H2O America (HTO) Q3 2026 Earnings Call Transcript

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DATE

Tuesday, Oct. 27, 2026

CALL PARTICIPANTS

• Senior Director of Treasury and Investor Relations - Jonathan Reeder
• Chair of the Board and Chief Executive Officer - Andrew Walters
• Chief Financial Officer and Treasurer - Ann Kelly
• President and Chief Operating Officer - Bruce Hauk

TAKEAWAYS

• GAAP Diluted EPS -- $0.99 for the quarter, compared to $1.27, reflecting a decrease due to a higher share count and increased operating expenses.
• Adjusted Diluted EPS -- $1.04 for the quarter, reflecting a $0.22 per share dilutive impact from an increased weighted average share count.
• Operating Revenue -- $250.2 million for the quarter, growing 4% primarily due to $16.2 million in rate relief and higher pass-through water supply costs.
• Standalone Adjusted Diluted EPS Guidance -- $3.10 to $3.16 for the full year, narrowed from the prior range of $3.08 to $3.18 while maintaining the $3.13 midpoint.
• Post-Acquisition Adjusted Diluted EPS Guidance -- $2.91 to $2.97, including the full-year impacts of the Quadvest and Cibolo Valley acquisitions and associated financing.
• Quadvest Active Connections -- 62,200 at the end of September, representing a 14% increase through the first nine months of 2026.
• Quadvest Development Pipeline -- 98,300 connections under contract and pending development, increasing 13% from 87,000 at the end of 2025.
• Company-Funded Capital Investment -- $465 million planned for 2026, revised from $483 million as developer-funded capital in Texas grew more than anticipated.
• Five-Year Capital Budget -- $2.7 billion through 2030, which management expects will drive a 13% rate base CAGR.
• Connecticut Revenue Request -- $28.8 million in annual revenue increases sought through a pending general rate case involving $145 million in infrastructure investments.
• Maine Revenue Request -- $9.5 million annual increase requested to recover approximately $36 million of infrastructure investments by the end of 2026.
• California PFAS Remediation -- $176 million estimated capital cost for the Williams Station project, with a proposed decision expected in the second quarter of 2027.
• Equity Issuance Proceeds -- $330 million netted from the settlement of approximately 6.5 million shares under a forward equity agreement in late September.
• Texas Revenue Adjustment -- $238,000 annual revenue decrease effective Oct. 1, 2026, following a regulatory decision on the third System Improvement Charge mechanism application.
• Water Production Expenses -- $103.3 million for the quarter, an increase of $5.0 million primarily due to higher average per-unit costs for purchased water.
• Depreciation and Amortization -- $32.5 million for the quarter, up $3.7 million due to utility plant additions placed in service.
• Long-Term EPS CAGR Target -- 6% to 8% for the 2026 to 2035 period, with management expecting performance at or above the top end of this range through 2030.
• Quarterly Cash Dividend -- $0.44 per share, representing an annualized rate of $1.76 per share.
• Texas Customer Base Projection -- 26% of the consolidated customer base by 2029, increasing from 8% at the end of 2025 due to recent acquisitions.
• Weighted Average Diluted Shares -- approximately 20% higher year to date, reflecting the impact of the March 2026 equity issuance and ATM program activity.
• Texas CapEx Budget -- $766 million planned for the 2026 to 2030 period, which remained unchanged despite the shift in 2026 funding sources.

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RISKS

• Andrew Walters stated, "interest rates are absolutely a risk," noting that while the housing market has shown resilience, borrowing costs impact the overall home-buying environment.
• Andrew Walters noted that "Nation-state activity has moved cybersecurity from a technology concern to an enterprise and operational resilience priority," citing recent coordinated attacks on water systems in other states.
• Bruce Hauk stated the company was "disappointed by the PFD" in Texas, which resulted in a $238,000 annual revenue decrease because evidence provided in rebuttal testimony was not given the appropriate weight.

SUMMARY

H2O America (NASDAQ:HTO) reported third quarter results and narrowed its full-year standalone guidance as it began the integration of the newly closed Quadvest acquisition in Texas. Management reported that the company's financial performance met internal expectations despite the dilutive impact of a 20% increase in weighted average diluted shares outstanding. The company indicated it is increasing its portfolio concentration in Texas, where it anticipates customer connections will grow from 8% to 26% of the consolidated total by 2029. Regulatory activity continues across multiple jurisdictions, with management pursuing over $180 million in combined rate recognition for infrastructure investments in Connecticut and Maine while preparing for a major California general rate case filing in early 2027.

• Efficiency strategy: CEO Walters stated, "every dollar of avoided operating expense enables the recovery of $7 of much needed capital investments with a neutral impact on customer bills."
• California legislative progress: Governor Newsom signed Senate Bill 1153, which strengthens wildfire resilience requirements and clarifies water utilities' wildfire liability limitations.
• Cybersecurity resilience: The company announced its participation in the Alliance for Critical Infrastructure, a group of 50 companies across six lifeline sectors focused on physical and cyber resilience.
• Affordability metrics: Management reported that its water rates across all jurisdictions currently remain below 1% of median household income.
• Texas documentation focus: Bruce Hauk indicated the company is taking additional time to file its 2027 Texas rate case to incorporate more extensive documentation requested by interveners in recent filings.
• Quadvest accretion: Management stated that the Quadvest acquisition is expected to begin delivering financial accretion in 2028.

