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Executives

Nick Giaimo – Investor Relations

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

David J. Dzuricky – Senior Vice President and Chief Financial Officer

Franklin H. Yoho – Senior Vice President of Commercial Operations

Analysts

James Lykins - Hilliard Lyons

Daniel Fidell - Brean Murray, Carret & Co.

Piedmont Natural Gas Company Inc. (PNY) F4Q09 Earnings Call January 5, 2010 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Piedmont Natural Gas year end 2009 earnings call. (Operator Instructions)

I would now like to turn the conference over to your host, Nick Giaimo. Please go ahead.

Nick Giaimo

Thank you, Linda. Happy New Year everyone and thank you for joining our year end 2009 earnings conference call. This call is open to the general public and is being webcast live over the Internet.

If you would like to access the webcast of this call, please visit our website at piedmontng.com and choose the Investors link. On the right hand side of that page you will find a link to the webcast.

On the call today presenting prepared remarks we have Tom Skains, President, Chairman and Chief Executive Officer and David Dzuricky, Senior Vice President and Chief Financial Officer. Other officers of the company are also in attendance.

At the conclusion of the prepared remarks, we will open the call to your questions. And finally as a reminder, 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 latest Form 10-K. With that I’ll turn the call over to Tom.

Thomas E. Skains

Thank you, Nick. Good morning and Happy New Year everybody. Thank you for joining us for our year end 2009 earnings conference call. We know many of you are just getting back from your holiday break and we appreciate your time with us today.

As you know, we filed our 2009 10-K and issued our year end earnings release on December the 23rd. To begin the new year we’ve included a Slide presentation in conjunction with our call today, which we hope will provide you with additional clarity and detail around our results.

This morning I’m going to talk about our 2009 accomplishments and then provide you with a general update on the company. Then I’ll turn the call over to Dave for a more detailed discussion of our 2009 financial results and our 2010 guidance.

Since Nick has already covered Slide 1, let’s turn right to Slide 2. I’m very proud of our team’s accomplishments in 2009. During a year of ongoing economic challenges, we were able to once again achieve record net income and earnings per share. While the housing market remains weak during this economic recession, we added more than 12,600 customers and improved our residential conversion efforts. We also worked with AGL Resources to restructure our SouthStar ownership on mutually beneficial terms.

Soon after that, we announced the pipeline infrastructure expansion to serve Progress Energy’s recently announced Wayne County Project. And finally, we demonstrated our financial strength again by raising our dividend in 2009 for the 31st consecutive year. Allow me to speak to each of these accomplishments in a bit more detail.

On Slide 3, you can see that our 2009 net income grew 12% to $123 million. This translates to diluted earnings per share of $1.67, which was above the upper end of our guidance range. Several factors led to our record results in 2009, including the impact of our 2008 North Carolina rate case, increased contributions from our SouthStar venture, lower O&M expense for the third year in a row and lower interest expense. I’ll let Dave speak to these details in just a moment, but as you can see 2009 was an excellent year for our company.

On the next Slide we’ve highlighted our gross customer additions for the year. As we’ve discussed with you earlier in the year, the economic recession has slowed down our new construction growth levels. However, we’ve worked very hard to mitigate this slowdown by focusing even more on residential conversions. In 2009 we converted over 3,000 new customers, which was 62% higher than 2008. Overall, we’ve added more than 12,600 new customers to our system in 2009, which is a gross customer addition growth rate of 1.3%. We expect that customer growth rate again at that level in 2010.

Moving to Slide 5, as I’ve discussed in our last call we reached an agreement with AGL Resources in July to restructure our ownership interest in SouthStar Energy Services. As expected, effective January 1 we sold half of our 30% ownership share to AGL for $57.5 million. The new agreement eliminates AGLR’s option to buy out our remaining 15% ownership and earnings interest in SouthStar. We continue to have an excellent working relationship with AGLR and feel that this new ownership structure better aligns our interest in SouthStar while enhancing Piedmont’s pure play LDC business model.

The timing of the SouthStar deal dovetails nicely with our October announcement of an agreement to provide natural gas service to Progress Energy’s Wayne County, North Carolina gas fired power generation project. Our total capital expenditures are estimated at $85 million over 2011 and 2012, to add about 38 miles of pipeline and associated compression facilities to our system. This project is supported by a long term service agreement with Progress and we expect an in-service date in July of 2012.

On Slide 6, you will see that our consistent financial performance allows us to reward our shareholders with a growing dividend. In 2009 we raised our dividend for the 31st consecutive year. We are committed to long term shareholder value and fully understand the importance of the growing dividend to our shareholders.

Finally I’d like to express my appreciation to all of our employees who are dedicated to performance excellence, high quality customer service and safe and reliable utility operations. It is their effort that led us to record performance levels in 2009.

