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Executives

Nicholas Giaimo

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

Karl W. Newlin - Chief Financial Officer and Senior Vice President

Analysts

Travis Miller - Morningstar Inc., Research Division

John Hanson

Spencer E. Joyce - Hilliard Lyons, Research Division

David E. Parker - Robert W. Baird & Co. Incorporated, Research Division

Piedmont Natural Gas (PNY) Q3 2012 Earnings Call September 10, 2012 11:00 AM ET

Operator

Good day, and welcome to the Piedmont Natural Gas Third Quarter 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Nick Giaimo. Please go ahead -- please begin, sir.

Nicholas Giaimo

Thank you, Rochelle. Good morning, everyone, and thank you for joining the Piedmont Natural Gas Third Quarter 2012 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 or view the slides of the accompanying presentation, please visit our website at piedmontng.com and choose the For Investors link. On the right hand side of that page, you'll find the appropriate links.

On the call today, presenting prepared remarks, we have Tom Skains, President, Chairman and Chief Executive Officer; and Karl Newlin, Senior Vice President and Chief Financial Officer. Other officers of the company are also in attendance to take your questions.

Finally, this call may include forward-looking statements, and our actual results may materially differ from those statements. More information about the risks and uncertainties relating to these forward-looking statements may be found in Piedmont's third quarter 2012 Form 10-Q filed Friday, September 7, with the SEC.

And with that, I'll turn the call over to Tom.

Thomas E. Skains

Thank you, Nick. And good morning, everybody, and thank you for joining us for our third quarter 2012 earnings conference call. As you know, on Friday we filed our 10-Q and issued our third quarter earnings release. This morning, I'm going to talk about our recent accomplishments and provide you with a general update on the company. Then I'll turn the call over to Karl to give you a more detailed discussion of our third quarter financial results and our updated 2012 guidance.

Beginning with Slide 2. Due to the seasonal nature of our business, we typically experience losses during the summer months that make up our third quarter. This quarter, we recorded a net loss of $4.6 million or $0.06 per diluted share, which was improved from a net loss of $8.7 million or $0.12 per share in the third quarter of 2011. We continue to be encouraged by customer growth in our service area. During the quarter, we added 2,670 new customers to our system and have added more than 8,700 customers year-to-date.

With the completion of our first 4 power generation delivery projects for Duke Energy, our focus this quarter has been on our fifth project for the Sutton facility. The Sutton project continues to progress on schedule, and I'll speak to it in more detail in just a moment.

Finally, on Friday, we reaffirmed our 2012 earnings per share guidance range of $1.58 to $1.68 per share. At the end of the first quarter, we directed investors towards the lower half of that range and confirmed that emphasis at the end of the second quarter.

Following this quarter, though, we're pointing back up to the middle of the range. Karl will provide you with more details in our guidance after my remarks.

Slide 3 shows our seasonal net loss of $4.6 million, which is more than $4 million improved from the third quarter of last year. Growth in margin and increased contributions from SouthStar and Cardinal and lower interest expense more than offset an increase in O&M expense.

On Slide 4, we've highlighted our gross customer additions for both the quarter and the year. As you can see, third quarter customer gains of 2,670 customers were 19% higher than the third quarter of last year. And for the year-to-date, we've added 8,728 customers, which is 21% improved from the same period in 2011.

We're encouraged that growth was across all categories and every quarter this year. We believe our growth trend reflects an improvement in the new construction markets in our service territory, and they certainly reflect the competitive pricing dynamics of natural gas compared to other fuels in our conversion markets. As a result, we anticipate modest continued improvements and customer growth.

Turning to Slide 5. As you know, in 2009, we introduced a portfolio of 5 power generation delivery projects to serve new combined-cycle natural gas power generation facilities in North Carolina, all now owned by Duke Energy. Those projects total more than $500 million of capital expenditures for our company. On our last call, I announced that we placed the Wayne County project into service on June 1, joining our other completed projects at Richmond County and at the Buck and Dan River facilities. With 4 projects behind us, our effort now is focused on the Sutton project, the largest of all of the projects. All major material have been received for that project, and we broke ground last quarter. The project construction is going well, and Sutton remains on schedule for its targeted in-service date of June 2013.

