H2O America's Q3 2025 Earnings Call: Contradictions in Texas Competition, Quadvest Valuation, and California Rate Hike Impact Growth Strategy

Date of Call: October 28, 2025

Financials Results

• Revenue: Revenues increased 7% in Q3 2025 (rate increases and infrastructure mechanisms contributed ~$14.6M; $6.6M attributable to higher pass-through water costs)
• EPS: Adjusted diluted EPS $1.27 for the quarter, up 8% YOY; YTD adjusted EPS $2.53, up 14% YOY (company narrowed 2025 adjusted EPS guidance to $2.95–$3)

Guidance:

• 2025 adjusted diluted EPS narrowed to $2.95–$3 (upper half of original $2.90–$3 range).
• Reaffirmed 5%–7% EPS CAGR through 2029 and expectation to deliver on the top half of that range (excludes Quadvest impact; Quadvest expected accretive in 2028).
• 2025 CapEx increased to $486M (up from $473M); 2026+ CapEx refresh to be provided at year-end uptake in February.
• Quadvest FMV disclosure planned early 1Q; Quadvest close expected by mid-2026; Cibolo Valley expected to close in Q4 2026.

Business Commentary:

• Financial Performance and Growth:
• H2O America reported adjusted diluted EPS of $1.27 for Q3, an 8% increase over Q3 2024.
• YTD adjusted EPS was $2.53 per share, a 14% increase over the same period in 2024.

• The growth was driven by increased revenue from rates and usage, higher other income, and disciplined execution of their growth strategy.

• Capital Investment and Infrastructure:

• The company has invested $358 million in water and wastewater infrastructure across four states through September 2025, accounting for 74% of their upwardly revised $486 million budget.
• This investment reflects their focus on making necessary infrastructure investments while engaging with local stakeholders.

• The investment is expected to support timely regulatory recovery and customer affordability.

• M&A Activity and Strategic Initiatives:

• H2O America announced two significant M&A deals in Texas: the transformational Quadvest acquisition and the acquisition of Cibolo Valley wastewater treatment plant and related collection system.
• These acquisitions are expected to drive long-term growth and expand the company's footprint in Texas.

• The acquisitions are a part of the company's strategic initiative to increase asset density and enhance regulatory recovery.

• Regulatory Developments and Approvals:

• The company obtained regulatory approval for significant capital investment projects, including a $3.1 million revenue increase for Connecticut Water and a third System Improvement Charge for Texas Water.
• These approvals reflect H2O America's constructive engagement with regulators and its ability to balance infrastructure investment with customer affordability.
• The regulatory approvals are expected to support the company's ongoing infrastructure investment plans.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted strong Q3 results: adjusted EPS $1.27 (+8% YOY), YTD adjusted EPS $2.53 (+14% YOY); revenues +7% in the quarter. They narrowed 2025 EPS guidance and reaffirmed 5%–7% CAGR through 2029, increased 2025 CapEx to $486M, and reported robust Quadvest connection growth of 11.5% (52,400 connections).

Q&A:

• Question from Agnieszka Storozynski (Seaport): Jonathan, congratulations. I can't wait to work with you on the other side. That's quite a change. Anyway, so let's start with Texas. So first, the Quadvest deal, I mean the fact that you guys are going to provide disclosures on the FMV only in January, you said or early the first quarter, why -- I mean just -- why such a long wait, so that's number one. Number two is on the back of the American Water Essential merger yesterday, you are gaining a big player in the Texas water market. I'm just wondering if it has any bearing on how you see the growth in that market. And then three, we're waiting for a PURA decision in Connecticut on the acquisition of Aquarion. I'm just wondering if you still have any appetite for this asset if it were to -- if the commission were to reject the current sale process. ... No, just Aquarion. Actually, Aquarion in both -- how you see acquisitions and the financing of them vis-a-vis your stock's performance? It seems like your stock is not really reacting to the strong results you're printing. Some of it could be the Aquarion overhang. But just if you could talk to us about given the stock price, and how you see accretion from both the Quadvest deal and any capacity you would have for additional transactions? ... Okay. Understood. And then one last question maybe for Ann. And maybe you have addressed it, and I wasn't paying full attention, what's the -- I mean, when I look at your narrowed guidance and year-to-date results that would imply really low earnings in the fourth quarter. Could you remind me what it is that weighs on those fourth quarter expectations to get to the midpoint of the narrow guidance? ... And what is this $0.20 of year-to-date other income? And again, I should have -- should have listened. Yes, it's about $0.20, I think, no?
  Response: Management: FMV appraisals are on the disclosed timeline (appraisals due in December; FMV to be disclosed early 1Q) and Quadvest is the near-term priority; Texas remains attractive despite larger competitors. They have no capacity for a large straight-equity raise while executing Quadvest and would consider hybrid debt or partner equity to preserve accretion and balance-sheet targets. Q4 EPS pressure reflects timing/regulatory adjustments, persistent higher operating expenses, increased depreciation/interest/taxes and share dilution. The year-to-date other income (~$0.13) is primarily AFUDC earned on extended construction projects.

