Piedmont Natural Gas F2Q08 (Qtr End 4/30/08) Earnings Call Transcript

| About: Piedmont Natural (PNY)

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

F2Q08 Earnings Call

June 11, 2008 2:30 pm ET

Executives

John Sutphin - Investor Relations

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

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

Analysts

Michael Grissom - Robert W. Baird

Jim Lykins - Hilliard Lyons

Gabe Moreen - Merrill Lynch

Yiktat Fung - Zimmer & Lucas Partners

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Piedmont Natural Gas second quarter earnings call. (Operator Instructions) I would now like to turn the conference over to your host, Mr. John Sutphin. Please go ahead, sir.

John Sutphin

Thank you. Good afternoon and thank you for joining our second 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 your 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-Q, which is available on the SEC’s website at sec.gov.

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

Thomas E. Skains

Thanks, John. Good afternoon, everyone, and thank you for joining us for our second quarter 2008 earnings call. As you already know, we filed our second quarter Q and issued an earnings release on Monday of this week. In addition, we issued a press release announcing our new LNG storage project. I will get to that project in just a minute but let me first walk through our financial performance for the quarter.

Net income for the quarter was $48.6 million, down 5% compared to the second quarter of 2007, and earnings per share of $0.66 was down $0.03, or 4%. However, our year-to-date net income of $130.9 million was up 7% from the same period in 2007 and earnings per share of $1.78 was up $0.15, or 9%.

Turning specifically to the second quarter, we were very pleased by the utility operations of the company. Margin was up 1% despite a quarter that was 4% warmer than last year and 5% warmer than normal. On the O&M side, we saw yet another quarter where expenses were lower than a year ago and that continues to be due to our process improvement initiatives.

Income from our joint ventures was down this quarter as a result of lower earnings SouthStar. Compared to a very strong quarter last year, earnings were down due to rising commodity prices and reduced opportunities from the management of storage and transportation assets.

Changing subjects, as you know we filed a general rate case in North Carolina on March 31st. In that filing, we request the permanent extension of our margin decoupling mechanism and saw $41 million in rate relief due to our growing customer base and related capital expenditures. New rates were [posed] to be effective November 1, 2008, the beginning of our 2009 fiscal year and a hearing has been scheduled for September 9th.

Finally, on Monday we held a press conference and issued a press release announcing our plans to own and operate a new LNG storage facility in Robeson County, North Carolina. The facility will be able to store approximately 1.25 DCF of natural gas and is expected to be in service for the 2012-2013 heating season. This core utility project will help us serve the peak demands of our rapidly growing customer base in the Carolinas, and while we are still very early in the process, we expect our capital investments to be in the range of $300 million to $350 million.

We are very excited to be working with the Robeson County officials and developers and look forward to being a positive catalyst in their community.

Now let me turn the call over to our Senior Vice President and CFO, Dave Dzuricky, for a more detailed discussion of our second quarter results. Dave.

David J. Dzuricky

Thank you, Tom and good afternoon, everyone. As you know, earnings per share for the quarter were $0.66 compared to $0.69 last year. SouthStar was nearly $6 million lower in pretax earnings in the current quarter compared to last year’s second quarter. There were a number of factors affecting their performance, most notably rising commodity prices and reduced opportunities from the management of storage and transportation assets, and price [lines]. SouthStar also accrued their liability relating to their consent order with the Georgia Commission.

In April of 2007, taking you back to last year, we had much cooler weather than this year and that adversely affected margin, and we continue to see conservation in our South Carolina and Tennessee markets while the effects of conservation are protected in the North Carolina market.

We continue to see positive benefits from our process improvement work, as seen on the quarter on quarter decline of $1.6 million in O&M expense.

Interest expense also declined slightly due to lower short-term interest rates and good cash flow from our operations. All other expense categories followed their normal trends.

On the capital side, while we have had a slowdown in capital spending relating to customer growth, we continue to move forward with a variety of system strengthening programs to be able to serve our future customer base. Most notably, we’re expanding our deliverability in the eastern part of North Carolina, where growth continues.

