 2029.
• New rate cases are being prepared for California (2028–2030 GRC filing in Jan 2027) and Texas (combined company GRC in first half 2027 to include QuadVest/Cibolo Valley).
• Active deployment of capital across service territories, with specific focus on resilience, water supply, and infrastructure upgrades.

Market and Competitive Landscape:

• Connecticut and Maine General Rate Cases (GRC) are advancing procedurally; expected to be effective February 2027.
• Texas rate case filing delayed to first half of 2027 to allow for robust documentation following scrutiny on recent filings.
• California Senate Bill 1153 passed, strengthening wildfire resilience requirements and clarifying liability limitations for water utilities.
• Texas PUCT adopted a decision resulting in a nominal $238,000 annual revenue decrease, with the company planning offsets to meet guidance.
• Housing market resilience in Texas (specifically Houston) remains strong despite national interest rate headwinds, supporting connection growth.

Risks and Challenges:

• Equity dilution from ATM issuances and March 2026 equity offering significantly impacted per-share earnings.
• Rising water production expenses (up 42 cents/share YTD) driven by higher water supply costs, extraction fees, and balancing accounts.
• Increased depreciation and amortization expenses ($28 cents/share YTD) from new utility plant placed in service.
• Regulatory risk and scrutiny regarding rate case documentation and cost recovery mechanisms.
• Cybersecurity threats and nation-state attacks on critical infrastructure pose operational resilience risks.
• Interest rate fluctuations and housing market conditions remain key sensitivities for customer growth.

Management Commentary and Tone:

• Tone was confident and pragmatic, emphasizing the successful execution of the QuadVest acquisition and strategic integration.
• Management highlighted a strong commitment to affordability while balancing necessary infrastructure investments for resilience and quality.
• CEO Andrew Walters expressed pride in the team's regulatory progress and cybersecurity preparedness, citing participation in the Alliance for Critical Infrastructure (ACI).
• CFO Ann Kelly emphasized the company's strong liquidity position and flexibility to de-lever over the five-year plan.

Analyst Questions and Answers:

• Texas Rate Case Timing: Delayed to H1 2027 due to late acquisition closing (QuadVest Oct 1, Cibolo Nov 2) and need for enhanced documentation to meet regulator/intervener scrutiny.
• 2027 Dilution Drivers: Primary drivers include a full year of QuadVest operations and stepped-up depreciation; timing of the 2026 closing kept YTD dilution lower than the 10-20% range.
• Connecticut Settlement: No settlement reached yet; regulatory decision expected mid-December with rates effective February 2027.
• QuadVest Depreciation Impact: Fourth-quarter depreciation impact is limited due to regulatory accounting; full impact recognized starting 2027, consistent with company-wide depreciation ranges.
• Affordability Strategy: Management emphasized maintaining low rates (<1% of median household income) and exploring affordability tariffs in Texas during the upcoming rate case.
• Financing Outlook: Equity raised in early 2026 provided flexibility to defer debt issuance; plan includes using equity to repay $310 million parent debt maturity in 2029.

Other Key Points:

• H2O America has paid a dividend for over 80 consecutive years, increasing it for the past 58 years.
• The company serves over 1.7 million people across four states (California, Connecticut, Maine, Texas).
• Cybersecurity is now viewed as an enterprise and operational resilience priority due to rising nation-state threats to water systems.
• California water supply investment opportunities are in early development phases, projected to span 5-10 years and remain independent of near-term growth forecasts.
• The acquisition of QuadVest adds significant scale and a robust development pipeline to the Texas Water Company subsidiary.