INDUSTRY GLOSSARY

• AMI: Advanced Metering Infrastructure, an integrated system of water meters and communication networks for automated data collection.
• FCBA: Full Cost Balancing Account, a regulatory mechanism in California that tracks differences between authorized and actual water production costs.
• GRC: General Rate Case, a formal proceeding before a utility commission to determine the rates a utility can charge its customers.
• PFAS: Per- and polyfluoroalkyl substances, a group of synthetic chemicals subject to environmental regulations that require specialized remediation in water supplies.
• SICC: System Improvement Charge, a regulatory mechanism allowing for the recovery of infrastructure investment costs between major rate cases.
• STM: Sale Transfer Merger, a regulatory filing required for the approval of utility asset acquisitions or consolidations.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the H2O America 2026 Q3 financial results call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question, please press star 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 again. I would now like to hand the conference over to your speaker today, Jonathan Reeder.

Jonathan Reeder: Thank you. Welcome to the third quarter of 2026 financial results conference call for H2O America. My name is Jonathan Reeder, and I am the Senior Director of Treasury and Investor Relations for H2O America. Presenting today will be Andrew Walters, Chair of the Board and Chief Executive Officer, Ann Kelly, Chief Financial Officer and Treasurer, and Bruce Hauk, President and Chief Operating Officer. For those who would like to follow along, slides accompanying our remarks are available on our website at h2o-america.com. Before we begin today, I would like to remind you that this presentation and related materials posted on our website may contain forward-looking statements.

These statements are based on estimates and assumptions made by the company in light of its experience, historical trends, current conditions, and expected future results, as well as other factors that the company believes are appropriate under the circumstances. Many factors could cause the company's actual results and performance to differ materially from those expressed or implied by the forward-looking statements. For a description of some of the factors that could cause actual results to be different from statements in this presentation, we refer you to financial results press release and to our most recent Forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission, copies of which may be obtained on our website.

All forward-looking statements are made as of today, and H2O America disclaims any duty to update or revise such statements. You will have an opportunity to ask questions at the end of the presentation. This webcast is being recorded, and an archive of the webcast will be available until January 26, 2027. You can access the press release and the webcast at H2O America's website. In addition, some of the information discussed today includes the non-GAAP financial measures of adjusted net income and adjusted diluted earnings per share that have not been calculated in accordance with generally accepted accounting principles in the United States or GAAP.

These non-GAAP financial measures should be considered as a supplement to the financial information prepared on a GAAP basis rather than an alternative to the respective GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the table in the appendix of our presentation. I will now turn the call over to Andrew.

Andrew Walters: Welcome, everyone, and thank you for joining us today. We are pleased to provide you with an update on our third quarter 2026 results, as well as the exciting progress our team has made with regards to executing our long-term value creation strategy. During the third quarter, we earned $0.99 per share on a GAAP diluted basis and $1.04 per share on an adjusted diluted basis. This brings our year-to-date 2026 earnings per share to $2.13 on a GAAP diluted basis and $2.30 per share on an adjusted diluted basis. Our third quarter and year-to-date results are consistent with our internal expectations in support of both our 2026 guidance as well as our long-term financial growth targets.

Ann will discuss we are narrowing our standalone 2026 adjusted diluted EPS guidance to $3.10-$3.16 per share, which preserves the prior $3.13 per share midpoint. We remain confident in our ability to deliver on our 2026-2035 year plan, as well as our long-term EPS CAGR target of 6%-8%. Before I ask Ann to discuss our financial results in more detail, for those people on this call that do not yet know, I am very excited to announce that we closed on the purchase of Houston, Texas-based Quadvest at the beginning of this month.

This is a significant milestone in our strategy to build a stronger utility portfolio, and I want to express my sincere thanks to all of my internal partners across H2O America that have helped us get to this point. It is a tremendous accomplishment, but we all know our work is far from complete as we continue to integrate Quadvest and bring to bear the numerous benefits of this transformative acquisition, including delivering on the anticipated accretion beginning in 2028. I also want to take a minute to thank all of the hardworking Quadvest team members for their support in bringing our two companies together and welcome them to H2O America team.

Quadvest brings an experienced team dedicated to providing dependable service to their customers, a strong development pipeline, and longstanding community relationships to our Texas Water Company subsidiary. I truly look forward to the great things that I know we will achieve together. One final point on Quadvest, Bruce will elaborate on this later in the call, is that realized customer growth remains robust with active connections up 14% in 2026, and we have a good line of sight on above-average growth continuing in the years ahead. In addition to Quadvest, I am pleased to report we have been advancing the ball in our pending Connecticut and Maine general rate cases.