That’s all I have at this point and we’ll turn the call back now to John Sutphin.

John Sutphin

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

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go to the line of Michael [Grissom] at Robert W. Baird.

Michael Grissom - Robert W. Baird

Good afternoon. First question in terms of the project that’s going on, is that in place of what you were considering to be a joint venture project?

Thomas E. Skains

Yes, that is the project that I made reference to in earlier calls that was under development. In this case, when we evaluated our growth requirements in the Carolinas, we evaluated our infrastructure needs in those states and looked at our core competencies around LNG storage facilities that we’ve been operating since the early ‘70s. We felt in this case that we would go the project alone rather than joint venturing.

Michael Grissom - Robert W. Baird

And the second question, just in terms of the nature of customer growth, how is that changing and if you could -- even if there’s any difference in North Carolina, South Carolina between development or just back-filling the existing customer service areas?

Thomas E. Skains

Well, we continue to see good growth in our markets of about 2% to 2.5% in terms of gross customer additions, largely driven by continued residential new construction, residential conversions, and commercial and industrial growth. If you look at our customer additions year-to-date, of course with the slowing of the economy, our residential new construction numbers were down but we are very pleased that our conversion numbers are up, six months to six months, and our commercial industrial numbers are about flat. So we feel good about the growth. We forecast that to continue and this LNG facility will be needed to meet the growth in our markets, particularly during peak periods and seasonal winter days.

Michael Grissom - Robert W. Baird

Thank you.

Operator

Thank you. Next we’ll go to the line of Jim Lykins of Hilliard Lyons.

Jim Lykins - Hilliard Lyons

Good afternoon, everyone. A couple more questions about the new project -- I know you were supposed to, or you expect to begin construction in ’09 and then be operational maybe by the 2012 to ’13 winter heating season, but is there anything else you can tell us right now about the timeline and maybe when you plan to make any of the filings?

Thomas E. Skains

Well obviously there are filings to be made with this project but notably there’s no certificate needed from the North Carolina Utilities Commission. This is an expansion of our utility infrastructure and will be part of our utility rate structure and cost structure when it goes into service. And there are permits, environmental processes to go through but there’s no major regulatory filing that’s required in this case to demonstrate a need or any of those other features that you may think of at the federal level in advance.

The project will be a part of our normal process of expanding and growing our utility infrastructure in the Carolinas.

Jim Lykins - Hilliard Lyons

All right. And will you guys be doing an open season for this project?

Thomas E. Skains

No, this will be dedicated for our own growth requirements.

Jim Lykins - Hilliard Lyons

Okay. What about the financing? Can you talk about that?

Thomas E. Skains

I’m going to turn that over to Dave Dzuricky who will address it.

David J. Dzuricky

We’ll finance this in the traditional way using cash flow from operations and a mixture of debt and equity. Keep in mind that it’s a -- it’s beginning now and will continue through the 2012 fiscal year, so the chunks will not be at a single point in time. It will be kind of a smooth spend through the process and we will be able to manage this within our normal financing programs and continue to maintain our target debt equity ratio as we report in the Q.

Jim Lykins - Hilliard Lyons

Okay. Can you say anything more about the debt-to-equity mix or how much you --

David J. Dzuricky

Well, we state in our Q, Jim, that our target is to be roughly 45% to 50% debt and 50% to 55% equity, and so we take that very seriously. We know the credit rating agencies like to see us in that range and we will mix equity and debt in order to hit those targets.

Jim Lykins - Hilliard Lyons

Okay. All right, and one last question and I’ll let someone else ask one -- last quarter you all had the benefit of the discontinuation of the storage accounting. I was wondering if we had that benefit again this quarter.

David J. Dzuricky

Well, we didn’t report anything in our MD&A about it, so it was not material to us this quarter.

