CHARLOTTE Sep 8, 2015 (Thomson StreetEvents) -- Edited Transcript of Piedmont Natural Gas Company Inc earnings conference call or presentation Tuesday, September 8, 2015 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Nick Giaimo Piedmont Natural Gas Company, Inc. - IR * Tom Skains Piedmont Natural Gas Company, Inc. - Chairman, President and CEO * Karl Newlin Piedmont Natural Gas Company, Inc. - SVP and CFO * Frank Yoho Piedmont Natural Gas Company, Inc. - Chief Commercial Officer ================================================================================ Conference Call Participants ================================================================================ * Sarah Akers Wells Fargo Securities, LLC - Analyst * Travis Miller Morningstar - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day and welcome to the Piedmont Natural Gas third-quarter 2015 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Nick Giaimo. Please go ahead, sir. -------------------------------------------------------------------------------- Nick Giaimo, Piedmont Natural Gas Company, Inc. - IR [2] -------------------------------------------------------------------------------- Thank you, Gina. Good morning, everyone, and thank you for joining the Piedmont Natural Gas third-quarter 2015 earnings conference call. If you're listening to this call over the Webcast but would like to dial in, please dial 646-254-3387. The 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 will 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 Form 10-Q, filed last Thursday with the SEC. Again, we are having some technical difficulties so if you're listening on the Webcast and would like to dial in, the number is 646-254-3387. With that, I will turn the call over to Tom. -------------------------------------------------------------------------------- Tom Skains, Piedmont Natural Gas Company, Inc. - Chairman, President and CEO [3] -------------------------------------------------------------------------------- Thank you, Nick. And good morning, everybody, and thank you for joining us for our third-quarter 2015 earnings conference call. As you know, on Thursday we filed our 10-Q and issued our third-quarter earnings release. This morning I'm going to talk about our third-quarter performance and provide you with a general update on the Company, including our recently announced Integrity Management Rider, or IMR, settlement in North Carolina for which we filed an 8-K earlier this morning. Then I'll turn the call over to Karl to give you a more detailed discussion of our forecasted capital investments, financial results, and financing plan. I'll begin 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 $8.3 million or $0.10 per diluted share. Regarding customer growth, we continue to see positive trends with the addition of more than 12,000 customers year to date, a 5% improvement from last year's growth level. Last week we reached an IMR settlement on the 2014 review and future IMR filings with the North Carolina public staff, subject to North Carolina Utility Commission approval. I will discuss the details of the settlement in just a moment. We continue to work diligently on our large capital expansion program for FY15. As Karl will address, we expect our utility capital expenditures and joint venture contributions to total more than $500 million for the year, driven by system integrity investments and customer growth. Earlier this fiscal year we announced our plan to issue up to $170 million of new equity over FY15 and FY16 as a part of at-the-market equity program to support our capital investments. This quarter we sold nearly 800,000 shares and year to date we sold 1.4 million shares. Finally, we reaffirmed our 2015 earnings per share guidance range of $1.82 to $1.92 per share. Slide 3 shows our seasonal net loss of $8.3 million, which was $1 million or $0.01 higher than the third quarter of last year. Margin growth and increased contributions from joint ventures were more than offset this quarter by increases in O&M expense, depreciation, general taxes, and interest expense. On slide 4 we've highlighted our gross customer additions for the quarter and for the year to date. As you can see, our customer gains of 3,745 were 2% higher than our gains for the third quarter of last year. For the year to date, customer gains of 12,248 were 5% higher than last year, including a 7% increase in residential new construction. We continue to be encouraged by strengthening new construction markets in our service territory, and affirm our revised gross customer addition growth rate of 1.6% to 2% for FY15. Moving to slide 5, earlier this year we told you that although our North Carolina IMR filing was approved it was still subject to further review. The public staff's review has concluded and we reached a settlement with them that seeks to create regulatory certainty, balance the interests of Piedmont shareholders and customers, and recognize the ancillary operational benefits of system integrity expenditures. As a part of the settlement we proposed to begin filing for rate adjustments twice a year on December 1 and June 1, for system integrity investments close to plant at September 30 and March 31 each year. Biannual filings will help further reduce regulatory lag associated with our elevated system integrity capital expenditure program. The settlement extends the IMR tariff from October 31, 2017 to October 31, 2019. It also establishes a procedural time line for the public staff's annual review of our IMR filings. To expedite that annual review, the settlement proposes fixed percentages of IMR recovery for various classes of system integrity expenditures, with the remaining percentages to be recovered in our next rate case. Through the IMR, we will recover 85% of transmission integrity expenditures, 90% of distribution integrity expenditures, 15% of right-of-way clearing costs for integrity projects, and 68% of the costs associated with our OASIS work and asset management system. Finally, the settlement makes certain tax-related adjustments. Subject to NCUC approval, the stipulation will be effective November 1, 2015. Finally, as a part of the settlement, we will make an immaterial adjustment to IMR margin revenue in the fourth quarter. We believe the settlement gives us more certainty around the IMR mechanism, particularly as it relates to the annual review process, and makes it more robust through a biannual true-up and a two-year extension. And with that, I'll now turn the call over to our Senior Vice President and Chief Financial Officer, Karl Newlin. -------------------------------------------------------------------------------- Karl