Piedmont Natural Gas Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: Piedmont Natural (PNY)

Piedmont Natural Gas (NYSE:PNY)

Q2 2013 Earnings Call

June 11, 2013 10:00 am ET

Executives

Nicholas Giaimo

Thomas E. Skains - Chairman, Chief Executive Officer and President

Karl W. Newlin - Chief Financial Officer and Senior Vice President

Franklin H. Yoho - Chief Commercial Operations officer and Senior Vice President

Jane R. Lewis-Raymond - Chief Compliance & Community Affairs Officer, Senior Vice President, General Counsel and Corporate Secretary

Analysts

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Spencer E. Joyce - Hilliard Lyons, Research Division

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Travis Miller - Morningstar Inc., Research Division

Operator

Good day, and welcome to the Piedmont Natural Gas Co. Inc. Second Quarter 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Nick Giaimo. Please go ahead.

Nicholas Giaimo

Thank you, Macrida. Good morning, everyone, and thank you for joining the Piedmont Natural Gas Second Quarter 2013 Earnings Conference Call. This call is open to the general public and is being webcast live over the Internet. If you'd like to access the webcast of this call or view the slides of the accompanying presentation, please visit our website at piedmontng.com and choose the For Investors link. On the right-hand side of that page, you will find the appropriate links.

On the call today presenting prepared remarks, we have Tom Skains, President, Chairman and Chief Executive Officer; and Karl Newlin, Senior Vice President and Chief Financial Officer. Other officers of the company are also in attendance to take your questions.

Finally, this call may include forward-looking statements and our actual results may materially differ from those statements. More information about the risks and uncertainties related to these forward-looking statements may be found in Piedmont's second quarter form 10-Q filed Friday, June 7, with the SEC. And with that, I will turn the call over to Tom.

Thomas E. Skains

Thank you, Nick, and good morning, everybody, and thank you for joining us for our second quarter 2013 earnings conference call. We saw many of you at the AGA Financial Forum last month and I appreciate you taking the time to join us again today.

As you know, we filed our second quarter 10-Q and issued our earnings release Friday afternoon. This morning, I'm going to talk about our recent accomplishments and provide you with a general update on the company. Then I'll turn it over to Karl to give you a more detailed discussion of our second quarter financial results.

I continue to be very proud of our performance in 2013. As you see on Slide 2, we reported net income of $55.8 million and diluted earnings per share of $0.74 in the second quarter, up 11% and 6%, respectively, from the second quarter of last year. We were also pleased to see continued customer growth during the quarter with the addition of more than 3,000 new customers, a 16% improvement from last year. Year-to-date, we've added nearly 6,800 customers, which is a 12% improvement from 2012.

We continue to work diligently in our large capital expansion program for fiscal year 2013. Our $550 million to $600 million program includes expenditures for the completion of our Sutton project, which we put into service on June 1. At the end of last month, we filed a general rate case in North Carolina for the first time since 2008. Over that time period, we've invested more than $1.2 billion in the state and we're seeking to refresh our rates to account for this investment. Finally, we reaffirmed our 2013 earnings per share guidance range of $1.67 to $1.77 per share.

Slide 3 shows our second quarter earnings of $56 million, which were nearly $6 million higher than the second quarter of last year. Our growth in net income was driven by higher margin, lower general taxes and increased contribution from our joint ventures and lower interest expense, partially offset by increased O&M and depreciation expense.

On Slide 4, we've highlighted our gross customer additions for the quarter and for the year-to-date. As you can see, our customer gains of 3,046 were 12% higher than the first quarter of last year, including a 28% increase in residential new construction. And for the year-to-date, customer gains of 6,792 were 16% higher than last year, including a 31% increase in residential new construction. These results reflect the continued improvement of the new construction markets in our service territories. And with that, we still forecast a slightly greater than 1% customer growth rate in 2013.

