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

Q2 2014 Earnings Conference Call

June 06, 2014 11:30 AM ET

Executives

Nick Giaimo - IR

Tom Skains - President, Chairman and CEO

Karl Newlin - SVP and CFO

Frank Yoho - CCO

Victor Gaglio - CUO

Analysts

Travis Miller - Morningstar

Sarah Akers - Wells Fargo

Chris Turnure - JPMorgan

Operator

Good day and welcome to the Piedmont Natural Gas Second Quarter 2014 Earnings 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, sir.

Nick Giaimo

Thank you, Jennifer. Good morning, everyone and thank you for joining the Piedmont Natural Gas second 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 second quarter’s Form 10-Q filed this morning 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 second quarter 2014 earnings conference call. We saw many of you at the AGA Financial Forum last month and appreciate the opportunities to speak with again today. As you know, we filed our second quarter 10-Q and issued our earnings release earlier today. This morning, I am going to talk about our recent 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 capital expenditures and second quarter financial results.

We continue to have excellent results in 2014. As you can see on Slide 2, we generated net income of $63 million and diluted earnings per share of $0.80 in the second quarter, up 12% and 8% from the second quarter of last year. We also demonstrated another strong quarter of customer growth with the addition of more than 3700 new customers in the quarter and nearly 8000 new customers year-to-date. That’s a 22% and 17% respected improvement from last year. In April, we and Duke Energy jointly issued a solicitation for proposals to build and operate a new major interstate natural gas pipeline into North Carolina to help meet the growing demand for natural gas in our markets.

I will speak to this project in greater details in just a moment. We also continue to work diligently on our $540 million utility and joint venture capital expansion program for fiscal year 2014, driven by an estimated $290 million of system integrity expenditures. Earlier this week, we announced another agreement with Duke Energy to serve their W.S Lee Power Generation facility near Anderson, South Carolina with a construction of a new natural gas pipeline and associated compression. Our estimated capital investment under this long-term contract is $38 million. Finally, we reaffirmed our 2014 earnings per share guidance range by $1.80 to $1.90 per share, but we’re now emphasizing the upper end of that range following our strong second quarter. Carl will speak of this in his remarks.

Slide 3 shows our second quarter earnings of $63 million, which were about $7 million higher than the second quarter of 2013. Our top line margin growth and utility operations as well as increased contributions from joint ventures more than offset increased O&M, depreciation and interest expense to support that growth.

On Slide 4, we have highlighted our gross customer additions for the quarter and for the year to-date. As you can see, our customer gains of 3,716 were 17% higher than the second quarter of last year, including a 19% increase in residential new construction. And for the year-to-date, customer gains of 7,948 were 22% higher than last year again including a 19% increase in residential new construction. These results reflect the steady growth with the new construction markets in our service territory. We expect this trend to continue and reaffirm our forecasted gross customer addition growth rate of approximately 1.5% for fiscal year 2014.

Slide 5 provides some additional details and our joint efforts with Duke Energy to build a second major natural gas pipeline into North Carolina. Given our growing customer demand as well as Duke’s new gas-fired power generation demand, we’re seeking proposals that would both support system this demand and also enhance geographic supply diversity, reliability and security and operational flexibility. We expect to receive the initial bids from pipeline operators next Wednesday and work through the project details by the end of the year. We’re excited about the prospects to bring an additional natural gas infrastructure into North Carolina and to enhance economic development in the state.

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

Karl Newlin

Thank you, Tom and Good morning everyone. As Tom mentioned, we had an outstanding second quarter with net income of $62.5 million and diluted EPS of $0.80 compared to $56.1 million and $0.74 in the second quarter of 2014. As Tom also noted, we have reaffirmed our EPS guidance range by $1.80 to $1.90 with emphasis now placed on the upper end of that range. I will address guidance in a moment, but let first me walk you through out capital investments and major line items for our second quarter income statement. Then I will turn the call back over to Nick to take your questions.