In order to continue making the much needed water infrastructure investments across our national footprint of systems necessary to provide high quality, reliable service to our customers, we have to constructively engage our key local stakeholders in a consensus-building process as we pursue the timely rate recognition of those investments, while being mindful of affordability. Our regulatory folks have been working tirelessly to keep both rate cases progressing according to their procedural schedules, and we anticipate constructive outcomes as a result of these efforts. In addition, our teams in California and Texas are placing a great deal of thought into preparing their own general rate case filings, which will be made in the months ahead.

Bruce will provide additional updates on each of our states in a few minutes, but now I will turn the call over to Ann to provide details on our third quarter 2026 financial results and key elements of our five-year financial plan. Ann?

Ann Kelly: Thanks, Andrew. Yesterday, after the markets closed, we released our third quarter and year-to-date 2026 operating results. As Andrew mentioned, we reported third quarter 2026 diluted EPS of $0.99 and year-to-date diluted EPS of $2.13 per share. On an adjusted basis for the third quarter of 2026, we earned adjusted diluted EPS of $1.04, which compares to $1.27 during the third quarter of 2025. On a year-to-date basis, our 2026 adjusted diluted EPS was $2.30 compared to $2.53 during the same period of 2025. These results were consistent with our internal expectations and supportive of the standalone 2026 adjusted diluted EPS guidance of $3.08-$3.18 that we established back in February.

While our adjusted net income is 8% higher through September 30, 2026, compared to the same period in 2025, this was more than offset by the higher share count as weighted average diluted shares outstanding were roughly 20% higher in the 2026 period as a result of leveraging our ATM program throughout 2025 and our equity issuance in March of this year. The year-to-date impact of opportunistically raising the equity in early March, partially offset by the reduction in interest expense and interest income generated from the funds, reduced our EPS by a net $0.17.

For those of you keeping track on our progress against our standalone 2026 adjusted diluted EPS guidance, adding that $0.17 to the aforementioned $2.30 of adjusted diluted EPS puts us at $2.47 of standalone adjusted diluted EPS through the first nine months of the year. This is slightly behind the $2.53 during the same period last year, due primarily to higher depreciation and operating expenses not currently reflected in our rates, as well as the prior year's equity issuances. Based on these results, and with only one quarter left in the year, we are trimming $0.02 off the high end and low end of our standalone range.

Our narrowed standalone 2026 adjusted diluted EPS guidance range of $3.10-$3.16 preserves the $3.13 midpoint. Further, in an effort to be as transparent as possible and level-set everyone's expectations now that the Quadvest acquisition is closed, we are providing a 2026 adjusted diluted EPS guidance range that includes the impacts of our Texas acquisitions and the financings thereof throughout the entire year. That range is $2.91-$2.97. At the midpoint, this equates to roughly 6% dilution from the midpoint of our 2026 standalone guidance. This is less than our previously communicated 10%-20% range of expectation, which is primarily due to the timing of the Quadvest closing on October 1, as opposed to our initially assumed mid-2026 date.

In terms of executing on our capital budget, our teams remain productively deploying capital across our service territories. However, due primarily to increased levels of developer-funded capital at our Texas subsidiary, partially offset by the inclusion of planned Quadvest CapEx following the October 1 close of the acquisition, we are adjusting our full year 2026 company-funded capital investment plan to approximately $465 million from $483 million. That said, the lower amount of expected 2026 company-funded capital investments in Texas simply shifts into the 2027 to 2030 period, such that there is no change in our $766 million of total planned Texas CapEx over the 2026 to 2030 period, and our consolidated five-year capital budget remains at $2.7 billion.

This shift is depicted in the appendix of our presentation on slide 23. Through the first nine months of the year, we have invested $325 million into company-funded infrastructure improvements. Moving to slide 8, I'd like to briefly discuss the key Q3 drivers resulting in the lower year-over-year adjusted EPS. Since the drivers are similar, I will keep the Q3 discussion higher level, but then provide more details when discussing the year-to-date results. During Q3, we realized a $0.25 per share increase due to higher revenues, with the bulk of this driven by rate relief, as well as higher revenues from pass-through water supply costs.

The revenue increase was partially offset by higher water production expenses of $0.13, primarily reflecting higher water supply costs. We also had an increase in other operating expenses of $0.16, with the biggest component being $0.09 of higher depreciation and amortization expense associated with utility plant additions placed in service. The remaining drivers relate to $0.22 of dilution due to the increase in the number of shares outstanding, partially offset by $0.03 of net other benefits. As for taxes during the third quarter, our effective income tax rate in both the 2026 and 2025 periods was 11%. Moving on to the year-to-date results on slide 9, we illustrate the key drivers resulting in the year-over-year EPS variance.

We realized a $0.95 per share increase due to higher revenues. Roughly two-thirds of this, or $0.64, was driven by rate relief primarily received from the prior general rate case in California and infrastructure surcharges in Connecticut, Maine, and Texas. There was also $0.44 of higher revenues for pass-through water supply costs that are largely offset in our water production expenses, such that they do not impact our net income. Customer growth contributed an additional $0.03. Offsetting a portion of these positives were $0.11 of lower revenues as a result of decreased regulatory mechanism adjustments, as well as $0.05 from lower customer consumption. The revenue increase was partially offset by higher water production expenses of $0.42.