Moving to Slide 5, one of our major business objectives in 2013 is the execution of a $550 million to $600 million capital expenditures program. This is largely driven by expenditures to enhance system integrity, which we've highlighted with the red bar. The green bar represents expenditures we realized to complete our Sutton project. With that project in service, we have now completed a portfolio of 5 recent power generation delivery projects totaling more than $0.5 billion.

Finally, the purple bar illustrates our cash contribution to our Constitution Pipeline joint venture. As you will notice, our forecasted total contributions for the Constitution project have been revised downward to $163 million to account for lower projected total project cost at $680 million. This is due to Constitution no longer planning to build greenfield compression, as they've contracted to lease new compression capacity from an expanded Iroquois Gas Transmission facility instead.

In light of our large utility capital expenditure programs, on May 31, we filed a general rate case with the North Carolina Utilities Commission to refreshen our rates based upon an updated rate base of $1.9 billion. Our filing proposes incremental revenues of $79.8 million, which includes $13.6 million related to higher fixed gas costs. Our revenue request is based on the proposed ROE of 11.3% with an equity capital structure component of 50.7%. We are also proposing to implement an integrity management rider pursuant to recently-passed legislation in North Carolina. This rider will allow us to recover federally-mandated safety and integrity expenditures outside of rate cases. Our intention is that these new rates be in place on January 1, 2014. I would note that even with our proposed rates, an average residential customer would still see annual bills that are 18% lower than our last rate case in 2008, given the lower commodity cost of gas.

With that, I would now like to turn the call over to our Senior Vice President and Chief Financial Officer, Karl Newlin.

Karl W. Newlin

Thank you, Tom, and good morning, everyone. As Tom mentioned, we had an excellent second quarter with net income of $55.8 million and diluted EPS of $0.74 compared to $50.2 million and $0.70 in the second quarter of 2012. Let me walk you through the major line items of our second income statement, and then I'll turn the call back over to Nick to take your questions.

On Slide 7, margin of $184 million increased $12 million compared to last year. Margin growth came from the residential and commercial segment due to customer growth, new rates in Tennessee and colder weather. In addition, margin was helped by increased services to power generation customers and increased contribution from industrial customers due to colder weather and customer growth.

On the expense side, Slide 8, O&M of $65 million was $5 million higher than last year due to increased contract labor for process improvement projects, and integrity and safety programs. In addition, increased pension expense, payroll and incentive accruals and regulatory expense all contributed to higher O&M.

Slide 9 shows depreciation expense of $27 million and general taxes of $9 million. While general taxes were basically flat, the increase in depreciation was due to growth in plant in service primarily from system integrity projects.

On Slide 10, income from joint ventures was $12 million during the second quarter, nearly $1 million higher than in Q2 2012. This is due to an increased contribution from SouthStar as a result of higher customer usage due to colder weather as well as a prior-year lower of cost or market gas storage adjustment.

Finally, on Slide 11, interest expense of $3 million was $2 million lower than the second quarter of 2012 due to increased AFUDC offsets, lower net interest expense due to interest income on amounts due from customers and lower short-term interest expense due to lower balances at a lower average rate. Lower interest expense was somewhat offset by an increase in long-term debt interest expense as a result of higher amounts outstanding. And with that, I'll turn the call back over to Nick.

Nicholas Giaimo

Thank you, Karl. Macrida, we're now ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Sarah Akers with Wells Fargo.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

After the first half of the year, it looks like the O&M growth rate is about 1.7%. Are there any headwinds that you would point to in the second half of the year to get up to the 5% annual increase embedded in guidance or might we expect the annual clip to come in south of that 5% mark?

Karl W. Newlin

Yes. Sarah, it's Karl. It's really a timing issue. We do forecast uptick in contract labor, for example, later this year, in IT and some other projects. So while I think there's a chance that we could come in below the 5% forecasted increase, I'm going to stick with that amount in our guidance for now.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Got it. And then second, are you able to give us a sense of how much of the $250 million system integrity CapEx in '13 is captured in the rate case versus potential future integrity rider increases?