Moving to on Slide 6, you can see that we continue to project the high level of capital expenditures throughout the forecast period. Capital expenditures for customer growth and system integrity which we have highlighted with the blue and red bars respectively now total $500 million in 2014. Increase relative to prior forecast is primarily related to increased costs for various system integrity projects. You’ll also notice a green bar in fiscal years 2015 and 2016 representing our power generation delivery project for Duke Energy to serve the W.S. Lee facility that Tom talked about in his remarks.

Finally the purple bars in years 2014 through ‘16 continue to represent our portion of the constitution pipeline project. Regarding that project we expect FERC to complete its environmental impact statements this summer for the Seven Seas coming 90 days thereafter. As you can see with this forecast we plan to make significant investments in the growth of our company.

On Slide 7, margin of $212 million increased nearly $28 million compared to last year. Margin growth came from customer growth, new rates in North Carolina and Tennessee, the Southern Power Generation project in place in the service last June and higher secondary marketing margins partially offset by lower industrial margin due to cost allocations and rate design changes in the North Carolina rate case.

On the expense side Slide 8, O&M was $70 million was $5 million higher than last year due to increased payroll, overtime, incentive accruals and regulatory asset amortizations partially offset by lower pension expense. Year to date O&M was higher than we originally anticipated due to better than expected EPS performance in the accrual of additional incentive compensation expense.

In addition, extremely cold winter weather led to greater than expected and fully over time expenses to provide safe and reliable service to our customers.

Slide 9, shows depreciation expense of $28 million and general taxes of approximately $9 million, the increase in depreciation is due to growth in plant and service related to power generation and system integrity projects.

On Slide 10, income from joint ventures was $14 million during the second quarter, $2 million higher than 2013, attributed mostly to an increased contribution from SouthStar due to colder weather, the addition of new Illinois customers as well as a favorable customer mix and price spreads in Georgia.

Finally on Slide 11, interest expense of $12 million was nearly $9 million higher than the second quarter of 2013, this was due to higher net interest expense due to decreased AFUDC, increased long-term debt expense from greater amounts outstanding and lower interest income on higher amounts due to customers. The colder winter weather led to increased sales in cash collections thereby reducing the amount our customers owe the company and reversing the net balance, so we’re now occurring interest on amounts we owe them.

Before I turn the call back over to Nick, let me briefly comment on our reaffirmed 2014 EPS guidance range. In March, we revised guidance upward by $0.07 to a range of $1.80 to $1.90 due our strong first quarter performance. Our emphasis is now in the upper end of the guidance range reflects continued strong performance in the second quarter for all the reasons I discussed earlier.

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

Nick Giaimo

Thanks Karl. Jennifer we’re now ready to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we’ll go first to Travis Miller from Morningstar.

Travis Miller - Morningstar

Wondered on these growth projects you have obviously done a lot with natural gas power generation side. Wonder if you had a chance here yet to look at the carbon rules or even just the discussion over the last year plus on the carbon rules. How much opportunity there might be for either increase natural gas generation supply or even projects, pipeline projects?

Tom Skains

Thank you, Travis. The carbon rule is long and extensive, we’ve had -- not had the time yet to fully digest it, obviously it’s complex but at the same time provides flexibility as I understand that the each state needs election utility on how to achieve the requirements and the goals set forward. I would say that in our market area there was already a move to natural gas generation away from coal and we see that continuing. We have been involved as you know in a multi-year effort to build additional natural gas infrastructure to serve new efficient gas power plants in our market area and we will continue to pursue that market, take advantage of opportunities that exist and follow the lead of the election utilities in our market areas as to what their requirements are, and what’s the geographic location of those facilities might be.

Travis Miller - Morningstar

Okay, great. And then a follow-up on the customer growth. I was wondering if you could just characterize that you continue to have good strong customer growth. Are you seeing this in economics? Are you seeing the housing come back? What are the characteristics that have carried this customer?

Tom Skains

Thank you Travis, I am going to turn that question over to Frank Yoho our Chief Commercial Officer to kind of give you some color around our core customer growth.