The increase was attributable to $0.41 of higher water supply costs due to the increases in the average per-unit cost for purchased water and groundwater extraction fees, as well as $0.12 from increases in water production balancing and memorandum accounts, primarily related to the Full Cost Balancing Account in California. These increases were partially offset by a $0.09 decrease in water production expenses as a result of increased availability from surface water, as well as a $0.02 decrease from lower customer consumption. In addition, other operating expense increased $0.46. The biggest driver here was a $0.28 increase in depreciation and amortization attributable to new utility plants placed in service, while higher administrative and general expenses were a $0.13 headwind.

The remaining drivers relate to $0.44 of dilution, which I mentioned earlier stemmed from the ATM share issuances in 2025 and our March 2026 equity raise. This was partially offset by $0.14 of net other benefits, including $0.05 of higher investment income and $0.05 of lower tax expense. Our effective income tax rate for the nine months ended September 30, 2026, was 14% versus 16% during the same period, 2025. The lower effective tax rate was primarily due to higher flow-through tax benefits.

Shifting from the year-to-date results to our full year 2026 and beyond expectations, the majority of the details on the figure on slide 10 should look familiar to everyone as we are reiterating all aspects of our financial guidance, including our expectations to deliver a nonlinear EPS CAGR over the 2026 to 2030 period at or above the top end of our 6%-8% long-term organic EPS growth target. As previously mentioned, with the close of the Quadvest acquisition, we are able to provide more specifics on the 2026 dilutive impacts while continuing to believe 2027 dilution could be in the 10%-20% range compared to our standalone plan, which is consistent with our previous comments.

We plan to initiate 2027 guidance for the company, including the impacts from the Quadvest and Cibolo Valley acquisitions in February in conjunction with our fourth quarter update. We also plan to roll forward our five-year CapEx budget at that time. Our 2026 to 2030 financial plan remains rooted in our $2.7 billion capital investment budget, combined with the addition of Quadvest. The two are expected to drive a 13% rate base CAGR off our year-end 2025 estimated rate base of $2.8 billion. Our team remains committed to not just delivering the rate base growth, but converting it into attractive earnings growth.

We believe we can execute on this plan by continuing to work constructively with our regulators and other key constituents to achieve fair and timely outcomes that minimize regulatory lag while finding ways to operate more efficiently to not only provide our customers with best-in-class service, but at affordable rates. As a reminder, our plan does not include any M&A opportunities beyond Quadvest and Cibolo Valley. We remain excited about our five-year plan and long-term prospects. Turning to the financing and credit side of things on slide 11. Recall, we previously indicated that our upsized equity offering in early March has afforded us flexibility with respect to our planned $100 million-$200 million of debt to fund the Quadvest acquisition.

As such, at the end of September, we leaned more into equity as we settled nearly 6.5 million shares under the $400 million, two-year forward equity agreement. This netted us $330 million in proceeds, which, in conjunction with the $290 million of net equity proceeds received in March, have been used to fund the close of the Quadvest acquisition along with our base CapEx throughout the year. We have $169 million available under our $370 million bank lines of credit, which along with our A- credit rating, results in a strong liquidity position to fund our daily operations as well as the capital needed to support our longer term capital investments.

We continue to expect to de-lever our balance sheet and strengthen our credit metrics over the course of a five-year plan, which includes an assumption that we will issue equity to repay our $310 million parent debt maturity in 2029. With that, I will turn the call over to Bruce to provide some regulatory and legislative updates as well as some brief Quadvest comments.

Bruce Hauk: Thank you, Anne. I am pleased to update everyone on the progress our teams have made on the regulatory and legislative front since our second quarter update. As usual, I will start with our biggest subsidiary, San Jose Water. We continue to work through the application we filed in April with the CPUC for our planned $176 million ion exchange PFAS remediation project at our Williams Station. We are seeking approval and recovery of this investment outside of the GRC process. Earlier this month, the ALJ set the dates for evidentiary hearings in late January. As such, we expect a proposed decision to be issued during the second quarter of 2027.

If approved, SJWC would adjust rates as the capital is invested via annual rate-based filing offsets, similar to the recovery approach afforded to our current AMI project, which remains on track to be completed around the end of this year. Although high-profile wildfire reform legislation failed to make it across the finish line during California's 2026 regular session, a significant piece of wildfire legislation pertaining to water utilities unanimously passed both chambers and was signed by Governor Newsom in late September.

Senate Bill 1153 strengthens water utilities' wildfire resilience by requiring all urban retail water suppliers serving 3,300 or more persons and serving a high or very high fire hazard severity zone to include incident-specific response procedures for wildfires as part of their disaster preparedness plans. Importantly, SB 1153 also clarifies water utilities' wildfire liability limitations. We view this as a positive step toward mitigating wildfire risk for water utilities and appreciate the legislature's support. Finally, I would just note that the California team continues preparations for the 2028 to 2030 GRC filing that will be made in January 2027. Shifting to Connecticut, our GRC continues to advance in accordance with the procedural schedule.

