Operator: Good day. Welcome to the Piedmont Natural Gas Company Incorporated Second Quarter 2013 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Nick Giaimo. Please go ahead, sir.
Nicholas Giaimo - IR: Thank you, Merida. Good morning, everyone, and thank you for joining the Piedmont Natural Gas second 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 related to these forward-looking statements may be found at Piedmont's first quarter Form 10-Q, filed Friday, June 7th, 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 second quarter 2013 earnings conference call. We saw many of you at the AGA Financial Forum last month and I appreciate you taking the time to join us again today. As you know, we filed our second quarter 10-Q and issued our earnings release Friday afternoon. This morning, I'm going to talk about our recent accomplishments and provide you with the general update on the Company. Then, I'll turn it over to Karl to give you a more detailed discussion of our second quarter financial results.
I continue to be very proud of our performance in 2013. As you see on Slide 2, we reported net income of $55.8 million and diluted earnings per share of $0.74 in the second quarter, up 11% and 6% respectively from the second quarter of last year. We were also pleased to see continued customer growth during the quarter with the addition of more than 3,000 new customers, a 16% improvement from last year.
Year-to-date, we've added nearly 6,800 customers, which is a 12% improvement from 2012. We continue to work diligently in our large capital expansion program for fiscal year 2013. Our $550 million to $600 million program includes expenditures for the completion of our Sutton project, which we put into service on June 1st.
At the end of last month, we filed a general rate case in North Carolina for the first time since 2008. Over that time period, we've invested more than $1.2 billion in the state and we are seeking to refresh our rates to account for this investment. Finally, we reaffirmed our 2013 earnings per share guidance range of $1.67 to $1.77 per share.
Slide 3, shows our second quarter earnings of $56 million, which were nearly $6 million higher than the second quarter of last year. Our growth in net income was driven by higher margin, lower general taxes and increased contribution from our joint ventures at lower interest expense partially offset by increased O&M and depreciation 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 3,043 were 12% higher than the first quarter of last year, including a 28% increase in residential new construction. And for the year-to-date customer gains of 6,792 were 16% higher than last year, including a 31% increase in residential new construction. These results reflect the continued improvement of the construction markets in our service territories and with that we still forecast a slightly greater than 1% customer growth rate in 2013.
Moving to Slide 5, one of our major business objectives in 2013 is the execution of a $550 million to $600 million capital expenditures program. This is largely driven by expenditures to enhance system integrity, which we've highlighted with the red bar. The green bar represents expenditures we realized to complete our Sutton project. With that project in-service, we have now completed a portfolio of five recent power generation delivery projects totaling more than $0.5 billion. Finally the purple bar illustrates our cash contribution to our Constitution Pipeline joint venture.
As you will notice, our forecasted total contributions for the Constitution project have been revised downward to $163 million to account for lower projected total project cost at $680 million. This is due to Constitution no longer planning to build greenfield compression, as they've contracted to lease new compression capacity from an expanded Iroquois Gas Transmission facility instead.
In light of our large utility capital expenditure programs, on May 31st we filed a general rate case with the North Carolina Utilities Commission to refresh in our rates based upon an updated rate base of $1.9 billion. Our filing proposes incremental revenues of $79.8 million, which includes $13.6 million related to higher fixed gas costs. Our revenue request is based on the proposed ROE of 11.3% with an equity capital structure component of 50.7%.
We are also proposing to implement an integrity management rider pursuant to recently passed legislation in North Carolina. This rider will allow us to recover federally mandated safety and integrity expenditures outside of rate cases. Our intention is that these new rates be in place on January 1, 2014. I would note that even with our proposed rates, an average residential customer would still see annual bills that are 18% lower than our last rate case in 2008, given the lower commodity cost of gas.
With that, I would 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 second quarter with net income of $55.8 million and diluted EPS of $0.74, compared to $50.2 million and $0.70 in the second quarter of 2012.
Let me walk you through the major line items of our second quarter income statement, and then I will turn the call back over to Nick to take your questions. On Slide 7, margin of $184 million increased $12 million compared to last year. Margin growth came from the residential and commercial segment due to customer growth, new rates incentive fee and colder weather. In addition, margin was helped by increased services to power generation customers and increased contribution from industrial customers due to colder weather and customer growth.
On the expense side, Slide 8, O&M of $65 million was $5 million higher than last year due to increased contract labor for process improvement projects, and integrity and safety programs. In addition, increased pension expense, payroll and incentive accruals, and regulatory expense all contributed to higher O&M.
Slide 9 shows depreciation expense of $27 million and general taxes of $9 million. While general taxes were basically flat, the increase in depreciation was due to growth in plant in service, primarily from system integrity projects.