And with that, I’d like to turn the call over to our Senior Vice President and Chief Financial Officer, Dave Dzuricky.

David J. Dzuricky

Thank you, Tom, and good morning everyone. As Tom said, we had a record year in 2009. Net income of $123 million and diluted earnings per share of $1.67 were about 12% higher than 2008 results. Let me walk you through the major line items in our 2009 income statement and review our 2010 guidance, and then I’ll turn the call back over to Nick to take your questions.

Picking back up on Slide 7, margin of $562 million was almost 2% higher than in 2008. This year we had the benefit of the 2008 North Carolina rate case, but this was offset by net gas cost adjustments for the year as well as lower volumes delivered to industrial customers. We saw the most severe impact from lower industrial volumes in the beginning of the year, with some recovery in the second half of 2009.

On Slide 8, we illustrate the magnitude of the margin stabilizing factors of our utility natural gas tariffs. For 2009, 70% of our margin was set to de-coupled residential and commercial margins in North Carolina, facilities charges and fixed rate contracts with large volume customers. Another 18% of margin was what we call semi-fixed. This includes the volumetric portion of margin in South Carolina and Tennessee that is normalized by rate stabilization tariffs in South Carolina and a weather normalization adjustment clause in both South Carolina and Tennessee.

Only 12% of our 2009 margin was fully volumetric. We continue to look for ways to match our margin recovery with the fixed cost nature of our business, including a proposed residential margin de-coupling tariff that is pending before the Tennessee Regulatory Authority.

On the expense side, O&M of $208 million decreased a little over 1% from 2008. This was mostly due to lower pension and medical expenses and lower contract labor. Our bad debt ratio, as shown on Slide 10, remains extremely manageable at 31 basis points. And remember, we calculate our bad debt ratio as net gas charge-offs over gas revenues. So to the extent that gas revenues decline due to lower commodity costs, our ratio necessarily goes up. In fact, if you calculate the ratio using 2009 charge-offs and 2008 gas revenues as the denominator, the normalized bad debt ratio is 24 basis points.

Income from joint ventures was over $33 million this year, 21% higher than 2008. The increase was due to contributions from SouthStar, and that was a function of higher revenues from the management of storage and transportation assets, the lower of cost market adjustment we experienced in 2008, and the associated benefit in 2009, as well as better margins in our Ohio market.

On Slide 13, we’ve shown our utility interest charges for the year at about $47 million, 21% lower than 2008. This decline was due to lower net interest expense on amounts due from customers, and lower interest in short term debt despite higher borrowings, due to more favorable short term interest rates. All other income statement categories tracked along their normal trends.

Finally, as a reminder, in November we announced our fiscal 2010 earnings per share guidance of $1.90 to $2 per share. We reaffirmed that guidance in our 2009 year end earnings release. The guidance range includes the $0.42 per share gain on the sale of one-half of our interest in SouthStar, gross customer additions forecasted at 1.3% and a $1.1 million margin increase as a result of the South Carolina RSA.

Capital expenditures are projected at $195.4 million and include $46 million for pipelines to serve two gas fired power generation projects in North Carolina. You’ll remember that last year we mentioned these projects had been delayed at the request of the customers, and that delay was from 2009 to 2010. There is no capital expenditure related to the Progress Energy Wayne County Project in 2010.

The guidance also includes stock buy backs forecasted at 1.8 million shares and does not include any new long term debt issuance for fiscal 2010.

And with that I’ll turn the call back over to Nick.

Nick Giaimo

All right. Thanks Dave. Linda, I believe we’re ready to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from James Lykins - Hilliard Lyons.

James Lykins - Hilliard Lyons

A couple of quick questions. First of all for the partial sale of SouthStar, I just want to make sure I’ve got this straight, will be a two month benefit for the full 30% and fiscal Q1. Is that correct?

David J. Dzuricky

No, that’s not correct. We book our earnings from SouthStar a month in arrears, so actually we’ll get one full quarter of benefit of the 30% interest in SouthStar which of course translates in Georgia to a 25% interest in the earnings from that state.

James Lykins - Hilliard Lyons

I’m wondering if its possible if we’ll see any change in and represented changes in the ownership in any of the other JV’s or if this is just going to be related to SouthStar. Is that something you can comment on?

Thomas E. Skains

The SouthStar transaction is the only transaction related to our joint ventures that has closed so far this year. There’s ongoing activity as you may have read in our 10-K. We will be engaged in the final permanent financing of the Hardy Storage venture early in this year and in connection with our Wayne County expansion project there will also be an expansion of the Cardinal venture to serve that power plant as well. And the details of that are reflected in the 10-K in terms of the order of magnitude of the capital that may be required by Cardinal to expand its capacity and how much of that is represented by our equity interest in the venture.

