Ladies and gentlemen, thank you for standing by and welcome to H2O America's conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one-one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one-one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Ann Kelly, Chief Financial Officer and Treasurer at H2O America. Please go ahead.
Good morning, everyone, and thank you for joining us this morning to discuss an exciting announcement for H2O America. Earlier today, we shared that our regulated Texas water and wastewater utility, the Texas Water Company and its affiliate, Texas Water Operations Services, will acquire all of the assets owned by Quadvest. Presenting on the call with me are Andrew Walters, Chief Executive Officer of H2O America, Bruce Hauk, Chief Operating Officer and President of H2O America, and Andrea Williams, President of Texas Water Company. For those who would like to follow along, slides accompanying our remarks are available on our website at h2o-america.com. A replay of this call will be available shortly after it concludes. Before we begin today, I would like to remind you that this presentation and the 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 the transaction press release and to our most recently filed Form 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 October 7, 2025. You can access the press release and the webcast at H2O America's website. I will now turn it over to Andrew to get us started.
Thank you, Ann, and good morning, everyone. Before I begin, I would like to take a moment to acknowledge those impacted by the devastating flooding in Texas. We are deeply saddened by this tragedy and know it affects not just the Hill Country, but all of Texas. Our hearts go out to those affected, including our communities, our coworkers, our customers, and those who have lost loved ones. We also want to thank all of the first responders for their support during this difficult time, as well as our entire Texas Water team for continuing to serve our stakeholders with integrity and courage as they navigate their own personal challenges during this time. As you're about to hear, Texas is an important part of H2O America, and we're going to continue doing our part to support the state.
With that in mind, let's get into the announcement we made this morning. We are thrilled that Texas Water will acquire Quadvest, a family-owned water and wastewater utility operating in Southeast Texas. Together, Texas Water and Quadvest will be the second largest investor-owned water and wastewater utility in Texas. Adding Quadvest to Texas Water is a unique opportunity to strategically diversify, enhance, and expand H2O America's operations in one of the fastest-growing regions in the U.S. It will allow us to strengthen our network of developers and drive stronger returns for our investors. As you all may be aware, I stepped into the CEO role last week as part of a planned leadership transition. Our former CEO, Eric, and I, along with the rest of the management team, have spent a lot of time thinking about how to keep growing our company in this next chapter.
More importantly, how to do it in a way that stays true to our values. When this opportunity with Quadvest came up, it hit all the right notes. We're bringing together two highly compatible teams who uphold the same culture of servant leadership. By joining forces, we're expanding our reach. By increasing our scale and diversification, our portfolio of utilities will be better balanced, and we will be able to invest more in our infrastructure, operations, and people across Texas and all of our states. This is transformative for H2O America, Texas Water, and Quadvest, positioning the combined company to grow faster and serve communities even better across Texas and the U.S. Andrea, Bruce, and Ann will each speak to the details of the combination in greater depth. First, I will provide a brief overview of the transaction and its benefits.
In terms of the deal structure, Texas Water Company and its affiliate, Texas Water Operations Services, have agreed to acquire the assets of Quadvest LP and Quadvest Wholesale LLC, respectively, for a total of $540 million. The acquisition of these assets, collectively referred to as Quadvest, adds over 47,000 connections, provides access to a strong and expanding development pipeline, and increases our exposure in the incredibly fast-growing Houston region. It also enhances our portfolio diversification nationally and regionally, with Texas customers expected to represent about 17% of H2O America's total customer base using 2024 year-end data. Importantly, this transaction is expected to be meaningfully accretive to our long-term growth rate, which you will hear more about in a few minutes. I'll turn it over to Andrea to share more about Quadvest.
Thanks, Andrew. First, I would like to reiterate how truly heartbroken we are for all those affected by the floods. I am a native Texan, and I've been based right here in the Hill Country for some time now. This is indeed deeply personal to me. I share my condolences to all who are impacted, the bravery and courage of the first responders, the volunteers, and communities coming to support one another with grit and with heart. It is a perfect example of who we are. We are Texans. Here at Texas Water Company, we will continue to do our part to support our state, and I'm excited to tell you more about how this combination will do just that. Since 2006, Texas Water Company has built a strong foundation in the Texas Hill Country, and we have quadrupled the number of connections we serve.
