Operator: Good day. Welcome to Piedmont Natural Gas First Quarter 2013 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the call over to Nick Giaimo. Please go ahead, sir.
Nicholas Giaimo - IR: Thank you, Alicia. Good morning, everyone, and thank you for joining the Piedmont Natural Gas First Quarter 2013 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 first quarter Form 10-Q, filed Wednesday, March 6, with the SEC.
With that, I will turn the call over to Tom.
Thomas E. Skains - Chairman, President and CEO: Thank you, Nick, and good morning, everybody, and thank you for joining us for our first quarter 2013 earnings conference call. As you know, we filed our first quarter 10-Q and issued our earnings release late yesterday afternoon. This morning, I'm going to talk about our year-to-date accomplishments and provide you with the general update on the Company. Then I'll turn it over to Karl Newlin to give you a more detailed discussion of our first quarter financial results.
We're off to a great start in 2013. As you see on Slide 2, we reported net income of $85.9 million and diluted earnings per share of $1.18 in the first quarter, up 13% and 12%, respectively, from the first quarter of last year. We were also pleased to see continued customer growth during the quarter with the addition of more than 3,700 new customers, a 9% improvement from last year's quarter. We're working diligently on our $550 million to $600 million capital expansion program for fiscal year 2013, driven by an estimated $250 million of system integrity expenditures as well as the completion of the Sutton project, which is on schedule for its June 1st in service day. I'll talk more about our capital expenditures in just a moment.
Earlier this year, we completed a secondary equity offering of 4.6 million shares to help fund the growth of our Company through a combination of direct issuances and equity forwards. Karl will outline the details of our equity offering in his remarks. Yesterday, our Board, demonstrating its confidence in the Company, increased the quarterly dividend from $0.30 to $0.31 per share. This is the 35th consecutive year the Board has raised the dividend. Finally, we reaffirmed our 2013 earnings per share guidance range yesterday of $1.67 to $1.77 per share.
Slide 3 shows our first quarter earnings of $86 million, which were about $10 million higher than the first quarter of last year; growth was driven by, higher margin, lower O&M and increased contribution from joint ventures and lower net interest expense. I'll let Karl speak to the details in just a moment.
On Slide 4, we've highlighted our gross customer additions for the quarter. As you can see, our customer gains of 3,746 were 9% higher than the first quarter of last year. This includes a 25% increase in residential new construction additions, reflecting the continuing improvement in the new construction markets in our service territory. We still forecast a slightly greater than 1% growth rate for customer additions in 2013.
Moving to Slide 5, you can see that coming off of a record of capital investments in 2012 we expect to outpace that spend in 2013. This is largely a function of expenditures to enhance system integrity which we have highlighted with the red bar on this slide.
Some of the projects included in the $250 million of system integrity CapEx are related to transmission line replacements, transmission line retrofitting for in-line inspection technology, cathodic protection corrosion control upgrades and the new work in asset management system. In addition, we still anticipate spending between $75 million and $85 million this year to complete our system expansion to serve Duke Energy Progress' Sutton plant near Wilmington, North Carolina.
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 - SVP and CFO: Thank you, Tom, and good morning, everyone. As Tom mentioned, we had an excellent first quarter with net income of $85.9 million and diluted EPS of $1.18, compared to $76.2 million and $1.05 in the first quarter of 2012. As Tom also noted, we've reaffirmed our guidance range to $1.67 to $1.77 per share. While weather was colder than last year, it was still 8% warmer than normal. However, the team has done a good job offsetting this with expense control in the first quarter so we have kept our guidance unchanged.
Let me walk you through the major line items of our first quarter income statement and provide some details on our equity issuance. Then I'll turn the call back over to Nick to take your questions.
On Slide 6, margin of $232 million increased $11 million compared to last year. Margin growth came from the residential and commercial segment due to customer growth, new rates in Tennessee and colder weather. In addition, margin was helped by increased services to power generation customers and an increased contribution from industrial customers due to colder weather and customer growth.
