H2O America (HTO) Earnings

Management highlights

- Texas Acquisition Progress * The QuadVest acquisition has received PUCT staff recommendation for approval without a public hearing, with no other parties requesting a hearing by the deadline. PUCT approval is expected by the August 26 statutory deadline, with closing planned for the end of Q3 2026 or early Q4 2026. * QuadVest reported strong organic connection growth: it served over 59,800 active connections at the end of June 2026, a 10% increase in H1 2026, following 16% growth in 2025. It also holds 99,000 connections under contract or pending development, a 14% increase from year-end 2025 despite converting 5,400 connections to active status. After closing, the combination of QuadVest, Cibolo Valley and existing Hill Country operations will grow Texas operations from 8% of the consolidated customer base to 26% by 2029. * The Cibolo Valley wastewater acquisition is on track to close in Q4 2026, with a PUCT approval deadline of September 29 if no hearing is required. * A combined general rate case for all Texas operations is planned to be filed in early 2027 after both acquisitions close, with new rates expected to take effect in early 2028. This will allow all completed capital investments to be added to the company's rate base. - California Water Supply Strategy * At San Jose Water Company (SJWC), 42% of customer bill payments go to cover wholesale water costs and groundwater extraction fees set by the unregulated Santa Clara Valley Water District (Valley Water). Valley Water has raised rates at a 10% CAGR and extraction fees at an 11% CAGR over the past 10 years, and current projections show these costs will more than double over the next 10 years, which is unsustainable for customer affordability. * SJWC is exploring two alternative cost-effective water supply solutions to reduce long-term reliance on Valley Water: direct potable reuse (purified water) and a regional desalination plant. Capital expenditures for these projects are not included in the 2026-2030 $2.7 billion capital budget. * For direct potable reuse: a 3 million mobile pilot purification unit is under construction, ahead of schedule, and targeted for completion and public demonstration by September 2027. Development of a full-scale regional plant is underway pending positive pilot results. * A feasibility study for a regional desalination plant on Monterey Bay has been launched to evaluate technical and economic viability. - Core Operational Priorities * The company's core priority is maintaining affordable customer rates while delivering high-quality, reliable water service. Every $1 of avoided operating expense allows $7 of additional capital investment to be recovered without increasing customer bills. * The company maintains a long-standing commitment to its dividend, having paid dividends for over 80 consecutive years and increased the dividend annually for the past 58 years.

Guidance

- No changes to overall financial guidance were disclosed. QuadVest acquisition is expected to cause 10% to 20% dilution to the company's standalone adjusted diluted EPS, driven by the step-up in depreciation from the acquisition's fair market value step-up. - The next general rate case in Texas after the 2027 filing is not expected to be filed for at least three years after the 2028 effective date of new rates from this case. - The 2027 Texas general rate case will include approximately $40 million of used and useful infrastructure investments that were not approved for recovery in the pending SIC filing, plus over $300 million of prior capital investments in the Texas Hill Country system, plus the fair market value of the QuadVest acquisition. - Exploration of alternative water supply projects in California will take 1-2 years to evaluate project viability, with any meaningful capital spending falling outside the current 2026-2030 five-year capital plan.

Segment performance

No segment-level financial performance data (absolute revenues or revenue contribution percentages) were disclosed in the provided transcript.

Risks & headwinds

- Future connection growth at QuadVest is not guaranteed, as it depends on multiple broader market and economic conditions. - Continued rapid cost increases from the unregulated Santa Clara Valley Water District threaten long-term customer affordability for California customers, and past engagement to control these costs has been unsuccessful. - There is no guarantee of settlement for the pending Connecticut rate case, as settlement is not historically common in that jurisdiction, even with the new commission composition. - The timing and structure of QuadVest acquisition financing depends on current market conditions at closing, creating uncertainty around the 2026 weighted average share count. - The company's ability to recover its large Texas capital investments in the 2027 general rate case is subject to PUCT regulatory approval, with no guarantee of the final size or timing of rate increases.

Analyst Q&A

• Q: Analyst asks how the rapid connection growth at QuadVest will impact the timing of future Texas rate cases, and how QuadVest's depreciation will be treated between acquisition close and 2028 rate effectiveness. /

  A: Management confirms the next Texas general rate case will be filed in 2027 for 2028 rates, and no subsequent rate case will be filed for at least three years after that. QuadVest's asset base will be stepped up to its acquisition fair market value, so depreciation will reflect the higher stepped-up value. This step-up is the primary driver of the projected 10% to 20% dilution to standalone EPS from the acquisition. (429 characters)

• Q: Analyst asks if the issues in the pending Texas SIC filing signal a deteriorating regulatory environment for water utilities in Texas, and asks if the company will meet the 2027 filing deadline with an updated depreciation study. /

  A: Management confirms there is no deterioration in Texas' regulatory compact; issues with the SIC filing stem from the company's need to adjust to updated regulatory requirements, not broader regulatory problems. Approximately $40 million of unused SIC-eligible assets will be added to the 2027 general rate case, and the company will complete the required updated depreciation study and meet the filing deadline. (478 characters)

• Q: Analyst asks for details on the 2027 Texas rate case: size, key asks, timeline and affordability considerations. /

  A: Management confirms the rate case filing will happen in Q1 2027 after both acquisitions close, for effective rates in 2028. The total request will be significant, including the $300 million of prior Hill Country investment plus the fair market value step-up from the QuadVest acquisition. Affordability is a top priority: the company plans to propose a customer assistance program for vulnerable customers similar to existing programs in other states, and is open to phasing in rate increases to limit customer impact. (463 characters)

• Q: Analyst asks for key milestones for the California alternative water supply project evaluation process. /

  A: Management states the evaluation of both direct potable reuse and desalination will take 1-2 years to fully dimension projects and confirm viability. The core goal of these projects is to "bend the cost curve" for customer affordability by reducing reliance on Valley Water's continuously rising rates. Because H2O America is regulated by the CPUC, the company can provide more stable, transparent long-term pricing than the current unregulated model. (398 characters)