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Piedmont Natural Gas Co. Inc. (NYSE:PNY)

F3Q07 (Qtr End 7/31/07) Earnings Call

September 13, 2007, 2:30 PM ET

Executives

John Sutphin - Manager, Finance and IR

Thomas E. Skains - Chairman, CEO, and President

David J. Dzuricky - CFO and Sr. VP

Analysts

Brooke Mullin - JP Morgan

Yiktak Fung - Zimmer Lucas Partners

Angela Ho - Wachovia Securities

Presentation

Operator

Ladies and gentlemen thank you very much for standing by and welcome to your Third Quarter Earnings Conference Call. At this time all participants are in a listen-only mode, still later we will be conduct a question-and-answer session and I will give you instructions at that time. [Operator Instructions]. As a reminder, today's call is being recorded.

For now, I will now turn the conference to your host and Manager of Finance and Investor Relations, Mr. John Sutphin. Please go ahead.

John Sutphin - Manager, Finance and Investor Relations

Thank you, Bob. Good afternoon and thank you for joining our third quarter 2007 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 www.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 Dave Dzuricky, Senior Vice President and Chief Financial Officer. Other members of our executive management team are also in attendance to assist with questions. At the conclusion of the prepared remarks, we will open the discussion to questions.

Finally, this call may include forward-looking statements within the meaning of the securities laws. Actual results may materially differ from those discussed in the forward-looking statements. More information about the risks and uncertainties relating to these forward-looking statements may be found in Piedmont's latest Form 10-K and Form 10-Q which are available on the SEC's website at www.sec.gov.

With that, I will turn the call over to Tom.

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

Thank you, John. Good afternoon everyone and thank you for participating in our third quarter 2007 earnings conference call. As I am sure you are aware we filed third quarter 10-Q in release to our third quarter earnings following our quarterly Board meetings last Friday. At the conclusion of the second quarter of this year we discussed the ongoing positive impact where business strategies and objectives. Today we are pleased to present the similar message with regard to our third quarter results.

As we concluded the third quarter of 2007, our net income was $112.7 million fiscal year-to-date, up $9.3 million from the same time period last year. This translates to diluted earnings per share of $1.51 and 11% increase over the same time period in 2006. Within the third quarter of 2007, our seasonal loss was $9.1 million, an improvement of $3.3 million from our seasonal loss in the third quarter of 2006. These earning results were driven by utility margins that surpassed last year’s mark by $2.2 million; enjoy venture income which was $3.8 million greater than the third quarter of 2006.

The continued growth of our customer base within our service territories and our ability to acquire and retain these customers remains the key driver of our margin growth. While our organic growth remained strong, we continue to focus our attention on the improvement of core business processes that will deliver long term value to our shareholders, customers and the communities that we serve. Our continuous process improvement initiatives remain a focal point as we further enhance the efficiency and the effectiveness of our internal processes and the structure of the organization as a whole.

We continue to see the ongoing positive impact of these initiatives in the form of O&M expenses, which are down $5.4 million year-to-date. While we simultaneously engage our organization and initiatives that will create long-term value for our stakeholders. Some examples include the successful completion of the full year of our 80:20 customer service initiatives, the completion of four AMR installations across our system earlier this year and the consolidation of our payment and collection functions currently underway, just to name a few of the examples. Addressing the needs of our various stakeholder groups, whilst simultaneously improving both financial and operational efficiency remain among the primarily goals of the company moving into the fourth quarter and beyond.

For further discussion of our third quarter and year-to-date financial results, I would now like to turn the call over to our Senior Vice President and Chief Financial Officer, Dave Dzuricky. David?

David J. Dzuricky - Senior Vice President, and Chief Financial Officer

Thank you, Tom. Yes, 2007 has been satisfying from a financial point of view. We continue to see good top-line growth in our margins for the quarter and the nine months reflecting the continued expansion of our markets, as Tom had previously mentioned. And innovative regulatory mechanisms we have in place have protected those margins in the face of 12% warmer than normal weather and customer conservation. Our operation maintenance in the quarter was essentially flat with last year and down $5.4 million for the nine months.

In 2006, we did have severance costs associated with our management restructuring and the financial benefits of that action are reflected in the current year. Our joint ventures also performed well increasing nearly $4 million for the quarter and $7 million for the nine months. Stores, party stores just went into service April 1, of this year, so is not in last year’s results. SouthStar continues to show good year-on-year earnings growth. The quarter in the year have not been about their challenges, however, we recognized in the third quarter $3.6 million relating to severance payments associated with further streamlining of our business operations.

We also awarded by the North Carolina Utilities Commission to discontinue an accounting convention, relating to capitalizing and amortizing demand charges, as we move gas in and out of storage. This is the practice that the Company adopted in the early 1980s and we will have a negative impact on earnings in the third quarter of $2.5 million net of tax. In spite of these challenges, our September 7, earnings press release reaffirmed our guidance range of the $1.40 to the $1.50 per diluted share. Overall, we are pleased with the third quarter and nine months results and looking forward to the remainder of the year.

And with that I am going to turn it back to over to John Sutphin.

John Sutphin - Manager, Finance and Investor Relations

Thank you, Dave. This concludes our prepared remarks and we now welcome your questions.