On the expense side, Slide 7, O&M of $56 million was $3 million lower than last year due to lower pension and medical expense and lower payroll expense. Our lower pension expense was the result of $20 million pension plan funding contribution we made in the first quarter. This lower O&M was partially offset by increased contract labor to support our system integrity programs as well as higher regulatory expense stemming from an increase in amortization of regulatory assets in Tennessee in last year's rate case settlement.
Slide 8 shows depreciation expense of $27 million and general taxes of nearly $10 million, each up about $1 million from the year ago quarter. The increase in depreciation was due to growth in plant in service, and the higher general taxes were a function of an increase in property taxes paid in North Carolina and Tennessee.
On Slide 9, income from joint ventures was $7 million during the first quarter, $1 million higher than 2012, due mostly to an increased contribution from SouthStar as a result of lower transportation and gas costs, as well as higher commercial asset optimization. Cardinal also provided an increased contribution due to its expansion last year to serve Duke's Wayne County power generation facility.
Finally on Slide 10, interest expense of $4 million was nearly $3 million lower than in the first quarter of 2012 due to increased AFUDC offsets, lower net interest expense due to interest income on amounts due from customers and lower short-term interest expense due to a lower average rate. This was somewhat offset by an increase in long-term debt expense as a result of the $300 million of long-term debt we issued in the second half of 2012.
Before I turn the call back over to Nick, let me briefly touch on the equity issuance we priced on January 29th. Consistent with our guidance issued last November, we sold 4.6 million shares to investors in the secondary market, which consisted of a 4 million share base deal and the exercise of the underwriters' over-allotment option of 600,000 shares. 3 million of these shares settled on February 4th and provided immediate proceeds of $93 million. The impact of those shares to our average share count will come when we report our second quarter earnings as these shares settled in our fiscal second quarter.
In addition, we entered into two forward settlement agreements for the remaining 1.6 million shares that will expire on December 15th of 2013. We expect to settle these forward sale agreements by delivering shares on or before December 15th. Our expectation is that these two agreements will provide another $47 million of capital. We still expect to supplement this capital raise with a long-term debt issue later in the year.
With that, I'll turn the call back over to Nick.
Thomas E. Skains - Chairman, President and CEO: Thank you, Karl. Alicia we are now ready to open the call for questions.
Operator: Dan Fidell, U.S. Capital Advisors.
Daniel Fidell - U.S. Capital Advisors: Just a quick question or two for me. I guess first up, maybe if you would, could you give us some color on Constitution and how that's going, kind of the next timing and hurdles we see for that project? I guess as a second question, switching topics just kind of on the regulatory side, what do you see in terms of potential outlook in any of the jurisdictions over the next several quarters or so, if any?
Karl W. Newlin - SVP and CFO: Yes, sure. So in Constitution, things continue to go well with the Constitution project. If you go to their website, they have talked about a couple of developments in the last few months. One, they finalized the route for the pipeline. They've made some changes from the original route due to landowner concerns and now they have the final route, they still expect to file their first certificate in late spring of 2013. As well, they have been able to negotiate a lease for future compression from Iroquois Gas Transmission. So instead of building Greenfield compression in New York, they are able to lease new compression from Iroquois about 32,000 horsepower on that project. So things are going well there. We've invested, you can tell from our release about $7 million life to date so far in the project and things remain on track. On the second question around our various jurisdictions, not sure what you're – what are you seeking there in terms of activity in the jurisdictions?
Daniel Fidell - U.S. Capital Advisors: Just wondering if there were any unique filings coming up. We've seen a number of companies going in for not just general rate cases, but kind of one-offs for various different riders and things. I'm just wondering what, if any, plans you have in terms of potential either general rate case filings or one-off filings through the year?
Karl W. Newlin - SVP and CFO: Yes. So we're constantly assessing and always evaluating our need for rate relief. But we haven't made any final decisions on that front in any of our jurisdictions. As it relates to riders that is, or a tracker, for various expenditures, that's something we would view very positively in any of our jurisdictions. In fact, towards that end, we've had conversations with the public staff in North Carolina regarding a tracker, as well as the TRA in Tennessee, and legislation has actually been introduced in North Carolina to permit a tracker as it relates to federal gas pipeline safety requirements. I believe that's still working its way through the legislative session. I'll turn it over to Tom. He wants to comment on that.
