H2O America Q2 Earnings Call Highlights

Key Points

• H2O America reaffirmed its 2026 standalone adjusted EPS guidance of $3.08–$3.18 after reporting second-quarter adjusted EPS of $0.72, down from $0.75 a year earlier. First-half underlying adjusted net income rose 17%, but a 19% increase in diluted shares, including the March $700 million equity raise, pressured EPS.
• First-half revenue growth was driven primarily by regulatory rate relief and infrastructure surcharges, while higher production costs, depreciation and share dilution offset much of the benefit. The company invested $207 million in infrastructure through June, or 43% of its full-year standalone capital budget.
• Texas expansion remains a key growth initiative: the Quadvest acquisition could close in late Q3 or early Q4, with the Cibolo Valley transaction expected in Q4. H2O America plans to file a combined Texas rate case in early 2027, while also pursuing rate increases and infrastructure recovery in Connecticut, Maine and California.

H2O America NASDAQ: HTO reported second-quarter 2026 GAAP diluted earnings per share of $0.62 and adjusted diluted earnings per share of $0.72, compared with adjusted EPS of $0.75 in the prior-year quarter. For the first half of 2026, GAAP diluted EPS was $1.12 and adjusted diluted EPS was $1.23, versus $1.25 on an adjusted basis a year earlier.

Chair and Chief Executive Officer Andrew Walters said first-half results were consistent with the company’s internal expectations and supported its standalone 2026 adjusted EPS guidance of $3.08 to $3.18. H2O America also reiterated its long-term organic EPS growth target of 6% to 8% and said it expects its 2026-2030 earnings growth rate to be at or above the top end of that range on a nonlinear basis.

Revenue Growth Offset by Dilution and Higher Costs

Chief Financial Officer and Treasurer Ann Kelly said underlying adjusted net income rose 17% in the first half, but the benefit was more than offset by a 19% increase in weighted average diluted shares outstanding. The larger share count reflected the company’s use of its at-the-market equity program during 2025 and a $700 million equity raise completed in March 2026.

Kelly said the timing of the March offering reduced first-half EPS by a net $0.06, after considering interest income and savings from using proceeds to repay bank borrowings and invest cash. Adding that impact back to reported adjusted EPS would place standalone adjusted EPS at $1.29 for the first half, she said.

First-half revenue increased by $0.70 per share year over year. More than half of that gain, or $0.41 per share, came from rate relief, including the prior California general rate case and infrastructure surcharges in Connecticut, Maine and Texas. H2O America said more than 90% of its budgeted year-over-year revenue increase has been approved by regulators.

Higher pass-through water supply costs added $0.25 per share of revenue but were largely offset in production expenses. Increased customer usage across the company’s four states added $0.06 per share.

Those gains were partly offset by higher water production costs, including increased purchased-water prices and groundwater extraction fees, as well as higher depreciation and amortization associated with utility plant additions. The company’s first-half effective tax rate was about 14%, down from 16% a year earlier, primarily because of higher flow-through tax benefits.

H2O America invested $207 million in infrastructure during the first half, representing 43% of its $483 million standalone 2026 capital expenditure budget. Kelly said the pacing reflects the seasonal nature of capital spending, particularly in Connecticut and Maine during winter months.

Texas Acquisitions and Rate Recovery Plans

The company continued to advance its pending Quadvest acquisition in Texas. President and Chief Operating Officer Bruce Hauk said Public Utility Commission of Texas staff recommended on July 9 that the transaction serves the public interest and could proceed without a hearing. With no other party requesting a hearing by the July 16 deadline, H2O America expects the matter to proceed under an Aug. 26 statutory deadline.

Management said the acquisition could close near the end of the third quarter or in early fourth quarter. The company also expects to close its pending Cibolo Valley wastewater treatment plant and collection-system acquisition in the fourth quarter.

Quadvest served more than 59,800 active water and wastewater connections at the end of June, up 10% during the first half, according to Hauk. Connections under contract and pending development increased to 99,000 from 87,000 at year-end 2025, despite roughly 5,400 connections converting to active customers. Hauk cautioned that future connection growth could vary based on several conditions.

H2O America plans to file a combined Texas general rate case after closing the Quadvest and Cibolo Valley transactions, targeting a filing in early 2027 and new rates in early 2028. The company said the filing will seek recognition for the fair-market-value rate base associated with Quadvest and more than $300 million of investment in its Texas Hill Country operations.

Separately, Hauk said the company is awaiting a PUCT decision on its third system infrastructure charge application. An administrative law judge proposed a $285,000 revenue decrease compared with H2O America’s requested $5.1 million increase. The company has filed exceptions and said it could use financial offsets to preserve its 2026 adjusted EPS guidance if the final ruling is less favorable. Any eligible investments not recovered through the mechanism could be included in the planned general rate case.

Regulatory Cases and California Water Supply

In Connecticut, the company filed a general rate case seeking a $28.8 million annual revenue increase tied to roughly $145 million of infrastructure investment not reflected in current rates. A final decision is slated for late January, with new rates sought in early 2027. In Maine, H2O America requested a $9.5 million annual revenue increase to recover about $36 million of investment, with new rates expected by May 27 under the state’s statutory timeline.

In California, the company requested approval for a $176 million PFAS remediation project at Williams Station and expects a California Public Utilities Commission decision before year-end. It also received approval for an $8.4 million rate base filing offset related to $53 million of additional advanced metering infrastructure investment.

Walters said H2O America is examining longer-term alternatives to reduce San Jose Water Company’s reliance on water supplied by Santa Clara Valley Water District. He said Valley Water’s purchased-water rates have increased at a 10% compounded annual rate over the past decade, while groundwater extraction fees rose at an 11% compounded annual rate.

The company is developing a roughly $3 million mobile water-purification pilot focused on direct potable reuse, with a public demonstration targeted for September 2027. It also plans a feasibility study of regional desalination options in Monterey Bay. Walters said any substantial capital spending tied to those potential supply projects would likely fall outside the company’s current $2.7 billion capital plan for 2026 through 2030.

About H2O America (NASDAQ:HTO)

SJW Group, through its subsidiaries, provides water utility and other related services in the United States. It operates in Water Utility Services and Real Estate Services segments. The company engages in the production, purchase, storage, purification, distribution, wholesale, and retail sale of water and wastewater services; and supplies groundwater from wells, surface water from watershed run-off and diversion, reclaimed water, and imported water purchased from the Santa Clara Valley Water District.

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