Newlin, Piedmont Natural Gas Company, Inc. - SVP and CFO [4] -------------------------------------------------------------------------------- Thank you, Tom. And good morning, everyone. I'll continue the discussion with capital expenditures and a joint venture update. On slide 6 you can see that we have refined our forecast for utility capital expenditures and JV contributions totaling $515 million for FY15. Continue to expect elevated levels of capital expenditures in future years, as seen in the red and blue bars, which is still largely a function of customer growth and system integrity. Green bars in 2015 and 2016 are for investments associated with the power generation delivery project for Duke Energy to serve their WS Lee facility in South Carolina. The light blue bars depict utility CapEx under our Atlantic Coast pipeline, or ACP, redelivery contracts, the majority of which will be invested in 2018. As a reminder, of the projected $190 million in ACP related facility capital expenditures, $170 million is supported by long-term contracts and will not require rate cases for cost recovery. Finally, as represented by the purple bar, we have adjusted joint venture contributions to $35 million in 2015 primarily driven by the timing and cost estimates for Constitution pipeline. Now, moving into third-quarter results, as Tom noted earlier, we experienced a seasonal loss of $8.3 million in the third quarter, compared to a loss of $7.3 million last year. I'll walk through the major line items of our third-quarter income statement and update you on our financing before turning the call back over to Nick to take your questions. On slide 7, margin of $112 million increased by $7 million due to new rates in North Carolina and Tennessee that result in higher margins from residential, commercial and industrial customers. On slide 8 operating expenses of $70 million increased $1 million from last year. Increases in contract labor, payroll and employee benefits were largely offset by a reduction in bad debt expense. The increase in bad debt expense is driven by lower receivables balance and lower projected customer charge-offs. Slide 9 shows depreciation expense of $32 million and general taxes of $12 million. The increase in depreciation is due to an increase in plant in service. General taxes grew due to increased property and state franchise taxes. On slide 10 income from joint ventures was $6 million, $1 million higher than in 2014, due to higher AFUDC at Constitution pipeline. Finally, on slide 11, utility interest charges of $17 million were $4 million higher than in the third quarter of 2014. The increase in long-term debt outstanding, coupled with decreased AFUDC, was partially offset by lower interest expense on amounts due to customers. Let me briefly comment on financing. As Tom mentioned, we sold 796,000 shares under the ATM program during the quarter using a forward sales agreement that defers issuance until we have more immediate need for the proceeds. We expect to issue additional shares in the fourth-quarter settlement to occur prior to the end of our fiscal year. Year to date we've issued 1.4 million shares totaling $51.5 million in gross proceeds. Our target remains to issue up to $170 million in equity during 2015 and 2016. In addition to the new equity, we plan to issue $100 million to $200 million of long-term debt during the fourth quarter subject to market conditions to keep us in line with our targeted capital structure of 40% to 50% equity and 50% to 60% debt. With that I'll turn the call back over to Nick to take your questions. -------------------------------------------------------------------------------- Nick Giaimo, Piedmont Natural Gas Company, Inc. - IR [5] -------------------------------------------------------------------------------- Thank you. It appears we've resolved some of our difficulties so we're now ready to open the call for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We will take our first question from Sarah Akers at Wells Fargo. Please go ahead. Your line is open. -------------------------------------------------------------------------------- Sarah Akers, Wells Fargo Securities, LLC - Analyst [2] -------------------------------------------------------------------------------- Good morning. It looks like the cost of Constitution jumped about 6% since the last update. Can you just go through the reason or reasons for that? -------------------------------------------------------------------------------- Tom Skains, Piedmont Natural Gas Company, Inc. - Chairman, President and CEO [3] -------------------------------------------------------------------------------- Yes. Thank you, Sarah. I'm going to turn the call over to Karl Newlin to respond to that question. -------------------------------------------------------------------------------- Karl Newlin, Piedmont Natural Gas Company, Inc. - SVP and CFO [4] -------------------------------------------------------------------------------- The latest cost estimate, Sarah, went up to $925 million from $875 million. A couple of things related to that. One was a fine tuning overall of the cost estimates as we looked to get moving on construction, hopefully soon. And then they rebid, I believe, part of the labor contract, which had some increased costs over the last couple of months. So $925 million is the total estimated cost now and that includes AFUDC. -------------------------------------------------------------------------------- Sarah Akers, Wells Fargo Securities, LLC - Analyst [5] -------------------------------------------------------------------------------- Got it. And then on ACP, any comments on how the pre-filing process has gone at the FERC, and any early resistance, any indications of what some of the roadblocks might be at this point? -------------------------------------------------------------------------------- Tom Skains, Piedmont Natural Gas Company, Inc. - Chairman, President and CEO [6] -------------------------------------------------------------------------------- I'd say overall things are going very well. We continue to work with our partners in Dominion, Duke and AGL in going through the pre-filing process. As you know, there have been various open houses, scoping meetings and town halls regarding the project and its roots. We do still anticipate filing for our FERC 7(c) certificate later this month. Overall I'd say things are going well. Most of the concerns or questions seem to stem from the proposed route that the pipeline will take, as well as any construction or mitigation measures that we can employ. But, again, I