Piedmont Natural Gas' CEO Discusses F1Q 2014 Results - Earnings Call Transcript

Mar. 7.14 | About: Piedmont Natural (PNY)

Piedmont Natural Gas Company, Inc. (NYSE:PNY)

F1Q 2014 Earnings Conference Call

March 7, 2014 10:00 ET

Executives

Nick Giaimo - Investor Relations

Tom Skains - President, Chairman and Chief Executive Officer

Karl Newlin - Senior Vice President and Chief Financial Officer

Frank Yoho - Senior Vice President and Chief Commercial Operations Officer

Analysts

Sarah Akers - Wells Fargo

Travis Miller - Morningstar

Operator

Good day, everyone. Welcome to today’s Piedmont Natural Gas Company First Quarter 2014 Earnings Conference Call. Today’s call is being recorded. And at this time, I would like to turn the call over to Mr. Nick Giaimo. Please go ahead, sir.

Nick Giaimo

Thank you, Melody. Good morning, everyone and thank you for joining the Piedmont Natural Gas first quarter 2014 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 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 first quarter’s Form 10-Q filed Thursday, March 6 with the SEC.

And with that, I will turn the call over to Tom.

Tom Skains

Thanks, Nick and good morning, everybody and thank you for joining us for our first quarter 2014 earnings conference call. As you know, we filed our first quarter 10-Q and issued our earnings release late yesterday afternoon. And this morning, I am going to talk about our year-to-date accomplishments and provide you with a general update on the company. Then I will turn the call over to Karl Newlin to give you a more detailed discussion of our first quarter financial results.

We are off to an excellent start in 2014 as you have read. As you see on Slide 2, we generated net income of $98 million and diluted earnings per share to $1.26 in the first quarter, up 14% and 7% from the first quarter of last year. We also demonstrated another strong quarter of customer growth with the addition of more than 4,200 new customers, a 13% improvement from last year. We continue to work diligently in our $450 million utility capital expansion program for fiscal year 2014 driven by an estimated $250 million of system integrity expenditures. Our financial strength manifested itself in several ways this quarter.

As you will recall in 2013, we executed a secondary equity offering of 4.6 million shares to help fund the growth of our company through a combination of direct issuances and equity forwards. While 3 million shares settled immediately, we completed the equity offering by closing out the equity forwards position for 1.6 million shares in December. In addition in February, Moody’s upgraded our company’s senior debt from A3 to A2 and short-term debt from P2 to P1. And yesterday, our Board again demonstrated its confidence in the company by increasing our quarterly dividend from $0.31 to $0.32 per share. This is the 36th consecutive year our Board has raised the dividend. Finally, we raised our 2014 EPS guidance range from $1.73 to $1.83 to $1.80 to $1.90, a $0.07 increase, which Karl will speak about in a moment.

Slide 3 shows our first quarter earnings of $98 million, which were about $12 million higher than the first quarter of last year. Our top line growth from utility operations as well as increased contributions from joint ventures more than offset increased O&M, depreciation and interest expense to support that margin growth.

On Slide 4, we have highlighted our gross customer additions for the quarter. As you can see, our customer gains of 4,232 were 13% higher than the first quarter of last year. This includes a 19% increase in residential new construction gains reflecting the continuing improvement in the new construction markets in our service territory. We expect this momentum to continue and reaffirm our forecasted gross customer addition growth rate of 1.5% for fiscal year 2014.

Moving to Slide 5, you can see that we are coming off a record year of capital investments in 2013 and we expect to continue to make substantial capital investments again in 2014. This is largely a function of expenditures for customer growth and system integrity, which we highlighted with the red and blue bars. The purple bar represents contributions to joint ventures with our 2014 to 2016 estimates attributed to the Constitution Pipeline project. During our year end call, we commented that our construction and in-service projections for Constitution may change based on the FERC’s regulatory review timeline for that project.

Although the current estimate of total project cost has not materially changed, the timing of the expenditures has been adjusted based upon our revised forecasted in-service date of late 2015 or 2016. As a result, our equity contribution projections have been lowered in 2014 and ’15 with the remainder to be funded in our fiscal year 2016. So as you can see with our forecasted levels of utility capital expenditures and joint venture contributions in 2014 and beyond, we plan to make significant investments in the growth of our company.

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

Karl Newlin

Thank you, Tom and Good morning everyone. As Tom mentioned, we had an outstanding first quarter with net income of $97.6 million and diluted EPS of $1.26 compared to $85.9 million and $1.18 in the first quarter of 2013. As Tom also noted, we have increased our EPS guidance range by $0.07 to $1.80 to $1.90. I will address the increase in guidance in a moment, but first let me walk you through the major line items for our first quarter income statement. Then I will turn the call back over to Nick to take your questions.

On Slide 6, margin of $262 million increased $30 million compared to last year. Margin growth came from increased secondary marketing, from retail markets experiencing growth, new rates in North Carolina and Tennessee and colder weather and from the Southern Power generation project being placed into service.

On the expense side, Slide 7, O&M of $61 million was $5 million higher than last year due to increased payroll, overtime, incentive accruals and medical costs partially offset by lower pension expense. As you probably noticed O&M this quarter came in higher than we originally anticipated at the beginning of the year with better than expected performance in the first quarter, we accrued additional compensation expense for year end purposes. In addition, extremely cold weather during the quarter led to greater than expected employee overtime expense to provide safe and reliable service to our customers.

Slide 8 shows depreciation expense of $30 million and general taxes of $9 million, the $3 million increase in depreciation was due to growth in plant service related primarily to power generation system integrity projects.

On Slide 9, income from joint ventures was $10 million during the first quarter, nearly $3 million higher than 2013, attributed mostly to an increased contribution from SouthStar due to the addition of new Illinois customers as well as colder weather. Increased AFUDC from Constitution Pipeline also added to the growth in joint venture income.

