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The Importance Of Aqua America’s Q2 2015 Earnings

Diluted income from continuing operations per share increases to $0.32. Quarterly cash dividend increases 7.9 percent to $0.178. The ongoing trend of strategic acquisitions is gaining steam and alters the future prospects for Aqua America. Aqua America (NYSE: WTR ), the second-biggest publicly traded U.S. water utility, reported earnings that reinforced its position as an excellent defensive play, a stock that can consistently deliver price gains even during periods of market duress. Aqua reported income from continuing operations of $57.4 million, which represents a notable annual increase of 4.7 percent. Earnings per share rose to $0.32 for the quarter, compared to $0.31 for the same quarter in 2014. As a result of robust customer growth, revenues increased to $205.8 million, rising 5.4 percent compared to the second quarter of last year. On a year to date basis, Aqua America achieved a 9 percent increase in income. During the same period, Aqua completed eight acquisitions, expanding its customer base by almost 8,700 connections. It aims to close at least 15 acquisitions by the end of the year, which is expected to result in an annual customer growth of 1.5 to 2 percent. This is the reflection of its successful strategy to focus on building value by fully optimizing its rapidly increasing asset portfolio while boosting acquisitions and controlling expenses. (click to enlarge) The long standing tradition of substantial dividend increases was reaffirmed . In fact, Aqua has paid a consecutive quarterly dividend for 70 years and the latest quarterly cash dividend of $0.178 per share, 7.9 percent higher compared to the previous quarter, represented the company’s 25th dividend increase in 24 years. It’s clearly impressive that the dividend has been increasing at an annual growth rate of 7.6 percent, which speaks to the company’s financial strength and unfailing commitment to increase shareholder value. In the first half of 2015, Aqua invested $150.1 million in infrastructure enhancements. More importantly, the company’s capital investment plan includes the increase of such investments to $325 million by the end of the year and more than $1 billion over the next three years. This demonstrates the management’s ambition and resolve to move forward aggressively despite the overhanging market turbulence. (click to enlarge) The cornerstone of Aqua America’s success has been its sophisticated expansionary approach aimed at constantly seeking acquisition opportunities that strategically expand its network of municipal and privately owned systems. The success of this approach is highlighted by the resilience shown during the recent vertiginous market swings and the subsequent outperformance of most major indexes. Aqua America has consistently maintained an edge over its main competitors in most crucial areas, and this trend remains intact. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Share this article with a colleague

Ormat Technologies Is An Unrecognized Alternative Energy Play

Summary Geothermal is a small but fast-growing and important part of the growing alternative electricity generating space. Ormat is an industry leader with significant new capacity coming online. The Ormat Energy Converter technology is a patent protected process that gives the company a competitive advantage in the space. We believe that ORA will eventually be valued like the high-yielding electric utilities as it boosts its dividend payout with strong free cash flow growth. Ormat Technologies (NYSE: ORA ) is a global leader in geothermal energy technology, which we think will be a net market share adder over the next half decade. The path towards expanded margins and stronger earnings growth has become more clear, which we think should re-rate the shares higher over the course of the next year. We think the company has completed a significant amount of strategic initiatives over the last year which is unlocking substantial shareholder value. Those key catalysts, which we believe should reward shareholders, include: Share exchange completion with Ormat acquiring parent company in order to get listed on the TA-25 Index. Underlying growth in the space should realize a double-digit CAGR through 2020, propelling earnings. Its patented Ormat Energy Converter technology provides a competitive advantage. Company Description The company is the leader in the geothermal and recovered energy power generation business. The company builds and operates environmentally-friendly geothermal and recovered energy-based power plants, typically using equipment that it designs and manufactures. Most of the operating portfolio is in the US, Kenya, and Guatemala. The firm has a ~80% market share in the geothermal binary power market segment. The company has two reporting segments: electricity revenues and product sales. Electricity revenue represents two-thirds of revenue and 63% of operating income. The company has 50 years of experience in the space and owns and operates approximately 650 MW of power generation. (click to enlarge) Source: Corporate Presentation Long-Term Opportunity Potential We think geothermal is an overlooked area of alternative energy investment that holds many of the strong properties that are sought after by both investors and power generation companies. The essential