Jim Lykins - Hilliard Lyons

Okay. And I know there’s supposed to be a reversal in the second half. I was wondering if you could maybe talk about the timing or if you can give us any indication on what that amount would be?

David J. Dzuricky

Keep in mind that last October, we had to unwind the demand capitalization amounts that were already in storage, so there -- as I recall, that was about $5.4 million. So that adversely affected our fourth quarter last year as we reported in our K, and so clearly that issue will not be there this year in the fourth quarter.

Jim Lykins - Hilliard Lyons

Okay, great. Thank you, gentlemen.

Operator

Thank you. Next we’ll go to the line of Gabe Moreen of Merrill Lynch.

Gabe Moreen - Merrill Lynch

Good afternoon, everyone. Actually, my questions were all asked and answered.

Thomas E. Skains

Outstanding. Thank you.

Operator

Thank you, sir. Next we’ll go to the line of Yiktat Fung of Zimmer & Lucas Partners. Please go ahead.

Yiktat Fung - Zimmer & Lucas Partners

Good afternoon. I just want to clarify on the new storage project, that is going to actually be in your rate base for North Carolina -- is that correct?

Thomas E. Skains

It’s in our utility operations and it will be in our cost structure for both North and South Carolina.

Yiktat Fung - Zimmer & Lucas Partners

So it’s shared between those two jurisdictions?

Thomas E. Skains

Yes.

Yiktat Fung - Zimmer & Lucas Partners

What’s kind of the split between North Carolina and South Carolina?

Thomas E. Skains

Dave, what is the split of our shared assets?

David J. Dzuricky

When we do a two-state allocation, it’s about 84% to North Carolina and about 16% to South Carolina.

Yiktat Fung - Zimmer & Lucas Partners

Thank you so much. Let’s see -- will you get I guess cash quick recovery on this project or will you just get the normal AFUDC and collect it all once the service becomes online?

David J. Dzuricky

Right. The normal convention in the two states actually are different. In North Carolina, we would expect to get AFUDC and in South Carolina we would expect to get CWIP treatment through the rate stabilization mechanism in South Carolina.

Yiktat Fung - Zimmer & Lucas Partners

Thank you. That’s very useful. Going on to SouthStar, of that $6 million I guess adverse change this quarter, how much was related to the [consent] agreement with the Georgia Utility Commission?

David J. Dzuricky

$625,000, or one-fourth of $2.5 million.

Yiktat Fung - Zimmer & Lucas Partners

So that’s a pretty small part of that.

David J. Dzuricky

Yes.

Yiktat Fung - Zimmer & Lucas Partners

And with regard to the impact of higher commodity prices on SouthStar in general, how should we conceptually think about it? Is this business basically always adversely affected by higher commodity prices or is it just because there’s a gap as to the prices in which you locked in your revenues? Or is it [the costs]?

Thomas E. Skains

Obviously nobody is selling natural gas at retail [like high prices], but having said that what hurt SouthStar the most is constantly rising prices, because they post -- they will post their prices to their customers at the beginning of the month and obviously, as you can appreciate, they cannot match the beginning of the month of full requirements for their customers because there’s weather variations and the like, so as the market rises through a month and they are filling in the gaps because of weather variances, that’s an adverse impact to them.

Yiktat Fung - Zimmer & Lucas Partners

So this adverse impact would not occur in an environment where prices are high but flat. Is that correct?

Thomas E. Skains

Correct. That is correct.

Yiktat Fung - Zimmer & Lucas Partners

Okay. That’s very useful. Thank you very much.

Operator

Thank you. (Operator Instructions) Gentlemen, there are no further questions in queue at this time.

John Sutphin

Great. Thank you. As always, we thank you for your interest in Piedmont Natural Gas and for taking time to be with us today. If you have any further questions pertaining to our second quarter results, or our new LNG storage project, please contact our investor relations department. This concludes our second quarter 2008 earnings call.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 4:30 p.m. Eastern Daylight Time today until July 23rd at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code of [931921]. International participants may dial 1-320-365-3844. That does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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