Finally on Slide 10, interest expense of $11 million was more than $6 million higher than the first quarter of 2013. This was due to higher long-term debt expense from greater amounts outstanding, lower AFUDC offsets and lower interest income on amounts due from customers.

Before I turn the call back over to Nick, let me briefly address our revised 2014 EPS guidance range of $1.80 to $1.90. In November, when we introduced our original guidance, we had anticipated margin growth related to customer growth, the impact of the general rate case in North Carolina as well as the impact of IMR adjustments in Tennessee and North Carolina. However, due to periods of sustained cold weather and increased wholesale market volatility, our company was able to generate margin from secondary wholesale market activity was well above expectations. Not only does this benefit shareholders in the first quarter, but it also greatly helped our retail customers since we shared 75% of secondary marketing gains with customers and 25% remaining with shareholders. Our revised guidance range reflects our increased margins stemming from the higher secondary market activity and our current assessment of the partial year impact of the North Carolina rate case, partially offset by higher incentive accruals due to top line and earnings per share growth.

And with that, I will turn the call back over to Nick.

Nick Giaimo

Thank you, Karl. Melody we are now ready to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will go to Sarah Akers with Wells Fargo.

Sarah Akers - Wells Fargo

Hey, good morning.

Tom Skains

Good morning, Sarah.

Sarah Akers - Wells Fargo

Just a question on guidance, does the updated range embed continued cold weather post fiscal Q1?

Tom Skains

This seems normal weather for the remainder of the fiscal year. It’s impossible to predict the weather, so we always default to using normal weather, but clearly the guidance range increase has occurred because we had such a strong first quarter. And one thing I would say is that if we do continued to experience favorable conditions to capitalize on additional wholesale market activity I think we have demonstrated and we continue to attempt to capitalize on that activity to maximize proceeds not only to us, but also to our customers.

Sarah Akers - Wells Fargo

So was February another good weather month and is that embedded in the guidance or does it just go through the fiscal?

Tom Skains

Yes, we need to be careful. Yes, Sarah, we need to be careful about talking about periods beyond the first quarter, but I can tell you that the weather in February was normal.

Sarah Akers - Wells Fargo

Okay, got it, perfect. And then on the secondary market, it looks like volumes were actually down 44%, is the story there just that the prices and end margins were so strong that had more than offset the volumes or what’s going on there?

Frank Yoho

This is Frank Yoho. And that’s accurate given the extraordinary circumstances around the market and the polar vortex we saw some pretty extraordinary pricing in margins around that. So that’s correct.

Sarah Akers - Wells Fargo

Got it. Thanks guys.

Tom Skains

Thank you.

Operator

(Operator Instructions) We will go to Travis Miller with Morningstar.

Travis Miller - Morningstar

Good morning, everyone.

Tom Skains

Good morning Travis.

Karl Newlin

Hi Travis.

Travis Miller - Morningstar

Follow up on the whole weather issue here, if you think about the weather taking out that weather benefit across all of your businesses, was there anything else in the core business that led to the earnings guidance increase?

Karl Newlin

It is primarily the wholesale marketing activity in the first quarter. I would say the business continues to perform very well. We saw a little better customer growth in the first quarter than was anticipated. Also think if you can strip away some of the incentive accruals that occurred in our O&M line as well as the over time that occurred because of additional colder weather in our O&M line, I would say, we are tracking on our original O&M expectations maybe even a little better, but with the additional accruals that it popped the O&M number up in the current quarter, let’s say, on all the businesses performing very well. The joint ventures performed well. Customer growth has been robust. But again, the guidance range was primarily stemming from strong wholesale activity in Q1.

Travis Miller - Morningstar

Okay, great. And then there has been a lot of talk across the industry here, certainly in the last three to four months about gas supply issues certainly in the Northeast Mid-Atlantic region. Wondering what you guys see just on a macro level, whether it’s in your service territory or some of your joint ventures in terms of gas supply constraints in these abnormally cold conditions, especially on peak cold days?

Tom Skains

Yes. That’s a great question, Travis. This is Tom Skains. You can just follow the basis differentials across the nation this winter, which have had presented some anomalies and some opportunities if you are active in the wholesale markets. If you look at those pricing dynamics, I mean it’s clear that in some regions of the country, capacity is needed. Additional infrastructure pipeline capacity is needed to move volumes of production and our supply development and resources in this nation to markets that are hungry for additional natural gas. One, because of growth, two, just because to sure up the reliability of service into those regions, where particularly some power generations facilities and other customers have not firmed up pipeline capacity to those markets. So we believe, for example, that the Constitution Pipeline project was a prime example of moving prolific Marcellus gas from Northeast Pennsylvania into gas hungry Northeastern markets in New York and New England. So if you look at these basis differentials and analyze those, you can see where capacity is really needed and you know the industry is well capitalized to take advantage of those and we just need to continue to pursue the development and push those project schedules through, so that the capacity is built for the benefit of both consumers as well as producers who need over long run I think some price signals to stimulate additional supply development.

Travis Miller - Morningstar

Okay, great. I appreciate the thoughts.

Operator

(Operator Instructions) With no further questions in the queue, I’ll turn the call back over to our presenters for any closing or additional remarks.

Tom Skains

Thank you, Melanie. This concludes our first quarter 2014 earnings conference call. Thank you all for joining us this morning and have a great weekend.

Operator

Ladies and gentlemen that does conclude today’s call. Thank you all for joining.

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Piedmont Natural Gas Co Inc. (PNY): Q4 EPS of $1.26 beats by $0.07. Revenue of $657.73M beats by $107.3M.