Keeping up that kind of growth requires investments and resources, and we believe the addition of Quadvest will help us do so. Quadvest is one of the largest investor-owned water and wastewater utilities in Texas and a family-owned company with deep roots in the Houston area. Since its founding in 1978, Quadvest has earned the trust and respect of the communities it serves, goodwill, and local relationships that remain a vital part of the company's ongoing success. This is reflected in its growth trajectory. In addition to its over 47,000 active connections, Quadvest is positioned for rapid expansion, with over 89,000 additional connections under contract and pending development. The company continues to benefit from the Houston area's population growth and the build-out of master plan communities by leading home builders, further supporting expectations of sustained double-digit customer growth.
Quadvest also brings strong partnerships with developers and community leaders, as well as in-house engineering, procurement, and construction capabilities. We believe these deep local relationships and growth prospects represent a compelling capital investment opportunity in one of the most dynamic housing markets in the country. I've personally known Quadvest CEO, Simon, for many years now, and through this process, we've spent meaningful time with his leadership team. We've been consistently impressed by their integrity, work ethic, and deep commitment to their people and communities. It's clear that both of our companies share similar values, which gives me great confidence in our ability to integrate successfully and grow together. What excites us most is the opportunity to create value for customers through operational excellence, enhanced service, and continued investment in critical infrastructure. Both of our companies bring strong foundations of trusted service, deep local expertise, and proven technology and best practices.
Together, we are well-positioned to build on that foundation and expand our impact in Texas. The addition of Quadvest's talented team, assets, and relationships, and our combined scale will help us deliver meaningful value for the communities and stakeholders we serve. To be clear, even as we expand into the Houston metro area, we will remain focused, as ever, on strengthening our water resiliency in the Texas Hill Country and serving current customers. Long-term, we will be able to better meet our increasing water needs in Texas with deep local roots and greater capacity to invest in necessary upgrades. I'll turn it over to Bruce to share more about the incredible growth opportunity this transaction presents.
Thanks, Andrea. This is a tremendous growth story. Quadvest operates in three of the fastest-growing counties by population growth in the entire country, with cumulative growth in the double digits over the past five years. In 2024, Houston ranks second among U.S. metropolitan areas for new private housing units authorized. Texas Water already operates in four other high-growth counties along the San Antonio and Austin corridor. Together, we'll have a presence in seven of the 50 fastest-growing counties in the U.S., placing us squarely in the top 2% of growth markets nationwide. This combination expands our scale across Texas, extending our footprint into some of the most promising, fast-developing areas. We are well-positioned to capture this growth and drive long-term value, not only for Texas Water, but for H2O America as a whole.
As you'll see on slide seven, with Quadvest, we expect our Texas customer connections to grow from about 7% of our total in 2024 as a standalone company to approximately 26% by 2029 as a combined platform. This transaction not only accelerates our growth, it creates a more balanced portfolio of water utilities across California, Texas, Connecticut, and Maine. As you saw on the last slide, this transaction meaningfully advances our strategic profile by creating a more balanced customer base across our states and within Texas. We enhance our ability to manage weather, economic, and regulatory risk nationally and regionally. It also deepens our growth profile by expanding our presence in one of the fastest-growing regions in the U.S., supported by a constructive regulatory environment and proven cost recovery mechanisms.
As Andrew shared at the top of the call, the combination creates the second largest regulated private water and wastewater utility in Texas. Our combined size and scale will allow us to deepen our foundation in Texas, a market where we have experience, and infrastructure investment is critical. We plan to deploy over $500 million across Texas Water and Quadvest in the next five years to drive growth, improve safety and reliability, and deliver strong value, all while supporting the state's ongoing economic development. I'll now turn it over to Ann to talk through how this translates financially. Ann?