With that, I'd now like to turn the call over to our Senior Vice President and Chief Financial Officer, Karl Newlin.

Karl W. Newlin

Thank you, Tom, and good morning, everyone. As Tom outlined, we had an excellent third quarter. Our seasonal net loss of $4.6 million or $0.06 per diluted share was $4 million or $0.06 improved from the year ago quarter. It was a fairly straightforward quarter, but let me walk you through the major line items of our income statement and talk about our fiscal year 2012 guidance, then I'll turn the call back over to Nick to take your questions.

On Slide 6, margin of $86.5 million grew $2.5 million compared to last year. Residential and commercial margin growth was a function of new rates in Tennessee, as well as customer growth. In addition, margin was higher on increased contribution from power generation and industrial customers, as well as increased wholesale marketing activity during the quarter.

On the expense side, Slide 7. O&M of $59 million was about $6 million higher than last year due to higher incentive accruals, increased contract labor for integrity and safety programs and higher pension and medical expense. I'll note that while O&M expense is higher than last year, it is consistent with the guidance we issued in November and is being controlled across the company slightly better than plan.

On Slide 8, income from joint ventures was $3 million during the third quarter, about $1 million higher than in 2011. This is due to an increased contribution from SouthStar primarily due to lower gas costs, as well as increased contributions from Cardinal Pipeline as a result of the expansion related to the Wayne County power generation delivery project.

Finally, on Slide 9, interest expense of $4 million was more than $7 million lower than in the third quarter of 2011 due to increased AFUDC offsets, higher interest income on amounts due from customers and lower interest expense on long-term debt as a result of a lower average rate.

Before I turn the call back over to Nick, let me discuss our 2012 earnings guidance. In November, we initiated fiscal year 2012 guidance in a range of $1.58 to $1.68. However, after an extremely warm first quarter, where weather was 16% warmer than normal and 31% warmer than in 2011, we pointed investors to the lower end of that range based on our reduced utility margins and lower contributions from SouthStar.

Following a second quarter that was equally as warm, we reaffirmed that guidance including the emphasis on the lower end of the range. However, throughout the year, our company has demonstrated a great deal of resiliency in combating the impact of warm winter weather that was beyond our control. As a result of the favorable outcome from the Tennessee rate case, better-than-expected debt financing terms and, most importantly, prudent O&M expense control by our employees, I'm pleased that we're removing the emphasis toward the lower end of the range and placing it back up to the middle of the range. Given the headwinds we faced in 2012, I'm very proud of our company's efforts on behalf of shareholders.

And with that, I'll turn the call back over to Nick to take your questions.

Nicholas Giaimo

Thank you, Karl. Rochelle, we're now ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question, we'll hear from Travis Miller with Morningstar.

Travis Miller - Morningstar Inc., Research Division

Going back to the O&M kind of a little bit, I was wondering if you could give a little more detail on those expenses incurred in the quarter that might be more one-time or -- even for the full year, that might be more one-time. And what are we thinking about in terms of ongoing O&M levels?

Thomas E. Skains

Yes. I -- we had a one-time item during the quarter where we had a partial recovery of our Tennessee franchise fee. It was about a $0.5 million recovery. If you remember at the end of 2011, we took a $1.5 million charge related to the uncollected portion of that Tennessee franchise fee. And through the process, before the TRA during fiscal 2012, we've managed a recovery of about $500,000 of that. So that recovery is in there in the quarter. It's a -- the rest of the trend is we continue to see expense higher than expected on the pension side. We did have a true-up during the quarter, which raised the pension expense a little more than we had expected. But we've been doing better on the payroll front, and that's been intentional. We've been, like I said in my prepared remarks, we've been pretty intentional around -- being careful around the incurrence of payroll expenses during the 9 months. So I think that -- hopefully, that gives you some flavor. I don't -- I'm going to hold off on giving any guidance on projections into 2013 as is our tradition. Once our fiscal year closes for '12, we'll give some guidance. So I think some pretty good color for fiscal '13, we'll issue that most likely in November.