• Question from Ian Rapp (Bank of America): Echo Angie's comments on adding Jonathan, obviously, a really good pickup for the team, looking forward to working with him again, congrats there. And then I think you hit on most of them, but I think maybe just to clarify, have you refreshed or roll forward the EPS guidance through '29 kind of at the high end of 5% to 7%. But I think if I heard you correctly, you're also going to refresh the full sort of CapEx schedule on 4Q. Would you say at this point that the EPS guidance fully bakes expectations for that CapEx refresh, or are you planning to sort of refresh that EPS guidance view on fourth quarter as well? ... Got it. That makes sense. And then just maybe two quick ones on the fair market value process. So it sounds like that's kind of the primary date for determining financing needs to finance this acquisition? A, is that correct? And then b, does the fair market value process, or it's kind of structured, allow you to fully capture these customer connection growth rates that you're highlighting, or would that be something that would maybe be more reflected in a future rate case?
  Response: Management: Long-term guidance will be refreshed holistically after the CapEx update and the Quadvest outcome (not incrementally). Financing needs are not determined by FMV—purchase price was agreed ($540M) and the financing mix (debt vs. equity) will be market-dependent. FMV uses an asset cutoff (effective July 1, 2026) and values invested assets including CWIP; connection growth is not the primary FMV driver and would be reflected via assets/rate processes over time.

Contradiction Point 1

Impact of Competition in Texas on H2O America's Growth

It directly impacts expectations regarding market growth and competitive strategies in a key market, potentially influencing company growth and investor expectations.

How will American Water's acquisition of a Texas utility affect H2O America's growth in the Texas market? - Agnieszka Storozynski (Seaport)

2025Q3: There is a lot of competition and interest in Texas, but the focus remains on the Quadvest acquisition. Competition has always been present, and H2O America will continue to pursue deals that meet investment criteria. - Bruce Hauk(COO)

Are there specific states for potential M&A, given the limited availability of sizable water/wastewater assets in your core states? - Angie Storozynski (Seaport)

2025Q1: There are opportunities within the states we operate in, particularly Texas. We are also expanding our views in California and Maine. We remain open to other states and will continue to explore opportunities while ensuring financial results and accretion happen as planned. - Andrew Walters(CFO)

Contradiction Point 2

Long-term Growth Rate and EPS Guidance

It involves changes in financial forecasts, specifically regarding long-term growth rates and EPS guidance, which are critical indicators for investors.

Does the 2029 EPS guidance include the CapEx update, or will it also be revised? - Ian Rapp (Bank of America)

2025Q3: The long-term growth rate through 2029 will be impacted by CapEx and the Quadvest acquisition. Once the transaction is complete, a holistic view of the CapEx budget will be presented, and the long-term growth guidance will be refreshed accordingly. - Andrew Walters(CEO)

How is your performance trending relative to the year's guidance? Are rate impacts in California and the fixed charges there a factor? Is there an offset from Texas? Are you ahead in any areas? - Richard Sunderland (JPMorgan Securities)

2025Q1: We expect that we are going to have continued success in expanding our utility growth, expanding our services, and executing on the integration of our acquisitions. - Andrew Walters(CFO)

Contradiction Point 3

Valuation Process of Quadvest and Impact on Growth Strategy

It involves the valuation process of Quadvest, which directly impacts the company's growth strategy, financing options, and investor expectations.

Why is there a delay in disclosing Quadvest's FMV? What impact does the delay have on the valuation process? - Agnieszka Storozynski (Seaport)

2025Q3: The delay is due to the process of the appraisers completing their work, including the most extensive process - the cost approach, which requires a full assessment of assets by the engineering firm. The valuation process is ongoing, and the FMV will be disclosed early next year, which will help investors model the deal more accurately. - Bruce Hauk(COO)

Does the fair market value process determine financing needs for the Quadvest acquisition? - Ian Rapp (Bank of America)

2024Q4: We do expect to close the transaction in the second quarter of next year. And as I mentioned in my prepared remarks, the financing plan is already in place for the cash and debt financing of the transaction. - Andrew Walters(CEO)

Contradiction Point 4

Impact of Connecticut Utility Acquisition on Growth Strategy

It highlights the company's strategic priorities and potential expansion opportunities, which are crucial for investor expectations and market positioning.

How does American Water's acquisition of a Texas utility impact H2O America's growth in the Texas market? - Agnieszka Storozynski (Seaport)

2025Q3: There is a lot of competition and interest in Texas, but the focus remains on the Quadvest acquisition. Competition has always been present, and H2O America will continue to pursue deals that meet investment criteria. - Bruce Hauk(COO)

Can you explain the water rate practices in California and if these approaches can be replicated elsewhere? - Donald Roger Liddell (Clear Harbor Asset Management)

2024Q4: In Connecticut, we will continue to drive growth through organic investments and pursue external opportunities to add to our Connecticut utility portfolio. - Andrew Walters(CEO)

Contradiction Point 5

Impact of California Rate Increase

It involves the impact of California's rate increase on the company's earnings profile, which affects financial performance and customer experience.

Does the fair market value process determine financing needs for the Quadvest acquisition? - Ian Rapp(Bank of America)

2025Q3: It's a more linear growth profile, and that's very helpful for us from a financial planning standpoint and from a customer standpoint. - Andrew Walters(CFO)

Given California's earnings changes, why is the nonlinear growth profile still referenced? - Agnieszka Storozynski(Seaport)

2024Q3: Despite the smoother earnings profile in California, the nonlinear growth profile persists due to differing rate cycles in California's divisions. - Andrew Walters(CFO)