properties of geothermal technology tap the heat from the Earth that escapes through various fissures as gas or water. Hydrothermal geothermal-electricity generation is derived from naturally occurring reservoirs of heat that are formed when water comes in contact with hot rock or through “escaping” heat of 300 degrees or more. The heated water rises to the surface and is extracted through geothermal wells, typically located within a few miles of a power plant. The key is if natural ground water sources and reinjected, extracted geothermal liquids are adequate to continuously replenish the geothermal reservoir creating a long-term renewable energy source. Geothermal in the US currently generates approximately 13 GW of geothermal energy. This is enough electricity to power approximately 20 million US homes, but represents just 0.2% of global electricity generating capacity with very low penetration. In the last year, the globe added 700 MW of additional capacity in 2014. Third-party forecasts as well as the Geothermal Energy Association (GEA) predict 10%-12% annual growth through the end of 2020. Bloomberg predicts that by 2030, capacity will grow to 40 GW, representing 270% capacity growth over the next eighteen years. Even with that massive growth, the percentage of power generated from geothermal would still be less than half a percent. The reason for the growth is the base-load potential of the source, meaning that it has a long-life potential (~30 years) and is cost competitive with coal and gas. Source: Bloomberg Energy Finance 2013 Proprietary Technology In Binary Plants A Differentiator Binary power plants are operated using the Organic Rankine Cycle where heat is transferred to a fluid at constant pressure. The fluid is then vaporized and then expanded in a vapor turbine that drives a generator, producing electricity. The company has proprietary technology that can be used in binary power plants to recover energy generation to capture unused heat derived from the industrial processes. This can be converted into electricity using the Rankine system. Ormat has a proprietary system called the Ormat Energy Converter which fulfills this purpose in both binary and REG systems. The whole system has been designed by Ormat including the turbines, pumps, and heat exchangers, as well as formulation of organic motive fluids, all of which are environmentally friendly. The company also patented and developed GCCU power plants in which the steam first produces power in a backpressure steam turbine and then is condensed into a binary power plant, producing additional power compared to conventional methods. We think ORA’s technology has a number of competitive advantages compared to its competition. Conventional steam plants can consume a substantial amount of water, causing depletion of aquifers. In the US, most of the natural geological geothermal energy plants and sources are in the West, namely Nevada, California, Arizona, Utah and Idaho. These are areas where water is a valuable commodity, meaning water-saving technology is far superior to conventional steam methods. ORA’s binary technology also has lower visual impact which can be aesthetically unappealing to residents in the localities. Traditional steam models have to have large cooling towers which emit exhaust plumes during cool weather. Ormat’s technology does not have emissions when using its geothermal fluid technologies. Other competitive strengths include the ease of operation and low maintenance. This is derived from the lack of contact between the turbine blade and geothermal fluids, which tends to have a corrosive effect. Instead, the company’s technology passes the fluids through a heat exchanger, which creates less friction and can withstand corrosive fluids better. We think its moat and competitive advantages are a strong positive on the shares. Between the focus on geothermal binary and recovered energy generation, ORA’s proprietary energy conversion technology and its global expertise separate it from the competition. Margin Expansion Story Underway The business lends itself to significant scale advantages with margins growing to 36.4% last year and 37.3% over the trailing twelve-month period. EBITDA margins are up to 47.8%, up 1,000 bps over fiscal 2013. We think margins should continue to expand bolstered by the electricity segment which has several natural advantages to scale. Some of that margin expansion will come from stronger pricing per MWh. We think the expansion of new capacity over the next two years along with increased utilization should help the segment achieve 40%+ gross margins on an annual basis. The product segment is also seeing much strong margins growing from 27% to the current 38.4%, a significant increase. The business can see more lumpy margin expansion and contraction depending on product mix and EPC service. We think it’s an important driver of the value-add in the business as it’s far superior to other alternative power companies like solar and wind. State And Federal Push Into Renewables Renewable portfolio goals have been set in 40 states which require state-based utilities to generate or import a certain percentage of their electricity from renewable energy or recovered heat sources. California, for instance, established one of the first renewable portfolio standards which requires 25% of electricity generation and usage by renewable, and 33% by 