H2O America 2026 Q3 Financial Results Call - H2O AMERICA

Explicit Guidance:

• FY 2026 Adjusted Diluted EPS (Standalone): Narrowed to $3.10–$3.16, preserving the $3.13 midpoint; excludes QuadVest/Cibolo impacts.
• FY 2026 Adjusted Diluted EPS (Including Acquisitions): Provided range of $2.91–$2.97; midpoint implies approx. 6% dilution versus standalone guidance.
• FY 2027 Dilution: Expected to range 10–20% relative to the standalone plan, driven by full-year QuadVest operations and stepped-up depreciation.
• Long-Term EPS Growth: Reiterated target of 6–8% organic CAGR for 2026–2030, with expectations to deliver a nonlinear EPS CAGR at or above the top end of this range.
• Rate-Based CAGR: Projected to drive 13% rate-based CAGR from year-end 2025 estimated rate base of $2.8 billion.
• FY 2026 Company-Funded CapEx: Adjusted downward to $465 million (from $483 million), primarily due to increased developer-funded capital in Texas; $766 million total Texas CapEx for 2026–2030 and $2.7 billion consolidated five-year budget remain unchanged.
• Tax Rate: Effective income tax rate for FY 2026 YTD was 14% (vs. 16% in 2025), driven by higher flow-through tax benefits.
• Financing: Plan to issue equity to repay $310 million parent debt maturity in 2029.

Business-Segment Outlook:

• Texas (Hill Country, QuadVest, Cibolo Valley): Expected to grow from 8% of consolidated customer base (current) to 26% by 2029.
• QuadVest Growth: Active connections up 14% YTD 2026; backlog of connections under contract/pending development stands at 98,300 (up 13% from year-end 2025), extending growth longevity.
• Cibolo Valley: Awaiting closing (expected mid-November 2026); acquisition approved by PUCT.
• Product/Service: Piloting California water supply investment opportunities (5–10 year timeline); pilot project expected to start in 2027.
• Regulatory Mechanisms: WQTA (nation's first PFAS recovery mechanism in CT) and forward-looking rate case test year in Texas recognized; SB 1153 (CA wildfire liability) and Maine rate jurisdiction consolidation approved.

Market and Competitive Outlook:

• Customer Growth: Active connections expected to grow above average; robust growth profile sustained by pipeline conversion in Texas.
• Pricing/Rate Recovery: Approximately 80% of planned capital investments (2026–2030) qualify for timely regulatory recovery.
• Housing Market Sensitivity: Interest rate environment and housing market viewed as risks, though Texas/Houston market shows resilience due to relocation value; rates assumed to normalize historically.
• Infrastructure Demand: Significant backlog of un-recovered infrastructure investments in CT ($145M) and ME ($36M) driving rate case filings.

Macro / Industry Outlook:

• Interest Rates: Acknowledged as a risk to the housing market; however, current levels are viewed as consistent with historical home buyer behavior, with lagged impact expected.
• Cybersecurity/Regulatory Risks: Heightened nation-state activity (e.g., Iranian attacks) elevates cybersecurity from a tech concern to an enterprise priority; H2O America joining the Alliance for Critical Infrastructure (ACI) to mitigate these risks.
• Wildfire Regulation: California SB 1153 clarifies liability limitations for water utilities, viewed as positive for risk mitigation.
• Supply Chain/Inputs: Water supply costs remain elevated due to higher per-unit purchase costs and extraction fees; balancing accounts in California and production balancing accounts impact expenses.

Strategic Initiatives:

• M&A Integration: QuadVest (closed Oct 1, 2026) and Cibolo Valley (closing mid-Nov 2026) integration underway; anticipated accretion beginning in 2028.
• Texas Rate Case: Combined GRC filing with QuadVest/Cibolo rate base included; filing scheduled for first half of 2027 (shifted from early 2027 due to late closing and documentation requirements); new rates expected effective in 2027 post-filing.
• CT Rate Case: Proposed decision anticipated mid-December; final decision late January; new rates effective February 2027 (approx. $28.8M revenue increase requested).
• ME Rate Case: Evidentiary hearings start early January; final decision expected late January; new rates effective May 2027 (approx. $9.5M revenue increase requested).
• CA Rate Case: Preparation for 2028–2030 GRC filing scheduled for January 2027.
• Capital Allocation: $330M proceeds from forward equity agreement (Sept) + $290M from March equity used to fund QuadVest and base CapEx; $169M available under $370M bank lines.

Risks and Headwinds to Outlook:

• Regulatory Lag/Scrutiny: Increased scrutiny on documentation in Texas filings; potential for delay in rate recovery if new rate cases face pushback or extended proceedings.
• Depreciation Timing: Full-year impact of stepped-up depreciation from acquisitions expected in 2027; fourth-quarter depreciation impact in 2026 not yet reflected in rates due to pending final orders.
• Consumer Demand: Interest rate volatility and housing market slowdowns remain key sensitivities for connection growth.
• Operational Risks: Cybersecurity threats (nation-state actors) and water supply variability (drought/rainfall) impacting reliability and cost.
• Acquisition Dilution: 2027 dilution range (10–20%) depends on timing of full integration and depreciation step-ups.

Management Tone on the Future:

• Confidence: High confidence in delivering 2026–2030 five-year plan and long-term targets; describes progress as "excellent" despite "intense need" for infrastructure investment.
• Strategic Patience: Emphasizes "value for money" and balancing affordability with resilience; willing to take time to file robust cases despite regulatory delays.
• Commitment: Reaffirmed 80+ consecutive years of dividend payments and increases over the past 58 years.
• Hedging: No specific mention of M&A beyond current acquisitions; explicit timeline constraints noted on water supply projects (5–10 years) to manage expectations.

Miscellaneous:

• Cybersecurity Partnership: Participation in ACI (50+ companies across 6 lifeline sectors) to enhance physical and cyber resilience.
• Workforce: Welcome of QuadVest team; continued integration of Texas subsidiary.
• Regulatory Leadership: PUC-T PFD adoption resulted in a $238,000 annual revenue decrease for Q3, partially offset by financial adjustments to meet guidance.