Thomas E. Skains - Chairman, President and CEO: Yes, Dan. Just to kind of complete the picture, as you're aware, we have a rate stabilization adjustment provision in South Carolina. So we annually file to true up our cost and revenues and return on our invested capital there. We would expect to make this year's filing as we do every year in June and new – put new rates into effect in South Carolina in November, the beginning of next fiscal year. As Karl mentioned, there are discussions ongoing in North Carolina and Tennessee. With respect to rider mechanisms or trackers, if you will, related to system integrity expenditures, there's been a bill introduced in the House of the North Carolina General Assembly and that process has begun. That would clarify from a statute standpoint the ability of natural gas utilities to request that the Commission consider system integrity trackers as part of their rate-making toolbox. In Tennessee, there's a broader discussion going on with Legislators there, as well as the TRA, about the advisability of system integrity trackers, rate stabilization type mechanisms and other regulatory reform. So, positive discussions in those two states as well as just ongoing annual tracking type activity in South Carolina through our existing RSA.
Operator: Travis Miller, Morningstar.
Travis Miller - Morningstar: I'm going to follow real quick on that system integrity initiative. The CapEx that you have in there for 2014, '15, I believe it's about $150 million each year. Does that include any of the system integrity projects that might be pulling around people discussing within the legislation or within any other initiatives, is there any upside, I guess?
Thomas E. Skains - Chairman, President and CEO: I am sorry?
Travis Miller - Morningstar: No. I guess just a historic question, any upside to that $1.50 – the $150 million?
Thomas E. Skains - Chairman, President and CEO: Yes. I'll let Victor Gaglio enhance my general response in just a second. But those are our current assessments of CapEx that we would expend in those two years to implement our system integrity programs under the current regulatory framework. Largely, what we're doing, as I mentioned in my comments, is pursuing transmission pipeline replacements, transmission pipeline retrofitting for in-line inspection across the Company. This is a multiyear program, begun in a large way in 2012 but continuing into '13, into the future. That work will continue along with just our ongoing system integrity and safety programs. What these numbers don't reflect or any new regulatory requirements that may come from the DoT or FMSCA as a result of the legislation that was passed two years ago. We are active in those rule-making proceedings along with other industry participants from American Gas Association and INGA monitoring them very closely. But these CapEx in the forward years in '14 and '15 reflect our assessment of higher programs under current – the current regulatory regime. Victor, any additional color you'd like to provide?
Victor M. Gaglio - SVP and Chief Utility Operations Officer: No. You have covered it well, Tom.
Travis Miller - Morningstar: Second unrelated. Wonder if you could talk about the competitive environment right now for SouthStar, what you're seeing with gas prices continued at lower levels, how that dynamic has shifted competitive environment?
Karl W. Newlin - SVP and CFO: So in SouthStar I think you are right. The lack of volatility has been challenging for SouthStar and really all retail marketers, I think to capture and retain customers. So they've done a couple of things. Number one, they have a good base of customer count in Georgia. Those customers tend to be fairly sticky and stay with SouthStar as a provider. There is turnover. There is some churn there, but continues to be a good base for them. The two things that they have done to try and grow the customer count is through affinity programs. So if you're a customer and you sign up with a retail marketer and you can couple that with say airline miles, they find that the customers tend to be a little stickier when they use that approach. So that's one angle that they've used. In addition, they've begun expanding into other states. So they're in Ohio. They've made some tentative advances into New Jersey and to New York, so they're beginning to expand their customer base. Then it just takes some time as there's other competitive offerings in the marketplace, but SouthStar is there with them.
Operator: At this time, we have no further questions.
Nicholas Giaimo - IR: Well, thank you, Alicia. This concludes our first quarter 2013 earnings conference call. Thank you, all, for joining us this morning.