Travis Miller - Morningstar Inc., Research Division

Okay. Quick follow-up on that line. The -- what was your O&M growth number embedded in your 2012 guidance?

Thomas E. Skains

I think 9% from year-over-year in the guidance we issued back in November.

Travis Miller - Morningstar Inc., Research Division

And did that include some one-times that you knew were coming up?

Thomas E. Skains

Included all of -- that we had visibility for at the time. I don't believe we included an expectation of recovery in Tennessee at the time.

Travis Miller - Morningstar Inc., Research Division

Okay, so that would offset then a little bit of the one-times, kind of if I'm thinking about a core O&M type growth number embedded in your thoughts for 2012, is that still in that 9% range give or take, and -- or...

Thomas E. Skains

Again, I don't want to give guidance out for '13, but I think you'll continue to see pressures across all corporate America on the pension side because of continuing lower discount rates in the year-over period. And there's usually wage and compensation pressure year-over-year. I think those are just general trends.

Operator

And next we'll move to John Hanson with Praesidis Investment.

John Hanson

Just a follow-up on the Wayne County project, I see your slide there that has the contribution for Cardinal Pipeline. Now the $0.3 million, is that the Cardinal Pipeline extra margin or the whole project?

Karl W. Newlin

So what page are you on?

John Hanson

Oh, that's on Slide 8.

Nicholas Giaimo

I think he's referring to the increased contribution from Cardinal due to Wayne County.

Karl W. Newlin

Okay, so what's the question about it?

John Hanson

Is it -- well, and I'm just making sure that is indeed the pipeline part, not the whole Wayne County project, right?

Karl W. Newlin

That's right. That's just the contribution from our ownership percentage in the Cardinal Pipeline.

John Hanson

Great. And establishing that, now let me just make sure I understand, and that's a one quarter, that's not a catch-up. So is that kind of an ongoing per quarter, we should see that kind of contribution from that extra throughput on that pipeline?

Karl W. Newlin

In general, yes. I mean, it's difficult to extrapolate for the full year. But in general, that's correct.

John Hanson

It's not a one-time, not a catch-up, that's my main...

Karl W. Newlin

That's right, it's not a catch-up.

John Hanson

And last question, I know we're getting down to the Sutton project, wrapping up. Anything beyond that, that we're seeing in the horizon?

Thomas E. Skains

Was the question related to the status of the Sutton project?

Karl W. Newlin

Future...

John Hanson

Beyond that, yes. Beyond that.

Thomas E. Skains

Yes. Well, first on the Sutton project, that project, as I mentioned, this is Tom, is going very well. Construction has commenced, all of the major contracts have been signed and key materials purchased and received. About 98% of the right-of-way of that project has been acquired, and we've cleared about 90% already. And the pipeline installation itself is about 40% complete. So we feel good about that project and where it stands in terms of meeting our targeted in-service date of June of next year. As far as the future of pipeline expansion projects to serve power generation is concerned, we maintain close contact and have a good business relationship with Duke Energy, which, as you know, bought Progress Energy a few months ago. As they continue to execute their fleet modernization strategy, we'll continue to coordinate with them and see what additional services we can provide. We had nothing to announce today in that respect, but we're maintaining close contact with them.

John Hanson

Okay, good, good. I did notice that when I compared the CapEx for power generation project slides from the last time that -- and I know the balance per year kind of go up and down different times, but it looked like things had -- the extra $20 million here in '12 and then we took $30 million off of '13, is that timing again, as we kind of move back and forth on these projects?

Karl W. Newlin

It's Karl. For 2012, it's just timing as we refine the finality around the power generation CapEx between '12 and '13.