After a thorough discovery process where our team responded to more than 1,300 questions, evidentiary hearings were completed earlier this month. A proposed decision is anticipated in mid-December, and a final decision is slated for late January. As a reminder, our application requests a $28.8 million increase in annual revenues as Connecticut Water seeks recovery for the approximately $145 million of infrastructure investments made between its last rate case and the end of 2026, as that investment is not yet reflected in current rates. Moving on to Maine on slide 14.

Maine Water is in a similar situation to Connecticut Water as the team continues to work through the GRC that was filed in mid-April, requesting a $9.5 million increase in annual revenues to recover approximately $36 million in infrastructure investments that have been made or are expected to be made in the state by the end of 2026 and are not currently in rates. Maine's adopted procedural schedule, in accordance with the state's 12-month statutory timeframe, has evidentiary hearings scheduled to begin early January, and we expect new rates to be effective by May 2027.

The only other item to note with respect to Maine is that the MPUC Chair, Phil Bartlett, resigned effective earlier this month to pursue an opportunity in the private sector. We would like to take a moment to thank Chair Bartlett for his contributions and service while at the commission. Commissioner Patrick Scully is serving as the acting Chair until a permanent replacement is nominated by Maine's next governor and confirmed by the Senate. As for Texas, the PUCT on 10/1 adopted the administrative law judge's proposal for decision, or PFD, in our third SICC mechanism application, and a $238,000 annual revenue decrease went into effect.

As we discussed on our second quarter call, we were disappointed by the PFD as the evidence that we provided in our rebuttal testimony was not given the appropriate weight. But in the event the PFD was adopted, we were prepared by identifying financial offsets that we could make to address the gap during the remainder of the year and still deliver on our EPS guidance. We strive for continuous improvement. As part of that commitment, we can and will make improvements in future filings now that we have a better understanding regarding documentation expectations of certain interveners.

These lessons learned will be incorporated in the combined company GRC that Texas Water plans to file during the first half of 2027 in order to recover the significant supply and reliability investments made in recent years, including those we have sought recovery of via our latest SICC filing and to recognize Quadvest and Cibolo Valley's rate base. Speaking of our two Texas acquisitions, we received the PUCT's approval of the Cibolo Valley sale transfer merger, or STM, filing in mid-September and expect to close the acquisition next week. As for Quadvest, we closed the acquisition on October 1.

As Andrew mentioned, we are thrilled to welcome Quadvest customers and employees to being a part of Texas Water and H2O America. Finally, I do want to take a few minutes to update everyone on the robust connection growth that Quadvest water and wastewater system continues to realize in the Houston area. As shown in the figure on slide 15, Quadvest was serving roughly 62,200 active connections at the end of September. This represents a 14% increase thus far in 2026 and keeps Quadvest on track for another year of impressive growth following the 16% growth realized during 2025.

What is equally impressive is that even as Quadvest pipeline converts into active connections, the number of connections under contract and pending development has been more than replenished, which extends the longevity of the growth profile. Specifically, Quadvest's 98,300 connections under contract and pending development at the end of September 2026 is 13% higher than the 87,000 at year-end 2025, despite converting roughly 7,700 connections into active customers during the first nine months of 2026. Of course, future connection growth will vary based on a number of conditions, so this is no guarantee of the future pace of growth.

However, these results are in line with our range of expectations, and we believe solid growth will continue in the greater Houston area. As a reminder, the addition of Quadvest's active customers, plus the continued conversion of the connections under contract and pending development, is the primary contributor that is expected to drive Texas from 8% of our consolidated customer base today to 26% by 2029. Between Quadvest and Cibolo Valley, plus our existing Hill Country operations, we are very excited about our long-term growth potential in Texas. That concludes my regulatory updates, and I will now turn the call back over to Andrew.

Andrew Walters: Thank you, Bruce. Before opening up the call to Q&A, I wanted to emphasize three points. First, affordability has been for years and continues to be a top priority for our company. We will continue to work with our partners in our states to keep rates as affordable as possible for our customers. This includes continuously striving to run the business as efficiently as possible, knowing that every dollar of avoided operating expense enables the recovery of $7 of much needed capital investments with a neutral impact on customer bills.

That is why we are exploring the water supply investment opportunities at our California subsidiary that we discussed on our last call, as we truly believe it could be a win-win-win for our customers, regulators, and our capital partners. But make no mistake, we do have to balance affordability with the extensive infrastructure needs throughout our service territories, all while providing high quality, reliable service. This means continuing to invest on a proactive basis to minimize system failures and water loss while ensuring the resiliency of our operations and water supply for the long term.

The second point, which is somewhat related, is the intense need to make the proper cybersecurity investments needed to protect both our IT and operational technology, and with it, more broadly, the public's health. Just last week, there was the high profile PHP vulnerabilities that were uncovered, and then earlier this year, as I am sure many of you were aware, there were coordinated attacks on community water and wastewater systems in Minnesota and other states by potential Iranian hackers. Nation-state activity has moved cybersecurity from a technology concern to an enterprise and operational resilience priority. While frontier AI models present considerable opportunities for advancements, they also pose unprecedented digital and physical risk in the wrong hands.