Karl W. Newlin

Well, I can tell you on the rate case, our true-up period is through September of this year.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

And does that only capture integrity rider CapEx that is in service, so to speak, or is it -- does that include any seawhip [ph] as well?

Thomas E. Skains

This is Tom. The rate case process generally picks up projects that are in service in North Carolina. But as you know, we've also filed in this case the integrity management rider, which would pick up any expenditures that don't close as of September and subsequent adjustments. So this rider mechanism is -- which we propose to make rate adjustments twice a year -- if approved, would pick up those ongoing integrity expenditures.

Operator

We'll take our next question from Spencer Joyce with Hilliard Lyons.

Spencer E. Joyce - Hilliard Lyons, Research Division

And I guess kind of minutia here, but congrats on crossing the 1 million customer mark. I saw that kind of embedded there in the Q.

Thomas E. Skains

We appreciate that, yes.

Spencer E. Joyce - Hilliard Lyons, Research Division

One almost kind of housekeeping note. I know we saw the first initial dilutive impact from the secondary offering this quarter. And I guess, Karl, I was just kind of wondering if you can maybe walk us through when we may see that forward sale agreement exercised and where we may or may not see that additional impact.

Karl W. Newlin

Yes, sure. So there's really kind of 2 pieces to that. As you know, the total offering is 4.6 million shares. We settled $3 million regular way. So because shares are time-weighted, in the EPS calculation, you'll see that share count accrete, if you will, over time for the remainder of our fiscal year. That still leaves the amount outstanding of the forward settlement agreements. Under those agreements, for the 1.6 million shares, we have the ability to settle at will. Any time between now and the middle of December of 2013 would be our expectation to settle, most likely in December. But again, we do have the flexibility to settle sooner, deliver the shares and take the cash at will. So you'll begin -- you'll see those additional shares leak into the denominator for EPS once that gets settled. But again, I would expect that to be in fiscal 2014 or December '13 which, obviously, is our fiscal '14. The final little nuance piece to is if you look, there's a note in the Q that just talks about whenever you have a forward settlement agreement, you have to go through treasury stock method accounting. To the extent that our prevailing stock price during that period is above the forward settlement price, you'll have some incremental dilution into the denominator. I think that's about 200,000 shares or so in the most recent period.

Spencer E. Joyce - Hilliard Lyons, Research Division

Okay. I will need to look at that note.

Operator

[Operator Instructions] And we will go next to Heike Doerr with Baird.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Two quick questions. One, can you drill down on your improvement in residential new construction? Are you seeing that in one specific state or are you seeing that across your operating territories?

Thomas E. Skains

I'm going to turn that over to Frank Yoho, our Chief Commercial Operations Officer, to give you some color on our growth. Frank?

Franklin H. Yoho

Yes. We are seeing the growth across, really, all our markets from Tennessee to South Carolina to North Carolina, so is very solid, especially on the residential new construction. And really, everywhere you look, it may not be dramatic but there are real clear signs of positive things happening in the economy especially related to residential new construction. So we're real pleased to see that right now.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Great news. And could you provide us an update on the situation with legislation being passed in North Carolina that would replace the commission? I believe your rate case will likely be completed before any new commissioners are seated, but can you tell us where that stands?