John Hanson

And then '13 is down $30 million, so is there -- are there things -- are we're kind of scaling back things next year for other reasons or is that just more of the timing on your side?

Karl W. Newlin

No, it's just timing of getting Sutton completed on time between our 2 fiscal years is all you're seeing there on the power gen.

Operator

And we'll move on to Spencer Joyce with Hilliard Lyons.

Spencer E. Joyce - Hilliard Lyons, Research Division

A couple of quick questions here. On Slide 6, that's $1.6 million in additional margin from the power gen, was that all attributable to Wayne County coming on line?

Thomas E. Skains

It was not all attributable to Wayne County, but Wayne County is in there for 2 months of our quarter.

Spencer E. Joyce - Hilliard Lyons, Research Division

Okay. And then just a sort of big picture question here, the Wayne County coming online, is it proceeding or has it been producing about -- as you all had expected? Any sort of hiccups there? Or does it feel like a pretty smooth rollout there?

Karl W. Newlin

It's Karl. Yes, I mean it's been a very smooth rollout in terms of from our side getting it in on time and in operations, been very smooth and everything from a contractual standpoint thus far has been fine. I don't know about the actual generation facility itself, but our assets, yes.

Spencer E. Joyce - Hilliard Lyons, Research Division

Yes, fair point there. One final little question, on the Cardinal Pipeline, that plus $0.3 million, I'm assuming that will be repeatable basically for the foreseeable future. That increase due to Wayne County should show up basically in Q4 and then Q1 and 2 of next year?

Karl W. Newlin

In general, yes. I mean, so this represents just our contribution from Cardinal because of our partial ownership interest in it through a joint venture. It had to be expanded to help serve the Wayne County facility. And because of that additional planned service, we will earn additional margin or pretax net income from that asset going forward. This represents, again, 2 months of that contribution. So although it's always a little dangerous I think to extrapolate in its entirety, in general, that's right. This is not a one-time item here.

Spencer E. Joyce - Hilliard Lyons, Research Division

So basically, the natural sort of earnings power there of Cardinal has...

Karl W. Newlin

Correct, but this is only 2 months.

Operator

And next we'll move to Dave Parker with Robert W. Baird.

David E. Parker - Robert W. Baird & Co. Incorporated, Research Division

A couple questions, maybe following on, on the investment opportunities that -- questions that John had in particular. I saw that the CapEx for pipeline integrity and other costs has gone up pretty substantially the next couple of years. Maybe you could give us some color there and refresh my memory how you get recovery of those investments, is that a traditional rate case or other mechanisms that allow you to get recovery of that? And I also noticed that you added some color on CNG fleet refueling stations. Maybe if you could -- maybe give a little color around that too, what allows you to move forward with that? Is it federal policy, state policy or that -- those are my 2 key questions, I guess.

Thomas E. Skains

Okay. Thank you, Dave. This is Tom. I'll answer the utility CapEx question and then ask Karl to address our CNG strategy. As you can see in the Q, I think it was Page 43, we've increased our current forecast for utility CapEx for fiscal years '13 and 14. This is largely due to the execution of our transmission and distribution integrity programs for pipeline safety and integrity. These expenditures would include retrofitting some existing transmission pipelines to accept internal inspection tools, replacing some older transmission lines, upgrading them with newer lines. We're also continuing a multiyear program to upgrade our LNG plants across the system and enhancing our system infrastructure for reliability and growth. We continue to focus on corrosion control and pipeline casings. We've programs for those. And we're also developing a new work and asset management system to help us execute our work management and our safety and integrity programs across our 3 states. This is our current forecast. We -- as you probably can -- would expect, are in the middle of our budgeting process for fiscal year '13 and our long-range planning process for the next 5 years at this time of the year. We're going to be presenting our fiscal year '13 capital and operating budgets for the board for their approval in October. So what I've just given you is kind of a general overview of our plans, but I think we'll be in a better position to provide you more color and detail on our utility CapEx when we issue our fiscal year guidance for '13, which will be, as Karl mentioned, most likely sometime in November. So that's what we're up to. The utility CapEx is increasing year-to-year in our forecast as the power generation CapEx declines once we've finished execution of the Wayne project earlier this year and complete Sutton next.

