Piedmont Natural Gas F4Q07 (Quarter End 10/31/07) Earnings Call Transcript

Jan. 6.08 | About: Piedmont Natural (PNY)

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 & SeniorVice President

Franklin H. Yoho – Senior Vice President CommercialOperations

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 welcometo the PiedmontNatural Gas fourthquarter earnings conference call. (OperatorInstructions) Atthis point I’d like to turn theconference now to themanager of finance and investor relations Mr. John Sutphin. Please go aheadsir.

John Sutphin

Good afternoon. Thank you for joining our fiscal year 2007earnings conference call. This call isopen to the generalpublic and is being webcast live over theInternet. If you’d like to access thewebcast of this call please visit our website atwww.PiedmontNG.com and choose theinvestors link. On theright hand side of that page you will find alink to thewebcast.

On the call today presenting prepared remarks we have TomSkains, President, Chairman & Chief Executive Officer and Dave Dzuricky,Senior Vice President and Chief Financial Officer. Other members of executive management teamare also in attendance to assist with questions. At the conclusion of the prepared remarks wewill open the discussion to your questions.

Finally, this call may include forward-looking statementswithin the meetings ofthe securitieslaw. Actual results may materiallydiffer from those discussed inthe forward-lookingstatements. More information about therisks and uncertainties related to these forward-looking statements may befound in Piedmont’slatest Form 10K whichis available on theSEC’s website at www.SEC.gov. With that, I’ll turn thecall over to Tom.

Thomas E. Skains

Good afternoon and happy New Year everybody. Thank you for joining us on our fiscal year2007 earnings conference call. We knowthat many of you are just getting back from your holiday break and weappreciate the time you’re taking to join us today.

As I’m sure your aware by now we filed our 2007 10K andissued our year end earnings release last Friday. 2007 was another good year for Piedmonta year in which we made substantial progress in many areas. We continue to invest in natural gasinfrastructure to serve our growing markets, streamline and consolidate ourbusiness processes and operations and enhance our customer service satisfactionlevels. Our non utility joint ventureinvestments lead by a strong performance from South Star Energy and withHardy’s Storage going into service last April also made significant positivecontributions 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 dilutedearnings per share was $1.40 in 2007 up 9% from $1.28 in 2006. Even with these new record levels of netincome and earnings per share our full potential was not realized in 2007largely due to two events that impacted our fiscal fourth quarter. A regulatory order that required us todiscontinue a long standing accounting practice at a $0.04 per share adverseimpact on margins in the fourth quarter and weather in the quarter, particularin October was substantially warmer than normal and the prior year and had a$0.02 adverse impact on margins. As youmay recall our fiscal fourth quarter is not subject to weather normalization inour Tennessee and South Carolinamarkets.

Dave will address our margin and other income statement lineitems in more detail in just a few minutes. We are now turning to 2008. Inour press release last week we also reaffirmed our fiscal year 2008 earningsguidance of $1.45 to $1.55 per share. In2008 we are seeing signs of slower growth in our residential new constructionmarkets and will work harder on our conversion markets as we emphasize theenergy efficiency and environmental benefits of the direct use of natural gasin homes and businesses in our market area. We still forecast a good customer growth in 2008 but not at the samelevel 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 maintainour margin decoupling tariff which would otherwise expire on October 31stof this year. This tariff is operated tothe benefit of both Piedmont’s customers andshareholders. We expect to make our filingon April 1st to be effective on November 1, 2008 the beginning ofour 2009 fiscal year.

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

Although it would be premature to give you the details, weare already in the early stages of project development on our next jointventure investment and will be working hard in 2008 to turn this project intoreality. So, stay tuned for more on thatat a later date during the year.

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

David J. Dzuricky

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

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

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

On the joint venture front two items deserve attention. First, 2007 marked the initiation of servicefor Hardy’s Storage. Injections to Hardywere made during 2007 and now are available for withdrawal during this winterheating season. Second, South Starimproved its performance in 2007 compared to 2006 and the remaining ventureswere essentially flat during the year.

