H2O America (HTO) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals a mixed performance. While revenue increased by 7%, expenses also rose, and there is uncertainty about future earnings due to regulatory adjustments and strategic expenses. The Q&A section highlights delays in key acquisitions and financing uncertainties, which may concern investors. Despite strategic acquisitions and infrastructure investments, the lack of clear guidance and management's vague responses about mergers and financing may prevent a strong positive reaction. Thus, the stock price is likely to remain stable within a neutral range over the next two weeks.
Key Financial Performance
Net Income per Share (Adjusted) $1.27 per share, an 8% increase over the third quarter of 2024. The increase was driven by higher revenue from rates and usage, partially offset by higher water production and operating expenses.
Year-to-Date Adjusted EPS $2.53 per share, a 14% increase over the 9 months ended September 2024. The increase was attributed to higher revenue from general rate cases and infrastructure recovery mechanisms, partially offset by higher water production and operating expenses.
Revenue Increase 7% increase in the third quarter. Contributing factors included $14.6 million from rate increases, $6.6 million from higher pass-through water costs, and $700,000 from higher customer usage in Connecticut and Texas, partially offset by reductions in California and other regulatory mechanisms.
Water Production Expenses Increased 3% in the quarter, driven by a $5.1 million increase in the average per unit cost for purchased water and groundwater extraction, partially offset by lower production volume and regulatory adjustments.
Other Operating Expenses Increased 9% in the quarter, driven by $5.6 million in higher general and administrative expenses (pension costs, salaries, and inflationary increases), $1.3 million in higher depreciation and amortization, and small increases in property taxes, partially offset by lower maintenance costs.
Capital Expenditures (CapEx) $358 million invested in water and wastewater utility infrastructure through September 30, 2025, representing 74% of the revised $486 million budget. The increase reflects accelerated advanced metering infrastructure deployment in California.
Financing Activities Raised $108 million of equity through the ATM program in the first 9 months of 2025. Average borrowing rate for line of credit advances was 5.42%, compared to 6.53% in the prior year.
Income Tax Rate 14% on a year-to-date basis, compared to 10% in the same period of 2024. The increase was due to higher pretax income in 2025 and the absence of a tax accounting method change benefit from 2024.
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Operating Highlights
Advanced Metering Infrastructure Deployment: Momentum in California with plans to accelerate implementation.
Texas Market Expansion: Announced acquisitions of Quadvest and Cibolo Valley wastewater treatment plant, adding significant connections and growth potential.
Infrastructure Investments: Invested $358 million in water and wastewater utility infrastructure across four states, 74% of the revised $486 million budget.
Revenue Growth: 7% increase in revenue driven by rate increases and higher customer usage.
Sustainability Initiatives: Achieved a 43% reduction in Scope 1 and 2 emissions from 2019 baseline, increased solar generation by 73%, and expanded rate assistance programs.
Recognition: Selected as one of America's greenest companies by Newsweek for the second consecutive year.
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Risk or Challenges
Regulatory Risks: The company faces challenges in balancing affordability with extensive investment requirements to replace aging infrastructure and treat emerging contaminants, particularly in Connecticut. Regulatory approval processes for acquisitions and rate adjustments, such as the Quadvest and Cibolo Valley deals, are complex and time-consuming, potentially delaying strategic initiatives.
Economic and Financial Risks: Higher water production expenses due to increased costs for purchased water and groundwater extraction, as well as inflationary pressures on salaries, wages, and pension costs, are impacting operating expenses. Additionally, the company is exposed to higher borrowing costs, with average borrowing rates for lines of credit at 5.42% and recent long-term debt issuances at fixed rates exceeding 6%.
Operational Risks: The company is experiencing a decrease in the availability of lower-cost surface water, leading to higher production costs. Maintenance costs have been reduced, which could pose risks to operational reliability in the long term.
Strategic Execution Risks: The success of the Quadvest and Cibolo Valley acquisitions depends on regulatory approvals and the ability to integrate these systems effectively. Delays or challenges in these processes could impact the company's growth strategy and financial performance.
Market and Growth Risks: While the company is experiencing robust connection growth in Texas, future growth rates are not guaranteed and depend on various conditions, including economic and market factors in the greater Houston area.
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Guidance & Outlook
2025 Adjusted Diluted EPS Guidance: The company has narrowed its 2025 guidance range of adjusted diluted earnings per share to $2.95 to $3. This represents the upper half of the original $2.90 to $3 range.
Long-term EPS Growth: H2O America reaffirms its 5% to 7% EPS compound annual growth rate (CAGR) through 2029, with expectations to deliver on the top half of the range. This excludes the impact of the pending Quadvest acquisition, which is expected to be accretive in 2028 and contribute to the long-term growth rate.
2025 Capital Expenditure Plan: The planned 2025 capital expenditure has been increased to $486 million from $473 million, reflecting accelerated implementation of advanced metering infrastructure deployment in California. A holistic refresh of the 2026 and beyond CapEx budget will be provided in February 2026.
