Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

F1Q08 Earnings Call

March 12, 2008 2:30 pm ET

Executives

John Sutphin – IR

Tom Skains – President, Chairman, CEO

Dave Dzuricky – SVP, CFO

Frank Yoho – SVP Commercial Operations

Analysts

Yiktak Fung – Zimmer Lucas Partners

Jim Lykins – Hilliard Lyons

Analyst for James Heckler – Levin Capital Strategies

Brooke Glenn Mullin – J.P. Morgan

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Piedmont Natural Gas first quarter earnings call. (Operator instructions). I would now like to turn the conference over to our host, Mr. John Sutphin, please go ahead.

John Sutphin

Thank you Joyce, good afternoon and thank you for joining our first quarter 2008 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 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. 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. For more information about the risks and uncertainties relating to these forward looking statements may be found in Piedmont’s latest form 10Q which is available on SEC’s website at sec.gov. With that, I will turn the call over to Tom.

Tom Skains

Thank you John. Good afternoon everybody and thank you for joining us for our first quarter 2008 earnings call. I had the pleasure of seeing some of you last week at our annual shareholders meeting. As you already know, we filed our first quarter 10Q and issued an earnings release yesterday morning. We’re pleased with our first quarter performance which resulted in net income growth of 16% compared to the first quarter of 2007 and diluted earnings per share growth of 19% over that same time period. This growth was generated by strong operating performance in virtually all areas of the company, including top line margin growth, [labho and m] expenses and continued strong performance by our joint ventures. Dave will provide more detail on the financials in just a moment.

The Board last week also continued its commitment to long term shareholder value by increasing our dividend for the 30th consecutive year. In yesterday’s earnings release we also reaffirmed our earnings guidance for 2008 of $1.45 to $1.55 per share. While we are pleased with this quarter, we remain optimistic for this year, we’re going to wait and see how the rest of the winter plays out before making any further refinements to that guidance range. As we stated last quarter, we’re filing a general rate case in North Carolina this year in order to update our cost and revenues and to extend our margin decoupling tariff. We plan on filing that case on April 1st to be effective November 1st and don’t have any further details to provide you today.

Finally, last quarter I alluded to Piedmont’s next project investment opportunity and I know many of you are interested in more details on that subject. Unfortunately we’re still early in the development phase and are not in a position to comment on any specifics other than to say that our business strategy is to evaluate cost effective energy infrastructure investments through both utility and non utility avenues. We hope to be able to give you more details on this project by the third quarter of this year. Now let me turn the call over to our Senior Vice President and CFO, Dave Dzuricky for a more detailed discussion of our first quarter results. Dave.

Dave Dzuricky

Thank you Tom. As Tom said we had a very gratifying first quarter in 2008. Margin was up $18.5 million over the first quarter of 2007 reflecting growth in our customer base in the residential, commercial and power generation markets. Gas cost, inventories, supplier refund and lost and unaccounted for adjustments, went in our favor in the first quarter of 2008 compared to last year’s first quarter where we had adjustments to gas costs that were unfavorable.

We also had the effect of discontinuing demand capitalization charges as required by regulatory order. What that will do is it will positively affect quarters where gas is withdrawn from storage, typically our first and second quarters and it will negatively affect quarters where gas is being injected into storage, typically our third and fourth quarters. Across the year, it should be neutral to the extent that inputs and withdrawals from storage are equal but it does change the shape of our quarterly earnings.

Our operating and maintenance expenses were essentially flat quarter on quarter, reflecting our continuing process improvement initiatives. And our ventures provided good growth in the quarter, coming primarily from Hardy Storage and SouthStar. As you will recall, Hardy was not in service in the first quarter of 2007 since it commenced commercial operations in April last year. SouthStar continued to perform well in managing both its basic retail business and its price risk management activities. And with that Tom, I’ll turn it back over to you.

Tom Skains

Okay John, the floor is yours to conduct the question and answer session.

John Sutphin

Thank you Tom, this concludes our prepared remarks, we now welcome your questions.

Question-and-Answer Session

Operator

(Operator instructions). And our first question comes from the line of Yiktak Fung from Zimmer Lucas Partners, please go ahead.