Thanks, Bruce. As Bruce outlined, this combination is a key part of our long-term growth strategy. With the more than $500 million we plan to invest in Texas over the next five years, we're increasing H2O America's total capital plan by 6% from $2 billion- $2.1 billion. The combination of strong underlying customer growth and meaningful investment opportunities positions us to drive sustained EPS growth over time. We believe this transaction strengthens H2O America's long-term growth outlook and expect it to be accretive to EPS and our credit metrics by 2028. The total purchase price reflects a combined transaction value of $540 million. We structured this as a debt-free transaction subject to customary closing conditions, including the approvals of the Public Utility Commission of Texas and expiration or termination of the waiting period under the Hart-Scott-Rodino Act. We expect to be able to close in mid-2026.
This transaction is not subject to any financing conditions and will be financed by a combination of privately placed debt and equity infusion from H2O America. Importantly, we're financing the transaction in a way that enables us to maintain our strong balance sheet and credit rating. We expect to issue $350 million- $450 million of common equity and $100 million- $200 million of debt. We would then expect to further recapitalize following our first rate case. In the near term, we'll be focused on combining our two companies while continuing to uphold our reputation as an exceptional provider of water and wastewater services. Ultimately, this transaction is about growth. We expect new opportunities for employees of both businesses as part of a larger, more diversified organization, and we also expect to continue our meaningful investments in the region.
Andrew, I'll now pass it back over to you to conclude.
Thanks, Ann. This is a truly great milestone for everyone at H2O America, and particularly our Texas colleagues. Our combined teams will leverage strengthened operations and the highly collaborative Texas environment to drive stronger returns for our investors. Andrea and her team have done an excellent job thus far, and we are confident in their continued leadership as we progress. This combination with Quadvest, of course, also benefits H2O America, and by extension, all our local utilities. Our natural platform, working in conjunction with local expertise, enables us to operate with speed and flexibility and get projects done, which translates into value for our customers and our investors. We're charting a well-defined path to achieving our vision of thriving communities with high-quality water today and for generations to come.
The entire H2O America leadership team and I are deeply grateful for the hard work of our team across the U.S., without whom this transformative moment would not be possible. We look forward to realizing the new opportunities for growth, innovation, and advancement this will unlock. With that, operator, we can open the line for questions.
Certainly. As a reminder, to ask a question, please press star one-one on your telephone and wait for your name to be announced. To withdraw your question, please press star one-one again. One moment for our first question. Our first question will be coming from Agnieszka Storozynski of Seaport. Your line is open, Agnieszka.
Thank you. Is there, are you willing to provide any additional information about maybe the rate base or anything that would help us quantify the earnings power of the assets that you're acquiring? I don't think that the typical rule of thumb is out, per customer or per connection, earnings or payments would work here.
Yeah. I'll take the first part of that, Angie, and first of all, thank you for your question. I know it's going to be difficult to quantify the financial impact on the transaction at this time. The company, Quadvest, has not been in for rates for such a long timeframe that there is no defined rate base that you could really use to quantify that value, particularly when you're using the fair market value process. That's something that will just have to come out once the fair market value process gets done. You can be assured that we did a lot of work around deriving what the value is and what the value will be. I think the key that this does for us, from my perspective, is that it further enhances our long-term growth rate. I don't know, Ann, if you would want to add anything else to that.
No, I think you hit on most of the key points. I mean, as Andrew Walters said, we do intend to file to use the FMV process. We've modeled a range of outcomes of both FMV and also growth rates and are very comfortable with our evaluation of the company, and, you know, being diligent in connecting with our process.
Okay. Can you at least say, for example, how big of an increase in the growth rate does that deliver by 2028? I mean, anything like, I don't know, percentage accretion? Again, something that would actually allow us to put it in the ballpark, what the financial impact of the acquisition is.
Yeah, when I was.
Go ahead.
Go ahead.
Oh, I was going to say.
You go first, please.
What I would say is we expect it to be meaningfully accretive in 2028.
Okay. Agnie, just to be clear, it will be dilutive in the first two years, or less than the first two years based off of that timing. It depends on when it closes and when we would be able to get in for our first rate case. The FMV itself doesn't produce new rates. The new rates get produced when we go in for our first rate case.
Okay. The dilution is not just about additional equity, right, that is being used to acquire this set? It's also about under earning. I mean, you were planning to have a rate case for your own Texas utility, right? Would it be sort of combined? The upcoming rate case would actually cover both of the, well, both of the companies, basically?
