H2O AMERICA Q3 FY2026 earnings call

• Financial Performance: Reported Q3 2026 GAAP diluted EPS of $0.99 and adjusted diluted EPS of $1.04. Year-to-date adjusted diluted EPS was $2.30. Results were consistent with internal expectations.
• Acquisition Closure: Successfully closed the acquisition of QuadVest (Texas-based) on October 1, 2026, and expects to close the Cibolo Valley acquisition shortly thereafter. These acquisitions are key to building a stronger utility portfolio in Texas.
• Customer Growth: Active connections at QuadVest increased 14% year-to-date in 2026, following 16% growth in 2025. Connections under contract and pending development also grew 13%, indicating robust future growth potential.
• Regulatory Progress: Advancing general rate cases (GRC) in Connecticut and Maine. In California, working on PFAS remediation approval and preparing for the 2028-2030 GRC. In Texas, addressing a recent PUCT decision that resulted in a revenue decrease, while preparing for a combined GRC filing in early 2027.
• Cybersecurity Focus: Emphasized the critical need for cybersecurity investments due to rising nation-state threats and vulnerabilities in water systems. H2O America is joining the Alliance for Critical Infrastructure (ACI) to enhance resilience.
• Capital Investment: Adjusted full-year 2026 company-funded capital investment plan to approximately $465 million (down from $483 million) due to higher developer-funded capital in Texas. However, the total five-year Texas CapEx budget remains unchanged at $766 million, and the consolidated five-year CapEx budget remains at $2.7 billion.

The provided transcript does not contain specific financial data broken down by distinct product segments (e.g., separate revenue figures or percentage contributions for individual subsidiaries like San Jose Water, Connecticut Water, Maine Water, or Texas Water). The company reports consolidated financial results.

• Standalone 2026 Guidance: Narrowed standalone 2026 adjusted diluted EPS guidance to $3.10–$3.16 per share, preserving the prior midpoint of $3.13.
• Combined 2026 Guidance: Provided new 2026 adjusted diluted EPS guidance including QuadVest impacts: $2.91–$2.97 per share. This represents approximately 6% dilution from the standalone midpoint, better than the previously expected 10–20% range due to the late closing date.
• Long-Term Plan: Maintained confidence in the 2026–2030 five-year plan, targeting an organic EPS CAGR of 6%–8%. Expects a 13% rate-based CAGR off the year-end 2025 estimated rate base.
• 2027 Outlook: Anticipates 2027 dilution from standalone plans to be in the 10–20% range, driven by full-year QuadVest operations and stepped-up depreciation. Will provide full 2027 guidance in February 2027 alongside Q4 results.

• Regulatory Lag and Outcomes: Risk of unfavorable regulatory decisions, as seen in Texas where a recent PUCT proposal resulted in a significant annual revenue decrease ($238,000), which management described as disappointing despite prepared offsets.
• Water Supply Costs: Increased water production expenses due to higher per-unit costs for purchased water and groundwater extraction fees, impacting net income.
• Cybersecurity Threats: Increasing risk from nation-state actors and coordinated attacks on water utilities, requiring continuous investment in IT and operational technology security.
• Interest Rates and Housing Market: Interest rates and housing market conditions pose risks to customer connection growth, although Texas/Houston markets have shown resilience.
• Infrastructure Aging: Need for extensive proactive infrastructure investment to minimize system failures and water loss, balancing affordability with reliability.

Q: Analyst asked why the Texas General Rate Case (GRC) filing shifted from early 2027 to the first half of 2027 and if this changes the effective date for new rates. / A: Bruce Hauk explained the shift is primarily due to the later-than-expected closing of the QuadVest (Oct 1) and Cibolo Valley acquisitions. Additionally, management noted increased scrutiny and documentation requirements from interveners in recent Texas dockets. They want to file a robust case rather than rushing, ensuring all necessary information is included for the commission and interveners. The timeline allows for thorough preparation given it has been over 10 years since their last Texas rate case.

Q: Analyst asked about the drivers behind the lower 2026 capital expenditure guidance and which states are impacted. / A: Ann Kelly clarified that the reduction is primarily in Texas, where there was more developer-funded capital expenditure compared to company-funded capital. This shift reduces the current year's company-funded CapEx but does not change the long-term five-year Texas CapEx budget of $766 million; the funds simply shift into the 2027-2030 period. The consolidated five-year capital budget remains at $2.7 billion.

Q: Analyst asked about variables that could drive 2027 dilution toward the high or low end of the 10-20% range versus the standalone plan. / A: Ann Kelly identified two main drivers: timing and depreciation. Timing affects how much of QuadVest’s operations are included in the full-year 2027 results compared to 2026. Depreciation is a key factor, as 2027 will include a full year of stepped-up depreciation associated with the new assets. Andrew Walters noted that these factors generally push dilution toward the higher end of the range.

Q: Analyst asked for updates on California water supply investment opportunities and whether they would impact near-term growth forecasts. / A: Andrew Walters emphasized that water supply development is a long-term process (5-10 years) involving partner alignment and pilot projects starting next year. He stressed that current growth forecasts are independent of these water supply projects and should not be viewed as dependent on them for the next five years. The focus is on securing value for customers through resilient supply chains over the longer horizon.

Q: Analyst asked about the balance between rate base recovery and affordability in the upcoming Texas GRC, and thoughts on interest rate sensitivities. / A: Bruce Hauk stated that affordability is a priority, noting that Texas currently lacks an affordability tariff unlike other jurisdictions. They aim to propose a solution for ratepayer assistance in the filing. Andrew Walters added that resilience and reliability are equally important, aiming for 'value for money.' Regarding interest rates, Walters acknowledged the risk but highlighted the resilience of the Houston housing market, citing relocation trends as a buffer against broader national housing slowdowns.