James Lykins - Hilliard Lyons

And lastly I’m wondering if the deal with Progress might have any impact on Robeson or if you all still plan on going forward with that and if so if the timing may have changed at all since we last talked about that.

Thomas E. Skains

Yes. Thank you. The Robeson project as you know and as reflected in our releases is still in a deferral stage at this point. There is no CapEx associated with Robeson in our plan for this year. The Robeson project will continue to be evaluated consistent with our growth trajectory. The last information we provided you all, we still stand by, that we would look later this year as to whether we need to get back into the development stage of Robeson during 2011 for construction as soon as 2012 to be in service somewhere in the 2015 timeframe. That really hasn’t changed at this juncture although we continue to evaluate that and will do so as we see market conditions unfold during the course of this year. This is all again with the expectation that our growth rate in ’10 will be as we projected, you know, about the 1.3% gross customer addition growth rate, which was comparable to what we witnessed in 2009.

The dynamics around Robeson really relates to the economic recovery and what we see in terms of customer growth in North Carolina.

James Lykins - Hilliard Lyons

When you talk about the 1.3, is that based on what you’re seeing right now? Or is that more how you anticipate the new construction market recovering?

Thomas E. Skains

That’s what we saw in 2009 and what we have in our plan for 2010. It’s about 12,500 customers.

James Lykins - Hilliard Lyons

Okay. Thanks.

Nick Giaimo

Thank you.

Operator

Ahead.

Nick Giaimo

Hello?

Thomas E. Skains

Hello?

Daniel Fidell - Brean Murray, Carret & Co.

I’m sorry. She cut out. Just a couple of quick questions. First to piggyback on Jim’s question, are you noticing any acceleration in customer growth just really in the last couple of months?

Thomas E. Skains

I’m going to let Frank Yoho kind of give you his feel on new construction markets, conversion markets and what he’s seeing in the marketplace.

Franklin H. Yoho

Good morning, Dan. This is Frank Yoho and right now we have clearly seen what we think is a leveling off as we saw the decline during ’09. We’ve seen it level off and while there are a few hopeful signs out there, we are cautious and thinking during the next year we are going to as our forecast indicates see conditions somewhat flat compared to what we’ve seen in the last quarter.

Daniel Fidell - Brean Murray, Carret & Co.

Just a second quick question on bad debt expense, saw just a very slight pick up in ’09 versus ’08. Is a somewhere level forecasted for 2010 as well?

David J. Dzuricky

Yes, we included in our guidance the bad debt expense and frankly when you’re down into the range of 25 basis points to 30 basis points, its tough to show an improvement. So yes, its pretty stable and its predicated on the fact that customer bills with gas prices where they are will be perhaps more reasonable this coming year than they were last year. And frankly, the price of gas doesn’t bother the customer as much as the total cost of the bill, and that’s what we’re looking at there.

Daniel Fidell - Brean Murray, Carret & Co.

Then just a final question on maybe you can give us just a little bit of color where things stand in Tennessee in terms of the residents, will the coupling request and whether or not you’ve made any kind of estimate in terms of your forward 2010 guidance in terms of an outcome in that case?

Thomas E. Skains

Thank you, Dan. Our guidance for 2010 does take into account the proposal that we have pending in Tennessee, so it’s baked in. That plan if approved would be approved obviously for a partial year. The hearing was held in December, I think December 17 and 18, just before the holidays, and we’ve received an informal indication that the TRA could address the matter on an agenda meeting later this month. Briefs were filed by the company and the Attorney General’s Office yesterday, so the matter has been heard, briefs have been filed, its now pending before the TRA. We’re hopeful that they’ll rule on the matter sometime in January.

Daniel Fidell - Brean Murray, Carret & Co.

Do you have any kind of a feel in terms of which way they’re leaning at this point?

Thomas E. Skains

I was not at the hearing, but my experts who were there are shaking their head “no.” We really don’t have a feel. We think we made a compelling case. We think the merits are on our side. But it comes down to a policy question for the TRA. We are hopeful that they will follow the trend in other states and adopt de-coupling. We think it’s the right thing for energy consumers, we think it’s the right thing for utility companies and we think it’s the right thing to delay the predicate to allow us to roll out energy efficiency and conservation programs and help our customers reduce their carbon footprint.

Operator

There are no further questions in queue.

Nick Giaimo

All right, Linda. I guess that concludes our call. We are available on the phone if you have any further questions, but thank you for joining us today.

Operator

Ladies and gentlemen, this conference will be available for replay after 12:00 PM Eastern today until February 16 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code 138416. Again that number is 1-800-475-6701. The access code is 138416. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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