Piedmont Natural Gas Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Piedmont Natural (PNY)

Piedmont Natural Gas (NYSE:PNY)

Q3 2013 Earnings Call

September 09, 2013 10:00 am ET


Nicholas Giaimo

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

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


Sarah Akers - Wells Fargo Securities, LLC, Research Division

Travis Miller - Morningstar Inc., Research Division


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

Nicholas Giaimo

Thank you, Tim. Good morning, everyone, and thank you for joining the Piedmont Natural Gas Third 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 relating to these forward-looking statements may be found in Piedmont's third quarter Form 10-Q filed Thursday, September 5, 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 third quarter 2013 earnings conference call. As you know, on Thursday, we filed our 10-Q and issued our third quarter earnings release.

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 the call over to Karl Newlin to give you a more detailed discussion of our recent joint venture investments, our third quarter financial results and our updated 2013 guidance. I'll begin with Slide 2.

Due to the seasonal nature of our business, we typically experience losses during the summer months that make up our third quarter. This quarter, we recorded a net loss of $2.3 million or $0.03 per diluted share, which was 50% improved from a net loss of $4.6 million or $0.06 per share in the third quarter of 2012.

We were encouraged to see continued customer growth during the quarter, with the addition of more than 3,200 new customers, a 21% improvement from last year. Year-to-date, we've added more than 10,000 customers, which is a 15% improvement from 2012.

We continue to work diligently on our large capital expansion program for fiscal year 2013, as I will address more in a moment, our revised utility capital expenditure range for the year is now $610 million to $650 million, which is being driven by increased expenditures for system integrity, as well as customer growth.

As we continue to spend capital to maintain the safety and integrity of our system, we have simultaneously solved to pursue regulatory mechanisms that will allow us to earn a recovery on and of those investments in a timely manner. In August, we filed for an Integrity Management Rider in Tennessee to recover capital investments associated with federal and state-mandated safety and integrity programs. We proposed a January 1, 2014, effective date for the first rate adjustment under the rider and that our rates be updated annually thereafter.

During the third quarter, we also made additional investments in our existing joint ventures. We purchased an additional 5% equity ownership stake in Pine Needle LNG from Hess Corporation for $2.9 million, which increased our overall ownership percentage to 45%. We also contributed $22.5 million to SouthStar Energy to maintain our 15% equity ownership in that venture, alongside AGL Resources' contribution of an unregulated retail natural gas marketing book in Illinois. Karl will address both of these investments in his comments.

We once again demonstrated our financial strength and flexibility by issuing $300 million of 30-year long-term debt at the beginning of August. And finally, on Thursday, we reaffirmed our 2013 guidance range of $1.67 to $1.77 per share with an expectation that our actual results will be near the upper end of that range.

Slide 3 shows our seasonal net loss of $2.3 million, which was more than $2 million improved from the third quarter of last year. Growth in margin and increased contributions from our joint ventures more than offset increased O&M, depreciation and interest 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 3,226 were 21% higher than the third quarter of last year, including a 32% increase in residential new construction. And for the year-to-date period, customer gains of 10,018 were 15% higher than last year, including a 29% increase in residential new construction. These results reflect the continued improvement of the new construction markets in our service territories. And as a result, we are revising our forecast of customer growth in 2013 upwards to a range of 1% to 1.5%.

Moving to Slide 5. As I mentioned earlier, we've revised our utility capital expenditures range for 2013 into $610 million to $650 million. This increase is a result of higher revenue-producing CapEx related to customer growth and increase in system integrity CapEx associated with safety and integrity expenditures, as well as our Sutton project expenditures coming in at the upper end of our previously established range for 2013.

You will also notice that our forecasted utility capital expenditures for 2014 and 2015 also increased from what we presented last quarter. These increases are partly due to higher system integrity expenditures from the development and enhancement of programs designed to maintain risk in our system. They also relate to our revised expectations on customer growth.

Finally, we've included in this presentation the contributions we have made and will make to both our existing joint ventures and to our Constitution Pipeline project, which is a new venture in development. With that, I will now turn the call over to our Senior Vice President and Chief Financial Officer, Karl Newlin.

Karl W. Newlin

Thank you, Tom. Good morning, everyone. As Tom outlined, we had an excellent third quarter. Our seasonal net loss of $2.3 million or $0.03 per diluted share was $2.3 million improvement from third quarter a year ago. Let me discuss the contributions we made to our existing joint ventures, and then I will walk you through the major line items of our third quarter income statement. Finally, I will briefly comment on guidance before turning the call back over to Nick to take your questions.

Moving to Slide 6. On July 1, 2013, we increased our ownership percentage of Pine Needle LNG company by 5%. We acquired the 5% ownership from Hess Corporation after their announcement of their intent to divest non-E&P assets. The additional 5% was purchased for $2.9 million, which increased our ownership percentage from 40% to 45%.

Additionally, effective September 1, 2013, AGL Resources and Piedmont agreed that SouthStar Energy should expand its services to Illinois, the ownership of the customers and related assets acquired in AGL's Nicor acquisition, as well as the purchase of an additional retail book earlier this year. AGL contributed approximately 108,000 Illinois customers and related assets, and we contributed $22.5 million to maintain our 15% ownership percentage. The investment is expected to be accretive between $0.02 and $0.03 to our earnings per share in 2014.

Moving to Slide 7. Margin of $97 million increased $10.5 million in the latest quarter compared to last year. Margin growth came from residential and commercial segment due to customer growth and colder weather. In addition, margin was helped by increased transportation services for new power generation contracts placed into service.