Quadvest Acquisition: The Quadvest deal approval process is ongoing, with the fair market valuation determination expected in December 2025. The deal is anticipated to close by mid-2026 and is expected to be accretive in 2028. Quadvest has shown robust connection growth, with a 11.5% increase in active connections since the end of 2024.
Cibolo Valley Acquisition: The acquisition of the Cibolo Valley wastewater treatment plant is expected to close in the fourth quarter of 2026. This acquisition includes approximately 1,500 active connections and the potential for over 250 additional connections.
Texas System Improvement Charge: Texas Water has filed for a $5.1 million increase in the system improvement charge for completed water and wastewater projects. A decision is expected in the first half of 2026.
Maine Water Rate Unification: A rate design proposal to unify 10 different districts into a single tariff has been filed. If approved, it would feature the first affordability tariff in Maine. A decision is expected in the first quarter of 2026.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Why is there a delay in providing disclosures on the FMV for the Quadvest deal?
A:The timeline for appraisals to come in is December, and shortly thereafter, the STM will be filed. The delay is due to the extensive process required for the cost approach, which involves a full addressing of the assets by the engineering firm.
Q:Does the company have any sense of the FMV appraisals yet?
A:No, the appraisals are still in progress, and the engineering firm has not completed the required work for the cost approach.
Q:What is the company's perspective on the American Water Essential merger and its impact on the Texas water market?
A:The company sees Texas as a large market with many opportunities. They are focused on the Quadvest acquisition and believe their growth forecast does not rely on acquisitions. They will not stretch beyond their accretion and balance sheet goals, and they view the merger as beneficial for the industry and customers.
Q:What is the company's stance on the Aquarion acquisition and its financing given the stock's performance?
A:The company believes the Aquarion acquisition makes strategic sense but is currently focused on the Quadvest acquisition. They do not have additional capacity in the straight equity market and would consider hybrid debt or partner equity for financing. Their accretion and balance sheet protection goals remain unchanged.
Q:What factors are driving the lower earnings expectations for the fourth quarter?
A:The lower earnings expectations are due to timing of gross margin and regulatory adjustments, higher expense items, additional operating expenses for strategic priorities, and continued higher depreciation, interest, taxes, and dilution from additional shares.
Q:What is contributing to the $0.13 of year-to-date other income?
A:The primary contributor is AFUDC from substantial investments, particularly in Texas, where longer-term construction cycles allow for extended AFUDC earnings.
Q:Will the company refresh its long-term EPS guidance when updating the CapEx schedule?
A:The refresh of long-term EPS guidance will depend on both the CapEx update and the outcome of the Quadvest acquisition. The guidance will be updated comprehensively rather than incrementally.
Q:Does the FMV process determine the financing needs for the Quadvest acquisition?
A:No, the financing needs are not determined by the FMV process. The company has agreed to a $540 million transaction value, and the financing mix of debt and equity will depend on market conditions.
Q:Does the FMV process account for customer connection growth rates?
A:No, the FMV process is based on the valuation of assets, including construction work in progress, as of a specific cutoff date, not on customer connection growth rates.
Q:Review of Unclear Management Responses
A:Management avoided providing a direct answer regarding the specific impact of the American Water Essential merger on their growth strategy, using general statements about competition and industry benefits instead. Additionally, they did not provide clarity on the exact timing or details of the equity raise for the Quadvest acquisition, citing the need for FMV disclosures and regulatory processes.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
California
Chief
Connecticut Water
HO America
Officer
PUCT
Slide
Texas Water
accounting
acquisition
addition
application
basis
connection
cost
credit
customer
date
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expense
factor
income
increase water
infrastructure
measure
month
plan
plant
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production
rate
result
service
share
statement
system
tax
term
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utility
wastewater
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Frequently Asked Questions
Where does this earnings call transcript come from?
All transcripts are sourced directly from the official live webcast or the company’s official investor relations website. We use the exact words spoken during the call with no paraphrasing of the core discussion.
How soon is the transcript available after the earnings call ends?
Full verbatim transcripts are typically published within 4–12 hours after the call ends. Same-day availability is guaranteed for all S&P 500 and most mid-cap companies.
Is the transcript edited or altered in any way?
No material content is ever changed or summarized in the “Full Transcript” section. We only correct obvious spoken typos (e.g., “um”, “ah”, repeated 10 times”, or clear misspoken ticker symbols) and add speaker names/titles for readability. Every substantive sentence remains 100% as spoken.
Why do some answers appear as “Unclear” or “Inaudible”?
When audio quality is poor or multiple speakers talk over each other, we mark the section instead of guessing. This ensures complete accuracy rather than introducing potential errors.
Who creates the AI Summary and Key Q&A highlights shown above the transcript?
They are generated by a specialized financial-language model trained exclusively on 15+ years of earnings transcripts. The model extracts financial figures, guidance, and tone with 97%+ accuracy and is regularly validated against human analysts. The full raw transcript always remains available for verification.