David E. Parker - Robert W. Baird & Co. Incorporated, Research Division

And before we get to the CNG or Tom handles that, is this -- the revised CapEx, is that -- I know you've been doing some work with consultant work as well internally, is -- are these revised numbers that sort of the culmination of that effort, Tom?

Thomas E. Skains

I'm sorry, Dave. Can you repeat that?

David E. Parker - Robert W. Baird & Co. Incorporated, Research Division

Yes. I was just wondering if the revised CapEx is sort of the culmination of some of the work you've been doing. I know you got some consultants working on doing some safety -- or at least evaluations of the system as well as from your internal people. Is that what's driven the substantial CapEx increase expectations?

Thomas E. Skains

Yes. I mean it's just this ongoing work and the experience that we're seeing as we execute our transmission integrity program across the systems. You mentioned the regulatory treatment for these expenditures. As you may know, in South Carolina, we have a Rate Stabilization Act where we true up investments and costs and revenues year-to-year, that vehicle covers CapEx investments and recovery of CapEx. We just completed earlier this year our Tennessee rate case and embedded in that, in the attrition period in that rate case, was the largest integrity project that we have scheduled for our national market area. It involves a new transmission line to replace an older line and -- which would allow that line to receive in-line inspection tools for future safety and integrity. In North Carolina, the state of the regulatory environment today there is that these type of expenditures will be recovered in general rate cases.

Karl W. Newlin

Dave, on the CNG, we have a regulated utility-type strategy in this market. As a fleet operator, we have about 900 trucks, and it's to our advantage to convert or purchase new. About 1/3 of those we believe to be capable of running on compressed natural gas, because we save the fuel cost if we do that. So currently, we have about 100 trucks that are CNG-capable and we're going to 300 over the next couple of years. To do that, we need to build additional infrastructure at our existing resource centers to refuel those vehicles, and that's in process. And we currently have 6 CNG fueling stations in use, and we'll build approximately 4 more next year. When we build those, they are open to the public. And so we undertake an effort to try and speak with commercial fleets in and around those resource centers across our 3-state service territory to realize the same cost savings that we enjoy and avail themselves of the lower priced compressed natural gas. We have about approximately 300 customer vehicles refueling at these CNG stations, at our resource centers, ranging from small operations to major corporations. Examples would include AT&T and Frito-Lay. Our strategy is to continue focusing on commercial fleets as we execute on the plan to build these CNG stations at our resource centers. We have not been and currently have no plans to target residential customers with this, although the pumps are certainly open to anyone who has a CNG vehicle and wants to purchase fuel with a credit card at our stations.

David E. Parker - Robert W. Baird & Co. Incorporated, Research Division

At the current natural gas price, Karl, is there any kind of quick payback for the investment for the conversion from gasoline to CNG?

Karl W. Newlin

Yes, absolutely there is. So the price of compressed natural gas, it depends on -- by state because there's different taxes, road and use taxes you have to apply. But in general, the price for compressed natural gas at the stations is around $2 per gasoline gallon equivalent. And as you know, that's about $1.50 to $2 a gallon cheaper than what you use for regular gasoline or diesel.

David E. Parker - Robert W. Baird & Co. Incorporated, Research Division

All right. And conversion, like for a pickup truck is what, runs about $10,000 or something [ph]?

Karl W. Newlin

Yes, it varies. I mean it really depends -- usually, it's around $5,000 to $7,000 depending on the equipment you use.

Operator

And there are no further questions at this time. I will turn the call back over to Mr. Giaimo for any additional or closing remarks.

Nicholas Giaimo

Okay, thank you, Rochelle, and thank you, everyone, for joining us today. This concludes the Piedmont Natural Gas 2012 Third Quarter Earnings Call.

Operator

And that concludes today's call. We thank you for your participation.

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