Yiktak Fung – Zimmer Lucas Partners

Good afternoon. My first question pertains to the [unintelligible] adjustments to gas cost inventory and supplier refunds, can you just go into a bit more detail as to what these adjustments are and whether they’re I guess more or less recurring items or kind of onetime items?

Tom Skains

Thank you for the question Yiktak, it’s nice to hear from you. Really these are just normal gas cost accounting adjustments that occur following our prudence reviews. There’s really nothing I can add to it other than that. As I mentioned in the first quarter of 2007 we had gas cost accounting adjustments that went the other way and in the first quarter of 2008, we had gas cost accounting adjustments that went in our favor. I really can’t comment on whether they’re recurring or not.

Yiktak Fung – Zimmer Lucas Partners

So basically these adjustments happen once every year in the first quarter?

Tom Skains

Well it seems to in the last two years Yiktak.

Yiktak Fung – Zimmer Lucas Partners

Okay and do you generally expect that these adjustments do average out to zero over time?

Tom Skains

Well it’s hard to tell I mean the nature of gas cost accounting is fairly complex, plus we’re operating across three states, we’re served by multiple pipelines and have probably 20 or 25 producers from whom we buy gas. One would think just the law of large numbers is that they would average out but it’s impossible for me to hypothesize about that.

Yiktak Fung – Zimmer Lucas Partners

I see and were these process adjustments for 2008 contemplated when the company issued guidance last year?

Tom Skains

Yes.

Yiktak Fung – Zimmer Lucas Partners

Okay, my last question is, I was wondering if you could I guess break out the joint ventures, the earnings from each of the joint ventures, especially Hardy and SouthStar, some more granularity?

Tom Skains

Breakout their earnings?

Yiktak Fung – Zimmer Lucas Partners

Yeah.

Tom Skains

I can try. You know if you refer to page 23 of the 10Q, you’ll see there that the increase quarter on quarter is roughly coming equally from both Hardy and SouthStar. We had a $1.7 million increase quarter on quarter from SouthStar and $1.6 million from Hardy, those are pretax numbers. And as we said, these SouthStar increase again is being very attentive to their basic retail business as well as their ability to manage price risk in a volatile market. Hardy of course as I mentioned in my prepared remarks was not in service in the first quarter of 2007. So what you’re seeing is pretax earnings comings from the commercial operations of Hardy. And Hardy is a FERC regulated entity that bills, that has a rate design of straight fixed variable rates. So you would expect that to be a fairly constant number under FERC rate design premises.

Yiktak Fung – Zimmer Lucas Partners

I see and that number should be pretty stable through all the quarters too, right?

Tom Skains

That’s the nature of straight fixed variable rate design. That’s right Yiktak.

Yiktak Fung – Zimmer Lucas Partners

Alright, thank you very much and congratulations on a great quarter.

Operator

Thank you. Next we go to the line of Jim Lylins from Hilliard Lyons, please go ahead.

Jim Lykins – Hilliard Lyons

Close enough and good afternoon everyone.

Dave Dzuricky

Hi Jim.

Tom Skains

How are you Jim?

Jim Lykins – Hilliard Lyons

Good, thanks, how’s everyone down there?

Tom Skains

Good, a little warm but we’re fine.

Jim Lykins – Hilliard Lyons

Just a couple questions first of all on customer growth. I was wondering if you could tell us what your assumption is for guidance and I know or I believe last quarter you talked about being around 2.5-3% NOI I’m just wondering how you foresee the next three quarters and also what’s happening with the conversion market?

Tom Skains

Thank you Jim, we have discussed in the previous call that we are seeing a slight downturn in our growth in our service area ranging in the 2.5-3% versus the 3-3.5% that we’ve seen over the last several years. That is included in the guidance that we reaffirmed with this release. The trends that we’re actually seeing of course are downward in residential new construction and we’re very pleased though to see an increase in quarter to quarter or year to year conversion customers.

Customers that we’re serving that we’re taking from some other energy source and we’re also seeing an increase in our commercial customer additions compared to last year. The total number of customers added for the quarter is reflected in the Q, there’s a table and I don’t recall now which page it’s on. Actually it’s on page 21, where we show the gross customer addition this quarter versus last quarter. I’m now going to turn the discussion over to Frank who can give a little bit more breakout of the residential new construction, commercial and conversion customer additions within that total. Frank.