Water utilities have to safeguard their own assets while also planning to sustain their essential services if another sector, such as energy or communications, is disrupted. We therefore need to continue to invest in cybersecurity to address the ever-changing landscape and risk. I am proud to highlight the recent announcement that H2O America is participating in the Alliance for Critical Infrastructure. ACI brings together roughly 50 companies across six lifeline sectors to strengthen the physical and cyber resilience of the critical infrastructure Americans depend on every day. We have to take and respond to these risks seriously.

Public welfare truly depends on it, and we are encouraged by the understanding and support we have for these efforts from our key constituents, including our state regulators. The final point I'd like to make is more of just a reflection on the considerable regulatory and legislative progress our teams have made in recent years. They are tremendous for a company of our size. Successfully navigating the fair market value determination and STM approval processes for the Quadvest and Cibolo acquisitions was no small feat, and we accomplished it while progressing the Connecticut and Maine general rate cases and preparing for the California and Texas ones.

Then there are the risk mitigating and return enhancing regulatory and legislative improvements that we have helped get approved from California Senate Bill 1153 and Maine's consolidation of rate jurisdictions this year to the approval of the WQTA, the nation's first PFAS recovery mechanism in Connecticut, as well as getting the ability to use a forward-looking rate case test year in Texas. What this progress means is that roughly 80% of our planned capital investments over 2026 to 2030 period qualify for timely regulatory recovery.

I could go on, but we will stop there and just say, I couldn't be more proud to lead this company and the great people that I get to call my partners on a daily basis. Our work is not done. We have a very busy regulatory agenda over the next 18 months, but I believe we are in a great position to execute both operationally and financially and continue to create meaningful value for all our stakeholders. With that, I will turn the call back over to the operator for questions.

Operator: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for questions. Our first question goes from Shar Pourreza with Wells Fargo. You may proceed.

Andrew Kadavy: Hi. Actually, this is Andrew on for Shar.

Andrew Walters: Hi, Andrew.

Andrew Kadavy: Thanks for taking my question. With the Texas GRC filing shifting from early 2027 to the first half of 2027, first, what is driving that shift? Second, does that shift come with a change in when we should expect new rates to be effective in Texas?

Bruce Hauk: Thanks, Andrew, and I will take that question. This is Bruce. We originally said early 2027, and we were expecting a mid-2026 close for those Texas acquisitions. As you know, we closed 10/1 on Quadvest, and we expect to close on Cibolo on 11/2. That shift in itself caused the timing of our rate case potential filing to be shifted a bit. We have also learned in some of the most recent docketed filings that there has been a real scrutiny and increased request for documentation. We want to take the time needed to file a robust case. As you can imagine, we have not filed a rate case in Texas for over 10 years.

We want to take the time that is required to be able to put forth the best case we can possible with all the information that the commission and the intervening parties will be looking for.

Andrew Walters: Does that help, Andrew?

Andrew Kadavy: Appreciate it. Thank you. On the lower CapEx for 2026, what is the driver there? Which states are impacted most by that lower figure?

Ann Kelly: Yeah, that is primarily in Texas, and it is just because we had more developer-funded CapEx than company-funded CapEx. As I mentioned earlier, that will just shift into the later period of the five-year plan. Our five-year plan for CapEx in Texas remains the same.

Andrew Kadavy: Great. Thank you. I will leave it there.

Andrew Walters: Thank you, Andrew.

Operator: Thank you. Our next question comes from Ross Fowler with Bank of America. You may proceed.

Ross Fowler: Morning, Andrew. Morning, Ann. Morning, Bruce. How are you?

Andrew Walters: Good morning.

Ann Kelly: Morning.

Ross Fowler: Just a couple questions from me. The first one is just as I think about the 2027 dilution of 10%-20% versus the standalone plan, what kind of variables should I think about or watch next year in 2027 that drive that towards one end of that range versus the other?

Ann Kelly: Yeah. So a couple of things. One is we had talked about 10%-20% dilution for 2026 and 2027. You saw that in 2026 that our dilution was actually under the 10% because of the late closing. So timing has a lot to do with it, and we will have a full year of Quadvest operations as well as the dilution in our results for next year. In addition is the step-up in depreciation, and so we will have a full year of stepped-up depreciation in our results for next year. So those are the two main areas that are driving that dilution.

Andrew Walters: Right. It will drive it to the higher end of that range is the idea behind the range that we gave in the first place.

Ross Fowler: Got it, Andrew. Thank you. Andrew, you mentioned at the very end of the call in one of your three points, sort of thinking about California water supply and how that fits together around the affordability conversation. Any sort of detailed updates as to how those conversations are progressing? I would imagine, and correct me if I am wrong, that you kind of want that sorted before you go in for the California rate case? So just some perspective there.

Andrew Walters: Yeah. It's an excellent question, Ross, and it's good that you're bringing it up in this context because the water supply development is not just a 2, 3-year process. It's going to be more like a 5 to 10-year process for us to get those types of projects put together and developed. We have to work with partners. The thing I will say is we are making good progress. The team here in California is really doing a strong job of working on getting those projects outlined, getting those potential partners lined up that we need to do. The most important piece to watch for the next step is really the pilot project that we highlighted before.