Frank Yoho

Yes. Travis. We’re seeing really strong trends, really continuing heavy trends and recovery in the market specifically the residential new construction, our scene across is -- that’s not really dramatic, it is heavy and we anticipate that it is that trend will continue.

Travis Miller- Morningstar

Okay. Thanks a lot.

Operator

Thank you. We’ll go next to Sarah Akers with Wells Fargo.

Sarah Akers - Wells Fargo

The 10Q comments on the April 14 or April 2014 implementation of a new technology in automation program, should this drive any meaningful O&M savings going forward?

Karl Newlin

Hey, Sarah its Karl. We were further to that -- there is our oasis program it’s been a multi-year effort to know our system better. We don’t quantify any saving going forward, but it’s a very important effort for the company. And I am going to ask Victor Gaglio to talk more about that effort that we disclose, he’s our Chief Utility Officer.

Victor Gaglio

Yes. Over return to primary purposes this project is to give us the ability to collect the data from the inspections and tests we do and feel to continue to operate, say for liable system, to capture that in our electronic format and be able to make good business decision on where we make our investments to maintain our facilities. Over time, we would expect some efficiencies to come add that but we really haven’t quantify that at this point.

Sarah Akers - Wells Fargo

Got it. And then one more, I know the weather has played a role in results this year, but can you give us a sense of the underlying business how that’s performing relative to the original 173 to 183 guidance?

Tom Skains

Sure, I mean you’re right. The weather and the volatility in the secondary market is definitely held the margin I would say overall, I mean the company is functioning very well, as Frank Yoho mention we continue to see good customer growth. We continue to have good investment prospects. I don’t know because of the customer growth, they also run system integrity and additional projects on the power gen side. The expense drag that you’re seeing right now mainly comes from the increase in the incentive compensation accrual because of the greater than expected EPS results. That trend line versus -- we were to strip all that out is running roughly to where we thought it would be, you could strip out the additional accruals. It’s running about what we thought it would be. There a little bit timing in there and so I think that the timing on some of the expense side can catch later in the year, but say all in all the company is performing very well. And we’re about, on the trend line we’d be expect for the extra performance from the secondary market actively.

Sarah Akers - Wells Fargo

Got it. And then looking into ‘15 on the O&M front I assume that will be a tailwind for not having that additional or greater than normal incentive comp?

Tom Skains

I mean, we’ll give guidance for 2015, when we did -- to probably November 1st, we will provide our year guidance at that time.

Sarah Akers - Wells Fargo

Okay. Thanks a lot.

Operator

Thank you. We’ll go next to Nabila Sheikh with JPMorgan.

Chris Turnure - JPMorgan

I want to check it on the constitution pipeline. And one just make sure, that I understand third final approval properly in that 90 day kind of window and when that ends. And then also in New York State obviously there’s been some chatter account is there, could you talk a little bit more to that? And then what that means right now. And that what couldn’t mean for timing, vis-à-vis that permanent?

Victor Gaglio

Yes, this is Victor Gaglio here. With regard to the third process, as we mentioned before we did receive the draft environmental impact statement, we did get an additional data request in early May that we’re responding to this week. We’d expect to have a final environmental impact statement later this summer. And 90 days from that is when we would expect the first certificate to come, those dates were all part of the program we’re still expecting any service state as we would report it before. As it relates to New York State we’re at point where we have submitted all the documentation I need we’re expecting a notice of completion to the application from them, there are hurdles with New York State but we’re moving through the process in that, in a way that we think is pretty typical for project of this nature.

Chris Turnure - JP Morgan

Perfect. Have you notice any change in sentiment there, to pull the war tax?

Victor Gaglio

No not really.

Operator

There are no other questions in the queue at this time.

Tom Skains

Great. Thank you, Jennifer. This concludes our second quarter 2014 earnings conference call. We thank you all for joining us this morning. Thanks.

Operator

That does conclude today’s conference. Thank you for your participation.

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