2020. Another state, Hawaii, has an ambitious goal of achieving 100% renewable energy generation by 2045. Hawaii has a significant amount of geothermal activity which can utilize Ormat’s technology, and we believe that it will be a significant contributor in the portfolio of renewable power generation. As costs of renewable energy generation continues to come down and when factoring in ancillary costs of CO2-emitting power generation, we think states will continue to raise renewable standards and goals towards at least 50%. Depending on the location, geothermal will likely be an important part of that renewables portfolio. Remember, geothermal power generation does not need to be the majority or even one of the top three sources for Ormat to see a significant boost in revenue. The Federal government does not have a set renewable portfolio goal, but through the EPA, has been pushing up renewable usage through the implementation of additional regulations onto CO2-emitting power generation, namely coal. This was done by the Obama administration in 2013 which directed the EPA to create new pollution standards for new and existing power plants. In this clean power plan, the goal is to cut carbon emission from the power sector by 30% below 2005 levels nationwide by 2030. Movement towards renewables, while not explicitly cited, is a key factor in achieving those ends. Valuation The shares amid the global sell-off trade at just 9.6x ttm EV/EBITDA, which we believe is a discount given the shift towards higher-margin electricity segment revenue generation. We used a sum-of-the-parts analysis of the business to more accurately assess the value of the shares. The electricity segment is similar to many of the publicly-traded utilities that are power generators. The only real difference is the source of the power generated coming from geothermal rather than coal or natural gas. Using the public utilities as comps, the shares are trading at a slight discount to others like PPL Corp. (NYSE: PPL ), NRG Yield, Inc. (NYSE: NYLD ), TerraForm Power (NASDAQ: TERP ), and NextEra (NYSE: NEE ), but ahead of some other peers like TransAlta (NYSE: TA ), AES Corp. (NYSE: AES ), and Abengoa (NASDAQ: ABGB ). The peer group comps have a median average of 8.9x, which is slightly ahead of the ntm EV/EBITDA ratio for Ormat at 8.5x. We think that the product segment is holding back the consolidated ratio, but given the growth in the business’s margins, we think that could be changing. In addition, we see the electricity segment as gaining scale which is expanding its margin significantly towards 40%. As such, we do think the consolidated multiple should expand towards 9.0x. We applied a 5.5x multiple to the product segment, which we think is fairly conservative, but given the size of the business, it’s not a significant driver to the consolidated multiple. On the electricity side, the margins should be at least in line with the comps. We could make the argument that the electricity segment should receive a premium valuation and that the product multiple is too conservative. We estimate $285 million in EBITDA net of the company’s Northleaf JV ownership. We think the shares are worth $42 using those fairly low multiples. Conclusion We believe Ormat is an ignored alternative energy company. While the market seems to cater towards the solar and wind companies, we think the geothermal space is actually superior to the economics of those two alternative energy segments. We think the shares are worth approximately $42 and that the long-term trends within the space are very strong. The company is bringing on significant new capacity over the next two years while it becomes more efficient and gains scale, boosting its margins and profitability. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Piedmont Natural Gas: A Strong El Niño Could Help Finance Capacity Expansions

Summary Piedmont Natural Gas reported FQ3 earnings last week that missed on both lines, although the EPS miss was not large enough to offset FQ2’s EPS beat. Faced with steady growth to natural gas demand in its service area, the company is raising funds via both debt and equity to finance midstream and downstream capacity expansion. Investors can expect the raising of these funds to reduce the company’s EPS in the near term, although an especially strong El Niño could offset this negative impact. I still expect the company’s valuation to decline in response to a pending interest hike, although conservative income investors should consider the company’s shares if they fall below $35. Natural gas utility Piedmont Natural Gas (NYSE: PNY ) reported FQ3 earnings (its current fiscal year ends in October) last week that missed on both lines. While the revenue miss was not surprising, given that natural gas prices over the summer were much lower than in FQ3 2014, the EPS miss came despite increases to system throughput and gross profit. Investors responded by sending the company’s share price, which was approaching an all-time high just last month following an EPS beat for FQ2 , down still further (see figure). In early June, I discussed the company’s dividend and earnings growth record in the context of an expected interest rate increase, concluding that: Barring a magnitude of earnings growth that I don’t expect to see until the Constitution pipeline is brought online in FY 2017, such a declining premium will lead to a declining