Just doing the pilot is going to be until next year to start, and then you have to go through the process. I don't want people to start getting overly excited about this for the even near term or even maybe even the medium term, but medium to long, absolutely things are definitely progressing exactly as they should.

Ross Fowler: All right. That makes sense. Thank you.

Andrew Walters: Thank you.

Operator: Thank you.

Andrew Walters: Okay. Ross, one thing I am just going to follow up. I know that you finished your question, but I want everybody to know none of the water supply projects are anywhere near our growth forecast. Those growth forecasts are independent of anything to do with the water supply forecast, too. Just keep careful for the near term because we will not be doing it for the five years. Obviously, for the 10-year, you may be starting to think about it at that point.

Operator: Thank you. Our next question comes from Angie Storozynski with Seaport Research Partners. You may proceed.

Angie Storozynski: Good morning. First, I wanted to ask about Connecticut. We were hoping to see a settlement there. You went through the hearings. Why no settlement? Is there any particular point that you guys cannot agree on? Is it maybe just because this is a new commission? Thank you.

Bruce Hauk: Thank you, Angie, and appreciate your question. As it relates to settlement discussions, we are not able to discuss anything regarding that. The only thing that I can share is, again, a proposed decision is anticipated in mid-December, and a final decision is slated for January for effective rates in February. I think that is what we have said in terms of the timing of rates being effective, regardless of whether a settlement would have taken place or not. I think we are still on track for an order and rates effective in February of 2027.

Angie Storozynski: Okay. Moving on to the updated guidance for 2026 inclusive of Quadvest. It is a little bit higher, about $0.10 higher than we all had thought, even accounting for the later closing of the transaction. My question is it just because you guys relied more on equity financing? Or is it that the depreciation expense coming with the asset is slightly lower than expected? Maybe that is the main question is what is that annualized depreciation expense from Quadvest? Thank you.

Ann Kelly: Yeah. Thanks, Angie. That is a great question. There is a dynamic with respect to the depreciation. While we have been approved by the commission to close, there has not been a final order and the certification of the rate making rate base. At that point, that is when depreciation for rate making will start. Because we follow regulatory accounting, we will essentially have a reg asset for any depreciation that comes in the fourth quarter. You really do not see the impact of the depreciation starting until next year.

Angie Storozynski: Understood. So that is roughly $0.10 of a drag. That is the depreciation impact or roughly the depreciation impact related to the fourth quarter. Again, I am trying to solve for the delta between what you guys are guiding to and where I am expecting you to be. So, that is roughly $0.10. Is it, again, trying to imply what the depreciation expense will be on an annualized basis next year?

Andrew Walters: I guess-

Angie Storozynski: For Quadvest.

Andrew Walters: Yeah. To maybe ask the question differently in order to maybe to try to address your question. If we were to just look at Quadvest itself and nothing else, Ann Kelly, what would be the kind of the time frame or something that allow investors to kind of understand what the amortization or depreciation might be specifically, if you've got something that you've talked to investors about around that.

Ann Kelly: Yeah. I would say it is consistent with our depreciation range. I wouldn't expect it to be any different. And then starting again in next year.

Andrew Walters: I think, Angie, it is mostly just timing. It is not necessarily like a modeling issue with maybe the way you looked at it other than the fact

Angie Storozynski: Yeah

Andrew Walters: it is just starting in July.

Angie Storozynski: Okay. Understood. Thank you.

Andrew Walters: You are welcome.

Operator: Thank you. Our next question comes from Alex Kania with BTIG. You may proceed.

Alex Kania: Hey there. Good morning. Just maybe a question going back to Texas. Just what are your kind of thoughts as you are preparing for the upcoming rate case later on in 2027. It is just about finding ways to, I guess, kind of strike a balance between the rate base that obviously you will be following with, given the fair market value determination and just balancing that with thoughts on affordability and making sure that there is appropriate consideration brought to that.

Bruce Hauk: Thank you for the question, Alex, regarding our approach for the rate case, affordability is a big theme and important across the entire country. We have been looking at affordability for a long time, and we are proud of the fact that all of our rates across our entire jurisdiction are lower than 1% as a percent of median household income. We actually have affordability tariffs in three of our four jurisdictions, of which Texas is not one that we do have a tariff currently. As we file the case in Texas, we will be mindful of that and try to approach the commission with a solution for an affordability tariff for ratepayer assistance. That is first on the list.

Second, we have made significant investments in the Hill Country for water supply and resiliency. Many people remember the winter storm of years ago where the grid was taken down. So we made sizable investments in generators and other kind of things for resiliency and reliability. Again, like I said, the water supply. Also, this case will allow us to bring in the rate making rate base for the two acquisitions that we talked on in the prepared remarks for Quadvest and Cibolo Valley.

As we have said before, the rate case will be significant, but we will be thoughtful in the approach we take in terms of how to keep customers first and approach that with the commission and the intervening parties.