Thomas E. Skains

Okay, yes. This is Tom, I'll address that and I'll ask Jane Lewis-Raymond to join in and provide any additional color. There are 7 commissioner seats in North Carolina. There are currently 6 commissioners in place. There is 1 vacancy. Our new Governor, Pat McCrory, has already made 3 appointments for 1, the vacant position, and 2 additional seats where the sitting commissioners' terms expire this summer. Those 3 appointments are proceeding along the normal course of review and confirmation by the General Assembly. So once those 3 new commissioners are seated, we will have a full complement of 7: 4 incumbent commissioners and 3 new commissioners. There was a previous bill that we discussed at the AGA Financial Forum and we have a slide on that on our presentations portion of our website talking about a North Carolina Senate Bill 10 that would restructure most commissions that operate in North Carolina and allow new appointments for all seats. That bill was defeated a few weeks ago and, to my knowledge, has not been reintroduced. And there is uncertainty as to whether it will be introduced and, if it does, whether it will pass. So at this point, we are planning, from my perspective, on a commission complement in North Carolina of 7 commissioners, 4 incumbents and 3 new.

Jane R. Lewis-Raymond

Yes. This is Jane Lewis-Raymond, the only thing I would add to that is that the current Executive Director of the Commission does retire in the middle of this month, Robert Gruber. And his replacement has already been confirmed by the General Assembly, Chris Ayers.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Okay. And the governor is Republican, correct? And right now you've got 6 Democratic commissioners. So we will see a change in that he's likely to appoint his 3 Republicans, correct?

Jane R. Lewis-Raymond

I'm not sure the exact breakdown of the party lines of the sitting commissioners. The commissioners he did appoint definitely are Republicans. And the current ones, there's always been a mix, so I don't think that there is, one way or the other, a slanted commission in any way.

Thomas E. Skains

This is Tom. Based upon my recollection, I don't believe there's a requirement at the North Carolina Commission like there is at the SERC by example, where there has to be x amount of Republican versus Democratic-related commissioners appointed. Well that's subject to check, but my recollection is the governor makes the appointments and they don't have to be tied to any specific party.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Yes. For some reason, I thought that there were 6 Democrats that were sitting on the current commission and that was part of the reason that they may have been targeted as part of Senate Bill 10 was to switch the political party of the entire commission all at once. Okay, that's all I have.

Operator

[Operator Instructions] We'll go next to Travis Miller with Morningstar.

Travis Miller - Morningstar Inc., Research Division

I had a question on the rate case. I wonder if you could talk a little bit about the decision to request that 11.3%. And obviously, I think it's quite a bit higher than what you're allowed now. Looks like it's quite a bit higher than what Duke got in North Carolina. But again, I recall it's in line with what you got in South Carolina. So I was wondering if you could kind of talk about those differences like, perhaps, North Carolina versus South Carolina and then North Carolina versus some decessions in your past ROE?

Karl W. Newlin

Yes. It's Karl, Travis. I think as you pointed out, we do have an 11.3% allowed ROE in South Carolina. We think there's some precedent for it there. And as we went and filed the rate case, as you know, a lot of thought and discussion goes into around the capital structure and the return on equity component. And as we look at our business, our business mix and our competitive position in our state, we think that's a fair return for the company, for shareholders as well as for the customers in our service territory.

Travis Miller - Morningstar Inc., Research Division

Okay. Have you found that North Carolina and South Carolina typically mirror each other in this respect, if you're looking at competitors or if you're looking at other utilities?

Karl W. Newlin

I mean, I think each state is independent and makes its own discoveries.

Travis Miller - Morningstar Inc., Research Division

Right. And what's the sensitivity around that, say, a 100 basis point move on your revenue increase request?

Karl W. Newlin

Yes. I don't think I'm really comfortable going into that level of discussion right now since we have the rate case pending.

Travis Miller - Morningstar Inc., Research Division

Okay. Is it as simple as you're just taking rate base times some kind of change or is there something else embedded in there?

Karl W. Newlin

Yes, that's right. I mean, you can take the proposed capital structure and apply the differential in the ROE and you should be able to get into -- back into the numbers you're looking for.

Operator

And it appears we have no further questions at this time.

Nicholas Giaimo

Okay. Thank you, Macrida. This concludes our second quarter 2013 earnings conference call. Thank you, all, for joining us this morning.

Operator

That does conclude today's conference. We appreciate your participation. You may now disconnect.

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