share price, at least relative to the S&P 500. Piedmont Natural Gas is an ideal investment for conservative investors but I recommend waiting until after interest rates rise and it begins to underperform versus the broader index before purchasing shares, as I believe that they will be available at a more attractive valuation at that time. This article re-evaluates Piedmont Natural Gas as a potential long investment following its FQ2 and FQ3 earnings reports, the return of low natural gas prices, and new forecasts for this year’s El Niño weather event to achieve near-record strength. PNY data by YCharts FQ2 and FQ3 earnings Back in June, Piedmont Natural Gas reported FQ2 earnings that beat by $0.05 on diluted EPS ($0.84 actual versus $0.79 expected) despite missing on falling revenue ($425 million actual versus $489 million expected). While more substantial than had been expected, the 8% YoY decline to revenue was not surprising given the sharp fall in the price of natural gas that has materialized over the last year (see figure). The company’s FQ3 revenues were also down on a YoY basis by 3.6%, coming in at $158.3 million and missing the consensus by $15 million. In both quarters, the impact of lower prices on revenue was partially offset by continued customer growth of 7% in the first half of FY 2015 and another 2% in FQ3. System throughput increased by 21% YoY in FQ3 alone, although this was from a relatively low base, since seasonal demand is the lowest in FQ3. Henry Hub Natural Gas Spot Price data by YCharts Piedmont Natural Gas reported higher gross income (“margins” in the company’s parlance) on a YoY basis for both FQ2 and FQ3 of 6.7% and 6.7%, respectively. In both cases, this was due to the company’s cost of gas falling by more than the revenue (declines of 21% and 4% in FQ3, respectively). Regulators in Tennessee and North Carolina had previously granted the company rate adjustments that supported revenue in both quarters, resulting in the improvements. While the gross income gain helped push the company to a diluted EPS beat in FQ2, it was not enough to offset the impact of higher corporate expenses on net income in FQ3, which fell from -$7.3 million in the previous year to -$8.3 million in the most recent quarter (see table). This resulted in a FQ3 EPS result of -$0.10 versus -$0.09, missing the consensus estimate by $0.03. The company attributed the bulk of the decline and miss to a 27% increase to its utility interest charges on a YoY basis to $16.7 million, with the increase resulting from a $200 million increase to its long-term debt over the same period. Piedmont Natural Gas Financials (non-adjusted) FQ3 2015 FQ2 2015 FQ1 2015 FQ4 2014 FQ3 2014 Revenue ($MM) 158.3 424.9 607.3 185.8 164.2 Gross income ($MM) 111.6 225.6 270.1 112.3 104.8 Net income ($MM) -8.3 66.4 93.0 -9.0 -7.3 Diluted EPS ($) -0.10 0.84 1.18 -0.11 -0.09 EBITDA ($MM) 46.5 118.4 145.4 24.6 44.7 Source: Morningstar (2015) Outlook Investors were disappointed in the company’s FQ3 earnings report, sending the share price down by almost 3% following the release of the report. Overall, however, the recent earnings reports as well as the FQ3 miss present an image of a utility that is working to meet fairly rapid and, to a certain extent, unexpectedly high demand growth in its service area. Its customer growth rate fell by half between FY 2008 and FY 2011, as annual residential new construction in its area fell from more than 20,000 to roughly 7,000. Both customer growth and residential new construction rates have rebounded since then, however, with each one setting a post-recession high in FY 2014. With three quarters completed, Piedmont Natural Resources is forecasting customer growth in FY 2015 to range from 1.6% to 2%, the upper end of which would represent its largest number since FY 2008 (see figure). Source: PNY June Investor Update (2015) This demand is supported by continued economic growth in its service areas in North Carolina and Tennessee. Both states have experienced rapid economic growth over the last five years (see figure), and are showing few signs of slowing down. North Carolina Real GDP data by YCharts One consequence of this strong growth has been sharp declines in the unemployment rates in both states (see figure), both of which are nearing their pre-recession levels. The housing market has begun to perk up as people’s financial security has increased, and while construction payrolls remain well below their pre-recession highs, they have increased at a more rapid pace since the beginning of FY 2015. All of these factors are contributing to increased demand for natural gas, both in the form of supply to power plants for electricity as well as direct deliveries to residential buildings. North Carolina Payrolls: Construction data by YCharts Faced with such expected demand growth, Piedmont Natural Gas is taking steps to increase its capacity to meeting demand at both the midstream and downstream stages of the natural gas delivery chain. Of the $1,870 million that it has allocated to capex and joint venture contributions through FY 2017, more than one-third will contribute to customer growth projects, while another $250 million will go toward JV contributions (most of the balance is intended for system integrity projects). The JV contributions, on the other hand, are intended to increase the midstream supply of natural gas by connecting unconventional