Andrew Walters: Alex Kania, I think this goes to the point that I talked about earlier in my remarks that while affordability is definitely a huge focus for our company, so is resilience, reliability, and the best water quality possible for our customers. Those are the things that we will continue to strive for. I think it's all about what I consider to be value for money. Are you getting value for your money on the investments? I can say that we strive very hard to make sure that we're proving out that value for money on the investments for our customers.

Alex Kania: Great. Thanks for that. Maybe just are there any thoughts just on the kind of overall sort of again, the growth environment? Obviously, you were able to add some to the customer connection backlog there, but just any thoughts or just sensitivities to obviously the interest rate environment, something to be kind of higher in mind right now. Just kind of any characterization of that as you look forward would be great.

Andrew Walters: Look, I think from my perspective, certainly the interest rate environment, the impact on the housing market, if you look over time, the rates that we're at today were rates that were pretty consistent with home buyers for many, many years. From that perspective, we're okay. It is a change, to be clear, from where it was before, and it takes time for that to kind of work its way through people's psyche and the way that they approach buying a house. As you think about it and as we think about it, interest rates are absolutely a risk. The housing market is absolutely a risk for us.

Quite frankly, I've been very impressed with the resilience of the housing market impact to date. In particular, the Houston market, where we are based, is an area that offers an incredible value for people that are relocating from other parts of the country. I think that's consistent with why you're seeing continued growth in spite of a more challenging overall market for home building.

Alex Kania: Great. Thank you.

Andrew Walters: Thanks.

Operator: Thank you. As a reminder, to ask a question, please press star one on your telephone. Our next question comes from Davis Sunderland with Baird. You may proceed.

Davis Sunderland: Good morning, everyone. Thank you so much, team, and congrats on getting Quadvest across the goal line.

Andrew Walters: Thank you, Davis. Good morning.

Davis Sunderland: Maybe I will start first. Andrew and Bruce, you guys have covered affordability very, very well. Please forgive me as I risk beating a dead horse here. I guess just to extend from Alex Kania and Ross Fowler's questions from earlier, understand the puts and takes with some of the pushback and maybe appreciate, Bruce, the example of beefing up some of the robustness of documentation and what that means tangibly for you guys.

I guess just looking into next year where you have two big rate cases and ultimately trying to parse through if this is like a temporary change to the way you guys will approach the rate case process and regulatory interactions, just given the inflationary environment and some of the heightened pushback and even rhetoric potentially against some of these utility rate increases, or if you expect this to linger into the future. I guess just trying to understand how you guys are thinking about it strategically.

Andrew Walters: Look, I think generally speaking, we try to have rate cases spread amongst our business units so that we don't have a big group of our units going at the same time. I think the timing of the investments that we were making in the Hill Country necessitated us going in at the time we were going. We had filed these SICs that we had been filing, and there's a requirement to come in for rates. We've got a lot of significant infrastructure that we have invested in order to enhance the water supply. That water supply, just to take a step on that's where the value for the money comes for our customers.

There has been a lot more variability in the way that water comes to us, whether by the rainstorms or the lack of rainstorms. Having this incremental supply and transmission that we purchased with KT Water and the integration in our system, which is hundreds of millions of dollars, is a huge investment for those customers in the Hill Country, but it will pay off by providing a lot greater certainty and risk mitigation. So that's the first part of it.

That's why the timing, though, is consistent with our California rate case, which I would generally speaking, would try to do Connecticut on one time, Texas on one time, and California at one time so that they're spread across the three different times. But there are unique aspects to each of the regulatory jurisdictions that don't necessarily allow such simplicity all the time. Does that help?

Davis Sunderland: Yes, that does. That is perfect. Thank you for that. Maybe just one other quick one for Ann. You talked about it a bit earlier, but just on financing outlook and how we contextualize the slightly later than expected Quadvest closing with what you guys have said about equity and debt needs for the remainder of this year and then looking into 2027 or just financing considerations more broadly. Thank you guys very much.

Ann Kelly: Yeah. Just to reiterate what I said earlier. We did raise $700 million in equity earlier this year with a combination of the equity issuance in March and the forward. What that did is it really provided us with the flexibility in terms of the timing of when to issue debt for the transaction. So we were able to draw down on the forward more than we had originally anticipated to help fund the acquisition this year. That just gives us more flexibility in terms of the timing of our debt issuance.

Operator: Thank you. I would now like to turn the call back over to Andrew Walters for any closing remarks.

Andrew Walters: Thank you. Thank you again for joining us today. H2O America proudly leverages our national platform to support our distinct local operations, all united by a shared mission, delivering reliable service and high quality water to more than 1.7 million people across four states. Together, we protect what is precious. At the same time, we continue executing our growth strategy and delivering shareholder value, including our unwavering commitment to the dividend, which we have paid for more than 80 consecutive years and increased it in each of the past 58. Our success is built on a culture of service and partnership. We value our customers, communities, and the environment, and capital partners.

I could not be prouder of our team, whose dedication makes it all possible. I am always available for follow-up, along with my partners, Ann and Bruce. We appreciate your interest in H2O America.

Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

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