Interest expense was up nearly $5 million compared to2006. The increase reflects the issuanceof long term debt that occurred late in 2006 and was fully reflected in our2007 results along with interest associated with funding out 2007 capitalbudget.

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

John Sutphin

This concludes are prepared remarks and we now welcome yourquestions.

Question-and-AnswerSession

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 Carolinafiling in addition to the coupling tariff and [inaudible] the cost revenue whatis the actual amount of the filing going to be? Can you give us that?

Thomas E. Skains

No. We haven’tdetermined that yet. We’re still in theearly stages of gathering our costs and expenses for the base period of thatrate filing and won’t have that information for a few months at thispoint. That filing is not due untilApril 1st as I mentioned and we’re at the early stages of puttingtogether cost revenues, billing determinates and other factors that wouldinfluence the actual rate levels.

James O. Lykins –Hilliard Lyons

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

Thomas E. Skains

In South Carolinaas you know we have the Rate Stabilization Act that we’re operating under whichwe’ve opted to participate in and as a result of that we’ve been making annualfilings to true up our cost and revenues. They’re consistent with the mechanism contained in that statute whichagain puts a band of permissible earnings around your authorized return onequity. So, we will of course make afiling later in the year. I believe thatfiling is typically made in the June timeframe, in the summer to be effectiveNovember 1, 2008. We will go throughthat process again this year. It’s arather expedited process and any results from truing up those costs andrevenues 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 toslow somewhat in Charlotte. I was just wondering if you could give us afeel for what’s happening with housing starts in Charlotteand also if the conversions may be able to – or how much those conversions maybe able to offset any of the slowing.

Thomas E. Skains

Okay. I’m going toturn that call over to Frank Yoho our senior officer of the commercialoperations so he can give you additional color around the growth that we stillsee in our markets, our real estate markets but again, decline slightly fromwhat we’ve seen historically.

Franklin H. Yoho

That’s correct. Weare still seeing growth in all our markets and Charlottebeing our largest city but we are seeing some slowing. We are going to aggressively go after theconversion market to hopefully make up some of that lost market on the newstarts but realistically we would anticipate our growth which has been right ataround 3% to slightly above 3% to probably fall to the 2.5 to 3% range for thisnext year.

James O. Lykins –Hilliard Lyons

Okay. That’s helpful.

Operator

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

Joanne M. Fairechio –Janney Montgomery Scott LLC

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

Operator

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

Yiktat Fung – ZimmerLucas Partners

A question about the potential new joint venture. Is it most likely to be another gasinfrastructure 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 projectdevelopment of that venture. The natureof the project at this point is proprietary and we’re actually operating undera confidentiality agreement. I wouldjust say generally though that the project will be consistent with ourpreviously announced strategy of focusing on wholesale and retail energy assetsthat compliment our business. It shouldbe of no surprise to investors. It willbe consistent with our previously announced strategy.

Yiktat Fung – ZimmerLucas Partners

Another question on the rate case in North Carolina is this filing really just to really complywith the previous order? Or, should wealso 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 withour last rate case approved our margin decoupling tariff on an experimentalbasis 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 ratecase filing as described by that order that the North Carolina UtilitiesCommission issued the margin decoupling tariff would go away. So, we have to file a general rate case to dothat consistent with the express terms of their order. Any time you file a general rate case youhave to true up revenues, costs, billing determinates and the like so it willinvolve the truing up of our costs revenues and all the other things that goalong with a general rate case. Again,it’s too early at this point to tell what the impact of that rate case will bein terms of either what the rate adjustment will be.

Yiktat Fung – ZimmerLucas Partners

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

Thomas E. Skains

No. We really can’taddress that. We believe that the amountthat we’re recovering is fair and appropriate.

Yiktat Fung – ZimmerLucas Partners

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

David J. Dzuricky

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

Yiktat Fung – ZimmerLucas Partners

How much of decrease in D&A would be caused by theretirement 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 NaturalGas and for taking time to be with us today. We look forward to seeing many of you in March at our annualshareholders’ meeting out here in Charlotte. This concludes our fiscal year 2007 earningscall.

Operator

Ladies and gentlemen that does conclude yourconference. You may now disconnect.

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