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

F4Q07 Earnings Call

January 4, 2008 2:30 pm ET

Executives

John Sutphin – Manager of Finance & Investor Relations

Thomas E. Skains – Chairman of the Board, President & Chief Executive Officer

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

Franklin H. Yoho – Senior Vice President Commercial Operations

Analysts

James O. Lykins – Hilliard Lyons

Joanne M. Fairechio – Janney Montgomery Scott LLC

Yiktat Fung – Zimmer Lucas Partners

Operator

Ladies and gentlemen thank you for standing by and welcome to the Piedmont Natural Gas fourth quarter earnings conference call. (Operator Instructions) At this point I’d like to turn the conference now to the manager of finance and investor relations Mr. John Sutphin. Please go ahead sir.

John Sutphin

Good afternoon. Thank you for joining our fiscal year 2007 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 please visit our website atwww.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 & Chief Executive Officer and Dave Dzuricky, Senior Vice President and Chief Financial Officer. Other members of executive management team are also in attendance to assist with questions. At the conclusion of the prepared remarks we will open the discussion to your questions.

Finally, this call may include forward-looking statements within the meetings of the securities law. Actual results may materially differ from those discussed inthe forward-looking statements. More information about the risks and uncertainties related to these forward-looking statements may be found in Piedmont’s latest Form 10K which is available on the SEC’s website at www.SEC.gov. With that, I’ll turn the call over to Tom.

Thomas E. Skains

Good afternoon and happy New Year everybody. Thank you for joining us on our fiscal year 2007 earnings conference call. We know that many of you are just getting back from your holiday break and we appreciate the time you’re taking to join us today.

As I’m sure your aware by now we filed our 2007 10K and issued our year end earnings release last Friday. 2007 was another good year for Piedmont a year in which we made substantial progress in many areas. We continue to invest in natural gas infrastructure to serve our growing markets, streamline and consolidate our business processes and operations and enhance our customer service satisfaction levels. Our non utility joint venture investments lead by a strong performance from South Star Energy and with Hardy’s Storage going into service last April also made significant positive contributions to our earnings growth in 2007.

Our net income in 2007 was $104.4 million a 7% increase over $97.2 million in 2006. Our diluted earnings per share was $1.40 in 2007 up 9% from $1.28 in 2006. Even with these new record levels of net income and earnings per share our full potential was not realized in 2007 largely due to two events that impacted our fiscal fourth quarter. A regulatory order that required us to discontinue a long standing accounting practice at a $0.04 per share adverse impact on margins in the fourth quarter and weather in the quarter, particular in October was substantially warmer than normal and the prior year and had a $0.02 adverse impact on margins. As you may recall our fiscal fourth quarter is not subject to weather normalization in our Tennessee and South Carolina markets.

Dave will address our margin and other income statement line items in more detail in just a few minutes. We are now turning to 2008. In our press release last week we also reaffirmed our fiscal year 2008 earnings guidance of $1.45 to $1.55 per share. In 2008 we are seeing signs of slower growth in our residential new construction markets and will work harder on our conversion markets as we emphasize the energy efficiency and environmental benefits of the direct use of natural gas in homes and businesses in our market area. We still forecast a good customer growth in 2008 but not at the same level as 2007 and this is factored into our earnings guidance for the year.

Also in 2008 we intend to file a general rate case in North Carolina our largest market area in order to maintain our margin decoupling tariff which would otherwise expire on October 31st of this year. This tariff is operated to the benefit of both Piedmont’s customers and shareholders. We expect to make our filing on April 1st to be effective on November 1, 2008 the beginning of our 2009 fiscal year.

Finally, I’d like to comment on our joint venture strategy. We are quite pleased with our portfolio of energy related joint ventures including our latest Hardy’s storage venture with NiSource and the value that they had for our shareholders. We believe that these businesses complement our core natural gas utility operations and we will continue to pursue attractive joint venture investment opportunities in 2008 and beyond.

Although it would be premature to give you the details, we are already in the early stages of project development on our next joint venture investment and will be working hard in 2008 to turn this project into reality. So, stay tuned for more on that at a later date during the year.

With that I’d like to turn the call over to our senior vice president and chief financial officer Dave Dzuricky for a more detailed discussion of our 2007 financial results.

David J. Dzuricky

Good afternoon everybody and let me also wish all of you and yours a happy New Year. As Tom mentioned earnings per share on a diluted basis for the year was a record $1.40 up 9% over the prior year. Also we were required by a regulatory order to discontinue an accounting practice that adversely affected our results for the fourth quarter and for the year by $0.04 per share.

The accounting practice was called demand capitalization and had been used by the company for over two decades. It capitalized upstream pipeline demand charges during storage injection periods and brought them back to the income statement during storage withdrawal periods. Obviously, this change at the end of the injection season caused us to recognize the adverse impact to income in the fourth quarter. Because of the change in accounting for demand charges coupled with the effects of weather mentioned by Tom the growth and margin you would normally expect to see from our customer growth has been masked.

Operation and maintenance expenses were $4.9 million lower in 2007 compared to 2006 reflecting the impact of our process improvement programs which are ongoing. You also may have noted in our 10K the depreciation expense was $1 million lower than 2006 even though we had $133 million of capital expenditures during 2007. At the end of 2006 we retired a significant amount of technology related plants and as you know that type of plant has a relatively short life and can have a quite an impact on appreciation depreciation expense.

On the joint venture front two items deserve attention. First, 2007 marked the initiation of service for Hardy’s Storage. Injections to Hardy were made during 2007 and now are available for withdrawal during this winter heating season. Second, South Star improved its performance in 2007 compared to 2006 and the remaining ventures were essentially flat during the year.