Ann, do you want to take the first track? I'll add anything to that.
Sure. Yeah. I mean, we filed our first step a couple of years ago, and we are required to file a rate case by 2028. We've also previously guided that we are in the process of making substantial investments in Texas with respect to the KP Water acquisition and bringing those wells online. That will be completed by 2026. We also expect this acquisition to close mid-2026. Once those milestones are completed, we would expect to file for the rate case, but in no case later than our requirement in 2028.
From a baseline perspective, Angie, you'll have the share issuance as you highlight, plus the debt issuance that will be the drag. In addition to that, any of the depreciation or amortization that comes from the FMV before those are included in rates. There are going to be kind of three areas that nick the earnings power for that period of time. Following the rate case, it will be meaningfully accretive to the company. It obviously depends on the outcome, hence why we're somewhat circumspect on the FMV process and the rate case process.
Right. The last question about the financing structure. I understand that it's primarily equity-based and then some leverage at your basically current business. Is it just because the systems that you're acquiring are already heavily levered? Is it just because you think that that's needed to get regulatory approval, meaning that there is basically no way to add any additional leverage to the businesses that you're currently acquiring?
Ann, go ahead.
Sure. Yeah. We are buying the business on a debt-free basis, so there will be some room. The $100 million- $200 million of debt is actually a combination of operating company and corporate debt. We will intend to put some leverage on the business. The amount of equity is to be focused on our balance sheet and to maintain our credit ratings throughout this period.
It is not like there is any credit or incenting or anything associated with the business that you're acquiring that would prevent some additional leverage. I mean, we've seen that happen with some acquisitions of regulated electric assets in Texas. I'm just making sure that there is no credit or incenting of the business being acquired.
Yeah, nothing currently, and we don't expect that going forward.
Awesome. Thank you.
As a reminder, to ask a question, please press star one-one on your touch-tone telephone. Again, for any questions, please press star one-one. I would now like to turn the conference back to Andrew for closing. Actually, we did have one last-minute question come from Ian Elkins of GWI.
Hi. Yeah. Can you hear me?
Your line is open, Ian.
Yes. Hi. Yeah. Congratulations on the deal, guys. That's a real, real zinger. Just a couple of questions. I wondered, first of all, if you could illustrate the mix of water versus wastewater connections in the business that you're acquiring and what impact that will have on the balance across your wider portfolio. Also, given the private nature of the equity that you mentioned, I wonder if there's room for a strategic investor to come in and take the equity in one go or whether it's likely to be syndicated.
Sure. First of all, thank you for asking the question. From a water versus wastewater perspective, this does add significantly to our wastewater expertise, but it's still weighted to a greater degree to the water side of the business. In terms of the equity, the equity that I would expect us to do would be in the market as opposed to doing some type of strategic investor. If we had something that's larger than this, then that would be maybe a need to include a strategic investor. For this, I think we're in a good spot to just issue it under regular way of financing.
Okay, that's great. Thank you very much, indeed.
Very welcome.
One moment for our next question. Our next question is a follow-up from Agnieszka Storozynski of Seaport. Your line is open, Angie.
Thank you. I just wanted to ask about the wholesale business. It's somewhat new to us on the public side. Could you give us a sense, for example, what's the profile or profitability of this business versus regulated utilities? Duration of contracts or anything that would give us a sense of how to project the earnings power of this business.
Sure. Bruce, maybe you could take a crack at that first, please.
Sure, Andrew. Thank you, Angie, for your question. As it relates to the wholesale business, those are typically contracts that are 50 years. We consider that, you know, regulated-like. Those contracts exist for long term. It's a situation where we actually build the water and wastewater facilities, the treatment plants, and provide that service wholesale to generally the MUDs in the area, if you will. That's how that works. As a connection count of the 47,000 connections that we mentioned earlier, about 12,570 of those are water and wastewater wholesale accounts. There's some serious opportunity for growth in that area as well.
The profitability, I mean, is it, you know, a similar level of returns? I mean, yeah. I mean, it's basically like a fee for service, right? It's not an asset-based, you know, profitability.