On the expense side, Slide 8, O&M of $63 million was $4 million higher than last year, due to higher utility expense, higher pension expense, as well as increased contract labor for process improvement projects and integrity and safety programs.

Finally, other miscellaneous expenses, which include things such as vehicle and transportation costs and other employee expenses, increased from the prior year.

Slide 9 shows depreciation expense of $28.6 million, general taxes of $8.3 million and joint venture pretax income of $3.7 million. While general taxes were flat, the increase in depreciation was due to growth in plant in service, primarily from power generation delivery projects. Increased contribution from joint ventures is primarily due to AFUDC and the Constitution Pipeline project.

On Slide 10, interest expense of $5.7 million was $1.6 million higher than the third quarter of 2013. The increase in interest expense was due to long-term debt interest expense as a result of higher amounts outstanding. This is partially offset by increased AFUDC.

Before I turn the call back to Nick to take your questions, let me briefly discuss our 2013 earnings guidance. As Tom mentioned on Thursday, we reaffirmed our 2013 guidance range of $1.67 to $1.77 per share, with the expectation that results will come in near the upper end of the range. Several factors have contributed to this expectation, including customer growth and underrun in payroll expense due to position vacancies during the year, lower interest expense on our commercial paper program due to lower rates and overall better expense control.

Our employees have worked extremely hard in 2013, and I'm very proud of their efforts to generate shareholder value.

With that, I'll turn it over to Nick to take your questions.

Nicholas Giaimo

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

Question-and-Answer Session


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

Sarah Akers - Wells Fargo Securities, LLC, Research Division

A couple of questions, I guess, on O&M. Based on your last comment regarding expense control, should we assume that you expect something lower than a 5% increase on O&M this year, which I think was the original expectation?

Karl W. Newlin

You're right. Our original expectation was a 5% growth. We're currently -- we're tracking a little below that, and that's reflected in pulling towards the upper end of the guidance range. So I think it's safe to assume it should come in a little below that 5% growth. One cautionary comment I'll make, and I think I made this in the last quarter, is we continue to see some pressure on contract labor, some of that was timing-related. So I think trying to annualize the current underrun would be -- would not be prudent to do so. I think it will be a little bit of a closure on that expense number as we get towards the end of the fiscal year.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Got it. And then I know you're not providing O&M guidance for '14 yet, but can you talk about any factors that should positively or negatively impact that line next year and, specifically, what you're seeing on the pension line, given likely higher discount rates?

Karl W. Newlin

Yes. You're right, we typically give guidance for the coming fiscal year in November and we intend to do the same this year. So I'll talk quite a bit more about the expected expense line items, expected earnings and financing for capital expenditures when we release guidance in November. I think the one thing that I would expect to see in the coming fiscal year on the pension side is a reduction from our previous year pension expense, and that's wholly due to the interest rates. As interest rates have increased over the past several months that should reduce our FAS 87 pension expense in our GAAP income statement.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Great. And then my last question was about financing, I'm not sure if you'll be able to answer or not. But with the higher CapEx budget, do you see a need for additional equity beyond what's already priced in the forward?

Karl W. Newlin

I'm going to address the financing needs in our guidance release for 2014. What I would say, though, is that, I mean, we've always endeavored this company to fund our capital expenditures, keeping our strong investment grade credit in line. We also endeavor to fund our capital expenditures over time, with a long-term debt-to-capital ratio between 45% and 50%. So we'd endeavor to do that going forward. I think you may not see specific ratios be exactly in line each and every quarter end, but over time, we definitely endeavor to meet that target.


[Operator Instructions] We'll take our next question from Travis Miller with Morningstar.

Travis Miller - Morningstar Inc., Research Division

I wonder if you could go over the regulatory or legislative progress on the pipeline hardening program that you guys have proposed, just the latest, whatever the latest is.

Karl W. Newlin

So you're referring to the integrity management rider in Tennessee or are you talking...

Travis Miller - Morningstar Inc., Research Division

Exactly, yes.

Karl W. Newlin

Okay. So we did file at the end of August for an integrity management rider in Tennessee. If you remember, several months ago, there was additional legislation signed in Tennessee that gave us the ability to consider alternative rate design there, and we've been setting it over the summer. And after reviewing it and filing our North Carolina rate case, which has an integrity management rider proposed in it as well, we thought it made sense to basically take that language from the North Carolina integrity management piece and file in Tennessee to seek similar treatment of a tracker in Tennessee. We've experienced some additional expenditures for pipeline integrity in Nashville, and so we thought it was prudent at this time to file for that IMR, that we're calling it in Tennessee to get the procedural clock started.

Travis Miller - Morningstar Inc., Research Division

Okay. Would the outcome of that try and hold any more CapEx, or you pretty much got in there what you're going to do, and that's just the regulatory outcome?

Karl W. Newlin

I mean, yes, we're going to spend in Tennessee what we need to spend on our system. What this does is try to close the regulatory lag in terms of recovery of and on that additional CapEx being expended or invested in Tennessee. When we make the filing, I think they have 120 days to go through the procedural process in Tennessee, and so we'd expect to have resolution in our early fiscal '14.


And at this time, there are no other questions in queue.

Nicholas Giaimo

Okay, great. Thank you, Tim. This concludes our third quarter 2013 earnings conference call. Thank you, all, for joining us this morning.


And that concludes today's conference call. We appreciate your participation.

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