Frank Yoho

Yeah, Jim, this is Frank Yoho. As Tom mentioned it is a challenging market compared to what we’ve seen in the past few years but we are hanging in there in the 2.5-3% growth range, we’re seeing clearly the hit to the residential new construction but we are seeing some bright signs out there with the commercial hanging in there along with the conversion. And some of our opportunities are involved with our NCNG acquisition going east we have a lot more propane customers out there which creates more conversion opportunities, so we see that as a potential opportunity out there. And we would continue our expectation that we’re seeing now for the, at least for the next fiscal year as we look forward.

Jim Lykins – Hilliard Lyons

Okay and also could we get the current cap ex projections for 08?

Tom Skains

No Jim, you can’t. But let me just add a little bit to that, first of all, obviously if our customer growth is a little slower than when we prepared the budget, you should see a little drop off in our cap ex related to revenue producing. Roughly 70% of our budget goes toward revenue producing investments.

The other thing that is a slight anomaly and it does not relate to our utility operations is that we have expected to make a contribution to Hardy Storage at the end of fiscal 2007. We made that as you’ll note in the Q in fiscal 2008 in the amount of $10 million. So you know we had a little lower equity investment in 07 and rebalance it back in 08. But that’s a contribution to an equity investment, not really a capital expenditure per se.

Jim Lykins – Hilliard Lyons

Okay, gotcha. Alright, that’s all I’ve got for now and congrats on the great quarter.

Operator

Thank you. And our next question is from the line of James Heckler, please go ahead, from Levin Capital Strategies.

Analyst for James Heckler – Levin Capital Strategies

Yeah, hi, it’s actually Neil Stein, I just had a couple of questions on the quarter. First it looked like you had a benefit of about $3 million from lower pension expense? Could you talk about what was the specific reason for that and do you expect that benefit to occur in later quarters and was that in the guidance?

Dave Dzuricky

Let me go backwards on your questions Neil. Yes it was in our guidance, yes it will be a persistent element as we move through the quarters and what that is reflective of is a pension redesign project that became effective January 1 of this year. And it’s described in the Q. But yes, that is the quantitative effect of plan changes made here with our pension fund.

Analyst for James Heckler – Levin Capital Strategies

So, if I’m right and this continues you know in every single quarter, the year over year benefit from pension expense is $0.10 in this year’s guidance? $0.10 per share?

Dave Dzuricky

I don’t know how you’re doing that math.

Analyst for James Heckler – Levin Capital Strategies

It looked like a $3 million benefit in this quarter. So if I multiply that by four, it’s $12 million. And if I tax effect it gets into the $7’s and that’s $0.10 per share.

Dave Dzuricky

Right, I understand. There’s also in there group insurance Neil.

Analyst for James Heckler – Levin Capital Strategies

Okay.

Dave Dzuricky

And let me try to explain to you the phenomenon there. Like most companies, even though we use an insurance provider, we’re essentially self insured and in January of every year we have a true up of our expenses from the prior year. So there was a decrease associated with the group insurance.

Analyst for James Heckler – Levin Capital Strategies

Okay, could you say [overlay].

Dave Dzuricky

You can’t just multiply that number by foreign tax effect it.

Analyst for James Heckler – Levin Capital Strategies

Or maybe to ask it a different way, what is the benefit in guidance kind of year over year from your pension policy change?

Dave Dzuricky

Well we don’t break out our guidance by individual element Neil, I’m sorry.

Analyst for James Heckler – Levin Capital Strategies

Okay and then the $6 million benefit for the quarter from the gas cost accounting adjustment, could you explain just a little bit more what that is?

Dave Dzuricky

Well what that is is an adjustment to our gas cost based on the results of audits that were performed on the company by our regulatory bodies. We agreed with adjustments and they had a positive effect on our earnings for the quarter.

Analyst for James Heckler – Levin Capital Strategies

Okay and then it looked like there was another accounting adjustment, you discontinued capitalization and amortization related to storage demand, that was a couple million dollars?

Dave Dzuricky

That’s correct.

Analyst for James Heckler – Levin Capital Strategies

And that was also in your guidance?