On Slide 10, income from joint ventures was $12 million during the second quarter, nearly $1 million higher than in Q2 2012. This is due to an increased contribution from SouthStar as a result of higher customer usage due to colder weather, as well as a prior year lower of cost or market gas storage adjustment.
Finally, on Slide 11, interest expense of $3 million was $2 million lower than in the second 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 lower balances at a lower average rate. Lower interest expense was somewhat offset by an increase in long-term debt interest expense as a result of higher amounts outstanding.
With that, I’ll turn the call back over to Nick.
Nicholas Giaimo - IR: Merida, we are now ready to open the call for questions.
Operator: Sarah Akers, Wells Fargo.
Sarah Akers - Wells Fargo: For the first half of the year, it looks like the O&M growth rate is about 1.7%. Are there any headwinds that you would point to in the second half of the year to get up to the 5% annual increase embedded in guidance or might we expect the annual clip to come in south of that 5% mark?
Karl W. Newlin - SVP and CFO: It's Karl. It's really a timing issue. We do forecast an uptick in contract labor, for example, later this year and in IT and some other projects, so while I think there's a chance we could come in below the 5% forecasted increase, I'm going to stick with that amount in our guidance for now.
Sarah Akers - Wells Fargo: Got it. Then second, are you able to give us a sense of how of the $250 million system integrity CapEx on '13 is captured in the rate case versus potential future integrity rider increases?
Karl W. Newlin - SVP and CFO: Well, I can tell you on the rate case, our true-up period is through September of this year.
Sarah Akers - Wells Fargo: Does that only capture integrity rider CapEx that is in service to speak or does that include any CWIP as well?
Thomas E. Skains - Chairman, President and CEO: This is Tom. The rate case process generally picks up projects that are in service in North Carolina, but as you know, we've also filed in this case, the integrity management rider, which would pick up any expenditures that don't close as of September and subsequent adjustments. So this rider mechanism is which we propose to make great adjustments twice a year. If approved, we'd pick up those ongoing integrity expenditures.
Operator: Spencer Joyce, Hillard Lyons.
Spencer Joyce - Hillard Lyons: I guess kind of minutiae here, but congrats on crossing the 1 million customer mark. I saw that kind of embedded there in the Q.
Thomas E. Skains - Chairman, President and CEO: Thank you.
Spencer Joyce - Hillard Lyons: One almost kind of housekeeping note. I know we saw the first initial dilutive impact from the secondary offering this quarter and I guess, Karl, I was just kind of wondering, if you could maybe walk us through when we may see that forward sale agreement exercised, and where we may or may not see that additional impact?
Karl W. Newlin - SVP and CFO: Yes. Sure. So it's really kind of two pieces to that. As you know, the total offering is 4.6 million shares. We settled $3 million regular way, so because shares are time weighted in the EPS calculation, you will see that share count accrete, if you will, over time through the remainder of our fiscal year. That still leaves the amount outstanding of the forward settlement agreements. Under those agreements for the 1.6 million shares, we have the ability to settle at will any time between now and the middle of December of 2013. It would be our expectation to settle most likely in December, but again we do have the flexibility to settle sooner and deliver the shares and take the cash at will. So you will see those additional shares leak into the denominator for EPS once that gets settled, and again, I would expect that to be in fiscal 2014 or December '13, which obviously is our fiscal '14. The final little nuance piece to it is, if you look there is a note in the Q that just talks about whenever you have a forward settlement agreement, you have to go through Treasury Stock Method Accounting to the extent that our prevailing stock price during the period is above the forward settlement price. You will have some incremental dilution into the denominator. I think that was about 200,000 shares or so in the most recent period.
Operator: Heike Doerr, Baird.
Heike Doerr - Robert W. Baird & Company: Two quick questions; one, can you drill down on your improvement in residential new construction? Are you seeing that in one specific (seat), or are you seeing that across your operating territories?
Thomas E. Skains - Chairman, President and CEO: I’m going to turn that over to Frank Yoho, our Chief Commercial Operations Officer, to give you some color on our growth. Frank?
Franklin H. Yoho - SVP and Chief Commercial Operations Officer: Yeah, we’re seeing the growth across really all our markets from Tennessee to South Carolina to North Carolina. So it is very solid, especially on the residential new construction and really everywhere you look, it may not be dramatic, but there are real clear signs of positive things happening in the economy, especially related to residential new constructions, so we’re real pleased to see that right now.
Heike Doerr - Robert W. Baird & Company: Could you provide us an update on the situation with legislation being passed in North Carolina that would replace the commission? I believe your rate case will likely be completed before any new commissioners are seated. But can you tell us where that stands?