Question and Answer

Operator

Thank you. [Operator Instructions].

And we do have a question from the line of Brooke Mullin with JP Morgan. Go ahead.

Brooke Mullin - JP Morgan

Yes. Good afternoon. Can you just give us an update on AGLs option regarding SouthStar, if there is any conversations ongoing now and what the next SouthStar?

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

Thank you, Brooke. This is David Dzuricky. What we have is what’s disclosed in our 10-Q and there is a decision point that could come up November 1. The option is strictly in AGLs hands at this point in time. So, it would probably be better to check with them as oppose to us. We are here waiting to either hear or not hear from them.

Brooke Mullin - JP Morgan

Thank you.

Operator

Thank you. And we have a question from the line of Yiktak Fung with Zimmer Lucas Partners. Please go ahead.

Yiktak Fung - Zimmer Lucas Partners

Good afternoon.

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

Good afternoon.

Yiktak Fung - Zimmer Lucas Partners

I would just like to, again, update on if there are any funds to file a rate case within North Carolina or Tennessee?

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

You are breaking up, can you--?

Yiktak Fung - Zimmer Lucas Partners

Hello, can you hear me? Hello.

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

About the rate case in North Carolina.

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

Was the question are there any plans to file the rate case in North Carolina?

Yiktak Fung - Zimmer Lucas Partners

Yes, that’s correct. That’s correct.

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

Yes. This is Tom Skains. Good afternoon. We have, as you know not filed any general rate case proceedings this year. And that’s of course true and all three stage, the footnotes to that is, however, we do operate under Rate Stabilization Act in South Carolina, which were electing utilities such as Piedmont, it encompasses annual cost and revenue filings and rate adjustments that are provided for in accordance with the legislation in that state.

In 2008, next year, under the provisions of the North Carolina Utility Commission’s order that approved our last rate case, which included our decoupling tariff mechanism, that decoupling tariff mechanism is due to expire by its own terms unless Piedmont trial to extend it. So, it is incumbent upon us to make a filing in 2008, should we choose to extend that decoupling tariff that is certainly our intention at this point. And that is to make a filing in North Carolina to seek that extension along with truing up our costs and revenues, but that’s just our intention at this moment of course things could cause that to change, but I can anticipate that approving at this juncture.

Yiktak Fung - Zimmer Lucas Partners

With the filing if there is one… would that be made this year or next year?

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

The North Carolina filing would be made in the spring of 2008, to be effective November 1, 2008, which is the beginning of our 2009 fiscal year in terms of the effectiveness of any changes in revenue margins and expense recovery.

Yiktak Fung - Zimmer Lucas Partners

One last question. You spoke of that $2.5 million charge due to some, I guess accounting… regulatory accounting adjustments in South Carolina, associated with demand charges. Can you just explain a bit more and is this a non-recurring item?

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

Yes, I am going to try to explain it fairly simply and thank you for asking that question because I am your spoken and said that was the charge in the third quarter, that’s a charge that will occur in the fourth quarter but was disclosed in our third quarter Q. Basically what capitalized demand attempts to do is recognize the fact that some of our flowing supplies in the summer go to storage and those flowing supplies have to get the storage through transportation and payment of upstream charges. So, what we did was shape or added along with the commodity cost of gas, a component demand charges that were capitalized into storage in the summer time. And then we withdraw… when the withdrawals occurred in the winter time, those charges came back out and were reflected as a charge to earnings. This was done from a financial reporting point of views strictly and so, it did not affect our customers in any way nor would a change affect our customers in any way. And a final answer is yes, that is a one-time event and non-recurring item.

Yiktak Fung - Zimmer Lucas Partners

Thank you very much.

Operator

Thank you. And there is a question from the line of Angela Ho with Wachovia. Please go ahead.

Angela Ho - Wachovia Securities

Hey, good afternoon. Just got a quick question on the AMR? Was that about 1 million points and points that you guys installed or--? And can you tell me about like how much cost savings you are expected to get out of that?

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

Yes Angela. Thanks for the question. You are right, it is about 1 million points that we had installed and we completed that earlier this calendar year. We actually if I recall, completed the North Carolina portion of that in January of this year and followed-up with the other two states shortly thereafter. The savings as you can imagine are in the form of less meter readers, less trucks, less fuel, less accidents, less insurance risks and we have all of those savings embedded in our guidance. Clearly, we would not have expended the dollars that we did had it not been an economic proposition. But to try to isolate one project at a time and talk about the relative economics of it, I am not sure where that would get us. But clearly, it was an economic project from the point of view of cost of capital.

Angela Ho - Wachovia Securities

Great. Thank you.

Operator

Thank you. [Operator Instructions].

And gentlemen there are no other questions in the queue.

John Sutphin - Manager, Finance and Investor Relations

Thank you, Bob. As always we thank you for your interest in Piedmont Natural Gas and for taking time to be with us today. This concludes our third quarter 2007 earnings call.

Operator

Thank you. And ladies and gentlemen, this conference will be available for replay after 6:00 PM Eastern this evening through October 25th, 2007. You may access the AT&T replay system at any time by dialing 800-475-6701 and entering the access code 885416. And again those numbers are 800-475-6701 access code 885416. And that does conclude our conference for today. Thank you for your participation. And you may now disconnect.

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