shale production regions, such as the Marcellus, to existing downstream natural gas networks. Construction of the first of these – the Constitution Pipeline project, in which Piedmont Natural Gas owns a 24% stake – is expected to commence by year’s end. Piedmont Natural Gas has nowhere near enough cash on hand to finance its planned capex and JV contributions, while its operating cash flow only covers some of the balance after dividend payouts are accounted for. As such, the company is raising additional funds via increases to long-term debt and equity offerings to finance its bold investment plans. The company previously announced plans to issue up to $170 million in additional equity, and due to this effort, its total number of shares outstanding increased by more than 800,000 between FQ3 2014 and the most recent quarter. Additional long-term debt will also be taken on to offset the new equity and maintain the company’s existing 55:45 debt-to-equity ratio. This new debt will reduce the company’s diluted EPS numbers moving forward by increasing its interest payments, much as occurred in FQ3. The company’s management is still guiding its FY 2015 diluted EPS number to $1.82-1.92, although the lower end of this range is most likely to occur, barring an unexpectedly strong showing in the normally slow FQ4 report. Recent weather developments raise the prospects that its FQ4 will be weaker than normal, followed by an especially robust FQ1 2016 earnings report. Following a no-show last year, the El Niño weather event has already begun to make its presence felt in the Pacific Ocean. This event has historically been characterized in North Carolina and Tennessee by the presence of warmer-than-average temperatures between April and November and colder-than-average temperatures between December and March. Piedmont Natural Gas reports strong seasonal revenues in the fiscal quarters ending in January and April. Forecasters now expect this year’s event to be one of the strongest since 1950, suggesting that demand for natural gas in the company’s service area will be slow in FQ4, but more than offset by a larger number of heating-degree days than average during the subsequent quarter. Finally, it should be noted that recent volatility in the global equities markets has called the Federal Reserve’s planned interest rate increase, which originally was expected to occur as soon as this month, into question . Hawks point to the low U.S. unemployment rate, while doves question the wisdom of such a move at a time when the broad equity indices are hovering at or near correction territory. Given the record of dividend increases at Piedmont Natural Gas, it comes as no surprise that the company’s share price has outperformed the S&P 500 by a substantial margin in recent weeks (see figure). That said, the valuations of dividend stocks in general and utilities in particular are expected to fall in response to the inevitable rate hike when it does occur, presenting potential Piedmont Natural Gas investors with the prospect of more downside than normal. PNY data by YCharts Valuation The consensus analyst earnings estimates for Piedmont Natural Gas have increased slightly for FY 2015 and FY 2016 over the last 90 days, as the likelihood of warmer-than-average conditions across the company’s service area in FQ1 has increased. The FY 2015 consensus estimate has been revised higher from $1.86 to $1.88, while the FY 2016 estimate has been increased from $2.00 to $2.01. Based on a share price of $36.35 at the time of writing, the company is trading at a trailing P/E ratio of 20.2x, a forward FY 2015 ratio of 19.3x, and a forward FY 2016 ratio of 18.1x. These are all near the bottom of their respective ranges in FY 2015, although they are still above the lows seen in early FY 2014. The company’s shares are not as highly valued as they were three months ago, although I would not characterize them as undervalued at present either. PNY PE Ratio (TTM) data by YCharts Conclusion Piedmont Natural Gas reported underwhelming earnings in FQ3, after beating on EPS in FQ2. The latest miss was attributable to the company’s higher interest costs, however, following an increase to long-term debt over the TTM period. This result is not entirely negative, as the company is in the process of raising capital from the debt and equity markets, which is needed to finance its large planned growth investments in new midstream and downstream capacity. Its long-term route to continued earnings and dividend growth is in place, although investors should expect planned increases to its long-term debt to reduce earnings via larger interest payments. Such impacts will likely be muted in coming quarters due to forecasts of a stronger-than-usual El Niño in late 2015 and early 2016, with previous events being characterized by colder temperatures and increased natural gas demand in the company’s service area. Recent volatility in the equity markets has caused Piedmont’s shares to outperform the S&P 500 by reducing the likelihood of a Federal Reserve rate increase this month. I would not hesitate to purchase the company’s shares following the rate increase, should it occur this month and push their price back below 17.5x forward earnings, or $35 at the time of writing, however, as I expect the company’s earnings in early 2016 to exceed current expectations. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.