Dave Dzuricky

Yes it was.

Analyst for James Heckler – Levin Capital Strategies

And is that a recurring benefit or will that reoccur in future quarters or next year?

Dave Dzuricky

As I explained in my prepared remarks, Neil, that will be income neutral for the year.

Analyst for James Heckler – Levin Capital Strategies

For the year, okay, understood.

Dave Dzuricky

When we withdraw gas compared to last year, it will look like a benefit. When we inject gas in the summer, it’ll look like a detriment. It really reshapes the quarters and not the year.

Analyst for James Heckler – Levin Capital Strategies

Okay and then just, I’m trying to understand all these non-recurring items or accounting adjustments. But going back to that pension item, that’s like a actual lower expense that maybe will continue into next year? Whatever, I don’t know how big the number is exactly but.

Dave Dzuricky

Yeah, not the full amount that you’re seeing there, Neil, but yes that was a permanent plan change.

Analyst for James Heckler – Levin Capital Strategies

Is there anything else in the quarter that I’m missing with respect to any sort of accounting adjustments or change in policies like accounting that benefitted your quarterly results? Or is currently benefitting your 08 guidance?

Dave Dzuricky

No I think you’re, I’m sorry go ahead Neil.

Analyst for James Heckler – Levin Capital Strategies

Just, it’s those three items?

Dave Dzuricky

I believe you’ve got them all.

Analyst for James Heckler – Levin Capital Strategies

Okay, is there anything like this beyond the quarter we should expect in future quarters? I’m just trying to properly forecast your [overlay].

Dave Dzuricky

Yeah, I understand. I mean we stand by our guidance. As Tom said in his remarks let us get through the winter and see where we are at the end of the winter. But we typically do not like to alter guidance after one quarter of the year. We’re barely out of the gate, we’re not anywhere near the finish line. So stay tuned.

Analyst for James Heckler – Levin Capital Strategies

Okay, thanks very much.

Operator

Thank you. (Operator instructions). And we do have a question from the line of Brooke Glenn Mullin from J.P. Morgan, please go ahead.

Brooke Glenn Mullin – J.P. Morgan

Yes could you give us a sense of what returns you’re earning in North Carolina currently?

Dave Dzuricky

We’ll be able to give you a perfect example of what we’re earning in North Carolina as soon as we file this rate case Brooke. Right now we’re as Tom said, we’re planning to file that on April 1st, so we’re only 19 days away from filing the case. I would ask you to bear with us through those 19 days so we can get that document filed and give our commission the opportunity to see it first.

Brooke Glenn Mullin – J.P. Morgan

Could you just remind us, will that be a forward looking test year? Or is that historical?

Dave Dzuricky

It will be based on a historical period for the 12 months ended December but we are allowed to make forward looking adjustments to it up to and through October 31 of this year. There is a practice in North Carolina that we can update our numbers up to the time of hearing in the state.

Brooke Glenn Mullin – J.P. Morgan

Okay and just lastly, you commented in the press release that weather was a benefit to the quarter. I had thought that you had weather normalization in your jurisdictions, can you just review that?

Dave Dzuricky

Well sometimes, first of all, we have both in South Carolina and Tennessee a weather normalization adjustment clause as opposed to a decoupled tariff like we have in North Carolina. And sometimes when the weather gets too far out of phase from normal, the weather normalization adjustment clauses don’t always work perfectly. You need to be in a band closer to normal which we were this year which will, which acted to benefit us in the quarter.

Brooke Glenn Mullin – J.P. Morgan

Okay so it was really the 2000, it was last year’s number that was the anomaly?

Dave Dzuricky

It was an anomaly, yes.

Brooke Glenn Mullin – J.P. Morgan

Okay, great, thank you.

Operator

(Operator instructions). And we have no additional questions, please continue.

John Sutphin

Thank you Joyce. 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 May at the annual AGA Financial Forum in Miami. And this concludes our first quarter 2008 earnings call.

Operator

And ladies and gentlemen that does conclude our teleconference for today, thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Piedmont Natural Gas Company, Inc. F1Q08 (Qtr End 01/31/2008) Earnings Call Transcript
This Transcript
All Transcripts