think all in all things are looking positive for the project. -------------------------------------------------------------------------------- Sarah Akers, Wells Fargo Securities, LLC - Analyst [7] -------------------------------------------------------------------------------- Great. Then shifting to the utility, just regarding the fixed percentage of the system integrity spend that's eligible for the IMR under the settlement, Is the total spend for each of those buckets fully reflected in the system integrity spend that's laid out on the slide deck such that we need to haircut the numbers in the slide deck before giving right of recovery in North Carolina? -------------------------------------------------------------------------------- Tom Skains, Piedmont Natural Gas Company, Inc. - Chairman, President and CEO [8] -------------------------------------------------------------------------------- That's correct. A couple of things on that. You're right, the dollars that appear in the red portion of our CapEx table are the total system integrity spend. That's true across all three states. That's a total number. To the extent that you would need to apply the haircuts that are in the proposed settlement with North Carolina you'd have to apply those. Another point I would make on that, really two points, I want to make sure I make on that is, number one, those percentages that Tom discussed that are in the 8-K this morning are static. Those do not change over time. Those are set percentages that would apply against the closed plant numbers in each one of the IMR periods going forward. Another point I would reiterate is that the costs that fall into the haircut percentages are not disallowed, they're just deferred until a future rate case. -------------------------------------------------------------------------------- Sarah Akers, Wells Fargo Securities, LLC - Analyst [9] -------------------------------------------------------------------------------- Got it. And then do you recover 100% of those in the Tennessee rider? -------------------------------------------------------------------------------- Tom Skains, Piedmont Natural Gas Company, Inc. - Chairman, President and CEO [10] -------------------------------------------------------------------------------- We do. The Tennessee rider is subject to an audit mechanism that they do each year. We've gone through, I believe, two audits thus far and we've received 100% recovery. -------------------------------------------------------------------------------- Sarah Akers, Wells Fargo Securities, LLC - Analyst [11] -------------------------------------------------------------------------------- Great. Thank you. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Thank you. We will now take our next question from Travis Miller of Morningstar. Please go ahead. Your line is open. -------------------------------------------------------------------------------- Travis Miller, Morningstar - Analyst [13] -------------------------------------------------------------------------------- Good morning. Thank you. I was wondering, on the higher level, this summer on the demand side, what did you see from the power generation demand? How are we trending here over the last few years? And what did you see this summer in terms of -- I would assume more gas demand, but just wondering what your thoughts are there? -------------------------------------------------------------------------------- Frank Yoho, Piedmont Natural Gas Company, Inc. - Chief Commercial Officer [14] -------------------------------------------------------------------------------- Yes, Travis, this is Frank Yoho. I'm Chief Commercial Officer. And we have seen increased demand in the power generation. And it's been from both the development of more and more power generation facilities from Duke, and also a competitive price of natural gas actually competing with coal in some of the dispatch stacks. So, we are seeing a pretty significant increase in our throughput with power generation. -------------------------------------------------------------------------------- Tom Skains, Piedmont Natural Gas Company, Inc. - Chairman, President and CEO [15] -------------------------------------------------------------------------------- Travis, this is Tom Skains. If you look at page 34 of the Q, we break out throughput by customer class. And you can see for the nine months ended July 31 our throughput to power generation is up 30% compared to the same time last year. But please recall that our service agreements with power generation customers are largely fixed-rate agreements, not volumetric rate-based agreements. So, our margin that we derive from those contracts is pretty steady irrespective of the level of throughput under them. -------------------------------------------------------------------------------- Travis Miller, Morningstar - Analyst [16] -------------------------------------------------------------------------------- Okay. Has there been a huge change, then, in the peak period also? On the hottest day of the summer have you seen big jumps in that peak demand level? -------------------------------------------------------------------------------- Frank Yoho, Piedmont Natural Gas Company, Inc. - Chief Commercial Officer [17] -------------------------------------------------------------------------------- Not real dramatic increase in the peak level. What we're seeing is more steady high volume throughput with the power generation. Especially it's been a hot summer here. It's been warmer than normal, which has driven the overall power generation load up. -------------------------------------------------------------------------------- Travis Miller, Morningstar - Analyst [18] -------------------------------------------------------------------------------- Got it. Thanks so much. I appreciate it. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- Thank you. We do not appear to have any further questions. I'll pass back to the speakers for any further remarks. -------------------------------------------------------------------------------- Nick Giaimo, Piedmont Natural Gas Company, Inc. - IR [20] -------------------------------------------------------------------------------- Thank you, Gina. This does conclude our third-quarter 2015 earnings conference call. Once again, we apologize for the technical difficulties we had at the beginning of the call. But the Investor Relations group is around all day to answer any follow-up questions. Thank you very much. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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