No, that's correct, Angie. It's more based off of a contract that's based off of per connections, but it also has escalators in there that are associated with either CPI or the water wastewater index. Those are the two things that can drive the rate. I call it more like contractually regulated as opposed to regulated like the other entities that we have that's regulated by PUC. I would say those are the primary differences in terms of the profile of that business. Obviously, for us, I would say that the value of the business is much greater in the core regulated business. This does allow us to attack a broader area within the city of Houston, which is predominantly financed by MUDs for new utilities in there. This gives us another tool in the tool chest to continue to enhance our growth profile.
And Andrew.
I would just.
Go ahead.
Please go ahead.
I was just going to add a couple of abstract stats. As Bruce Hauk mentioned, you know, backed by very long-term contract utility-like, the average age of those contracts is 42.4 years. Very long term. Also, when you think about our long-term plan, by 2029, we would expect the combined business to have approximately 7% of unregulated business, including this wholesale business, and 93% regulated. That's H2O America as a whole.
Is that based on the customer count or based on earnings? What is that percentage based on?
That's based on net income.
Okay. Lastly, is there any, you know, like an earnings benefit related to the economies of scale? You already have operations in Texas. Basically, any sort of SG&A accretion. You're keeping the management team in place. Again, is there any benefit of scale?
Yeah. Thanks, Agnie, for that question. The answer is yes, but I think those benefits come in the form of procurement, as an example. We talked about in the past how we have a new customer information system going in. In that customer information system, it's priced at different tiers. This tier for this business will be at the lowest tier to handle the extra growth that we're offering. That tier is at a significant discount to the first tier that we have as a company. That is just an example. In addition to that, the scope and scale of skills that we have by the combined teams gives us the opportunity to continue to grow. Texas is a place where we're growing so quickly, it's just a question of how many employees we add and when we add them.
For this, this gives us that opportunity to put those teams together. To the extent that synergies come out, it's been the fact of not adding as many people as we would have had to add anyway.
Okay. Just one more. Texas tends to have severe drought issues. Talk to us about how that impacts the risk profile of this business, not just the one that you're acquiring, but your existing one, and how the profitability of the Texas operations actually changes or not depending on the degree of drought conditions in the state.
Bruce, if you would take the first, and then Ann, you can do a follow-up.
Thank you, Angie. The diversity of Texas, you know, in terms of water resources is significant. Obviously, you're aware of the pervasive drought that we've seen in the Hill Country and how we're addressing that from a source of supply with our KT project, adding 6,000 acre-feet of groundwater to our supply there to serve our customers. Houston's a much different scenario in terms of water prevalence and availability. This really helps us diversify our risk in the state and candidly across our entire footprint from Connecticut, Maine, Texas, and California as a whole. We're very fortunate to be able to add these assets to diversify, you know, our opportunities to provide service to our customers and then also de-risk some of the situations or occurrences that may happen across the portfolio.
Yeah, Bruce. You definitely summed it up. This is about diversifying both across H2O America and across Texas. The fact that Houston is located in an area that has ample access to water does not exacerbate the drought conditions that we have been experiencing in the Hill Country.
Okay, thank you.
Agnie, thank you very much for all your questions. Much appreciated.
I'm showing no further questions. I would now like to hand the call back to Andrew for closing remarks.
Thank you very much. First of all, I would like to again thank the team for their incredible hard work in bringing us this transformational transaction. I believe that this sets our company up for a growth profile that we have not seen in this company's history to date. Together, we will be in seven of the top 50 fastest-growing counties in the entire United States. Just to highlight that, that's out of 2,500 counties nationwide. It is a very rare air for the number of counties and the speed of growth that we'll be in. We will sustainably improve the long-term growth rate. I know we can't comment on the specific numbers yet because until we go through all the process, we won't have all that. We know under a variety of scenarios that this will be sustainably better for our company.
This further diversifies our regulatory, weather, and earnings contributors. That will be meaningful as we continue to grow the company and add further stability to our earnings growth profile. Finally, I want to express to all impacted by the flooding that you are in our hearts and our prayers. With that, I'd like to conclude the call. Thank you.
This concludes today's conference. Thank you for participating. You may now disconnect.