Interest expense was up nearly $5 million compared to 2006. The increase reflects the issuance of long term debt that occurred late in 2006 and was fully reflected in our 2007 results along with interest associated with funding out 2007 capital budget.

With that, I’ll turn it back over to John Sutphin.

John Sutphin

This concludes are prepared remarks and we now welcome your questions.

Question-and-Answer Session

Operator

(Operator Instructions) First to the line is Jim Lykins with Hilliard Lyons. Please go ahead.

James O. Lykins – Hilliard Lyons

First of all your North Carolina filing in addition to the coupling tariff and [inaudible] the cost revenue what is the actual amount of the filing going to be? Can you give us that?

Thomas E. Skains

No. We haven’t determined that yet. We’re still in the early stages of gathering our costs and expenses for the base period of that rate filing and won’t have that information for a few months at this point. That filing is not due until April 1st as I mentioned and we’re at the early stages of putting together cost revenues, billing determinates and other factors that would influence the actual rate levels.

James O. Lykins – Hilliard Lyons

What about South Carolina? Could you just update us on what is next on the agenda in that state?

Thomas E. Skains

In South Carolina as you know we have the Rate Stabilization Act that we’re operating under which we’ve opted to participate in and as a result of that we’ve been making annual filings to true up our cost and revenues. They’re consistent with the mechanism contained in that statute which again puts a band of permissible earnings around your authorized return on equity. So, we will of course make a filing later in the year. I believe that filing is typically made in the June timeframe, in the summer to be effective November 1, 2008. We will go through that process again this year. It’s a rather expedited process and any results from truing up those costs and revenues will take effect in fiscal year 2009 beginning November 1, 2008.

James O. Lykins – Hilliard Lyons

I believe you said that the housing market is starting to slow somewhat in Charlotte. I was just wondering if you could give us a feel for what’s happening with housing starts in Charlotte and also if the conversions may be able to – or how much those conversions may be able to offset any of the slowing.

Thomas E. Skains

Okay. I’m going to turn that call over to Frank Yoho our senior officer of the commercial operations so he can give you additional color around the growth that we still see in our markets, our real estate markets but again, decline slightly from what we’ve seen historically.

Franklin H. Yoho

That’s correct. We are still seeing growth in all our markets and Charlotte being our largest city but we are seeing some slowing. We are going to aggressively go after the conversion market to hopefully make up some of that lost market on the new starts but realistically we would anticipate our growth which has been right at around 3% to slightly above 3% to probably fall to the 2.5 to 3% range for this next year.

James O. Lykins – Hilliard Lyons

Okay. That’s helpful.

Operator

Next from the line of Joanne Fairechio with Janney Montgomery Scott. Please go ahead.

Joanne M. Fairechio – Janney Montgomery Scott LLC

I apologize Jim already asked my questions. They were basically about the customer growth.

Operator

Next from the line of Yiktat Fung with Zimmer Lucas Partners. Please go ahead.

Yiktat Fung – Zimmer Lucas Partners

A question about the potential new joint venture. Is it most likely to be another gas infrastructure project or could it also move into non regulated areas?

Thomas E. Skains

Well, let me say this we are still in the very early stages of the project development of that venture. The nature of the project at this point is proprietary and we’re actually operating under a confidentiality agreement. I would just say generally though that the project will be consistent with our previously announced strategy of focusing on wholesale and retail energy assets that compliment our business. It should be of no surprise to investors. It will be consistent with our previously announced strategy.

Yiktat Fung – Zimmer Lucas Partners

Another question on the rate case in North Carolina is this filing really just to really comply with the previous order? Or, should we also anticipate a substantial request for a rate increase?

Thomas E. Skains

Well, as you recall the order that was issued back in 2005 in connection with our last rate case approved our margin decoupling tariff on an experimental basis for a three year period that expires at the end of this fiscal year. It expires at the end of October 31, 2008. So, unless we make a general rate case filing as described by that order that the North Carolina Utilities Commission issued the margin decoupling tariff would go away. So, we have to file a general rate case to do that consistent with the express terms of their order. Any time you file a general rate case you have to true up revenues, costs, billing determinates and the like so it will involve the truing up of our costs revenues and all the other things that go along with a general rate case. Again, it’s too early at this point to tell what the impact of that rate case will be in terms of either what the rate adjustment will be.

Yiktat Fung – Zimmer Lucas Partners

Can you at least give us an indication of whether the company is under recovering or over recovering in North Carolina?

Thomas E. Skains

No. We really can’t address that. We believe that the amount that we’re recovering is fair and appropriate.

Yiktat Fung – Zimmer Lucas Partners

With regards to one of the disclosures that were in 10K the company paid about $3.6 million of termination benefits in conjunction with some cost savings program. Is that expected to not recur in the future and how much savings does the company expect to generate from those payments?

David J. Dzuricky

That $3.6 million accrual reflects what we estimate to be the severance benefits associated with the ongoing process improvements within our operations area related to closing our business offices and centralizing those activities. Because we have a limited number of business [inaudible] recurring because the [inaudible] process improvements. And, it relates to activities that we will undertake in 2008 and beyond. As to what that in fact is on us financially all I can tell you is that it’s included in our guidance for 2008 and clearly will be for any forward years beyond that.

Yiktat Fung – Zimmer Lucas Partners

How much of decrease in D&A would be caused by the retirement of the technology assets?

Thomas E. Skains

Probably about $4 million.

Operator

(Operator Instructions) To the presenters, no further questions in the queue.

John Sutphin

As always we thank you for your interest in Piedmont Natural Gas and for taking time to be with us today. We look forward to seeing many of you in March at our annual shareholders’ meeting out here in Charlotte. This concludes our fiscal year 2007 earnings call.

Operator

Ladies and gentlemen that does conclude your conference. You may now disconnect.

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