Thomas E. Skains - Chairman, President and CEO: This is Tom. I’ll address that, and I’ll ask Jane Lewis-Raymond to join in and provide any additional color. There are seven commissioner seats in North Carolina. There are currently six commissioners in place; there is one vacancy. Our new governor, Pat McCrory, has already made three appointments for; one, the vacant position; and two additional seats where the sitting commissioners’ terms expire this summer. Those three appointments are proceeding along the normal course of review and confirmation by the General Assembly. So, once those three new commissioners are seated, we will have a full complement of seven; four incumbent commissioners and three new commissioners. There was a previous bill that we discussed at the AGA Financial Forum. We have a slide on that on our Presentations portion of our website talking about a North Carolina Senate Bill 10 that would have restructured most commissions that operate in North Carolina and allow new appointments for all seats. That Bill was defeated a few weeks ago, and to my knowledge has not been reintroduced and there is uncertainty as to whether it will be introduced, and if it does whether it will pass. So at this point, we are planning, from our perspective, on a commission complement in North Carolina of seven commissioners; four incumbents and three new.
Jane R. Lewis-Raymond - SVP, General Counsel, Corporate Secretary and Chief Compliance and Community Affairs Officer: The only thing I would add to that is that the current Executive Director of the Commission does retire in the middle of this month, Robert Gruber, and his replacement has already been confirmed by the General Assembly, Chris Ayers.
Heike Doerr - Robert W. Baird & Company: The (indiscernible) is Republican, correct, and right now you've got six Democratic Commissioners. So we will see a change in the sense that he is likely to appoint the three Republicans, correct?
Jane R. Lewis-Raymond - SVP, General Counsel, Corporate Secretary and Chief Compliance and Community Affairs Officer: I'm not sure of the exact breakdown of the party lines of the sitting commissioners. The commissioners he did appoint definitely are Republicans and the current ones – there's always been a mix, so I don’t think that there is one way or the other a slanted commission in anyway.
Heike Doerr - Robert W. Baird & Company: Okay. Is there…
Thomas E. Skains - Chairman, President and CEO: This is Tom. Based upon my recollection, I don't believe there is a requirement at the North Carolina Commission like there is at the FERC by example where there has to be an X amount of Republicans versus Democratic related Commissioners appointed. Well that's a subject to check but my recollection is the Governor makes the appointments and they don’t have to be tied to any specific party.
Jane R. Lewis-Raymond - SVP, General Counsel, Corporate Secretary and Chief Compliance and Community Affairs Officer: For somebody (indiscernible), there were six Democrats that were sitting on the current Commission and that was part of the reason that they may have been targeted as part of Senate Bill 10 was to switch the political party at the entire commission all at once.
Operator: Travis Miller, Morningstar.
Travis Miller - Morningstar: I had a question on the rate case. I wondered if you could talk a little bit about the decision to request that 11.3% and obviously I think it's quite a bit higher than what you are allowed you now. So I guess it's quite a bit higher than what Duke got in North Carolina but again recall it's in line with what you got in South Carolina. So I was wondering, if you could kind of talk about those differences maybe perhaps North Carolina versus South Carolina and then North Carolina versus some (decisions) and your past ROE?
Karl W. Newlin - SVP and CFO: I think as you pointed out we do have an 11.3% allowed ROE in South Carolina but we think there was some precedent for there. As we went and filed a rate case as you know, a lot of thought and discussion goes into around the capital structure and the return on equity component and as we look at our business, our business mix and our competitive position in our state we think that's a fair return for the Company for shareholders as well as for the customers in our service territory.
Travis Miller - Morningstar: Have you found the North Carolina, South Carolina typically mirror each other in this respect, if you are looking at competitors or if you are looking at other utilities?
Thomas E. Skains - Chairman, President and CEO: I mean each state is independent and makes its own discoveries.
Travis Miller - Morningstar: What's the sensitivity around that say 100 basis point move on your revenue increase request?
Karl W. Newlin - SVP and CFO: I don’t think I am really comfortable going into that level of discussion right now because we have the rate case pending.
Travis Miller - Morningstar: Is it just simple you are just taking a rate base, something is going to change or is there something else embedded in there?
Karl W. Newlin - SVP and CFO: Yes. That's right. I mean you can take the proposed capital structure and apply the differential in the ROE and you should be able to get back into the numbers you are looking for.
Operator: It appears we have no further questions at this time.
Nicholas Giaimo - IR: Thank you, McCrea. This concludes our second quarter 2013 earnings conference call. Thank you, all, for joining us this morning.
Operator: That does conclude today's conference we appreciate your participation. You may now disconnect.