Piedmont Natural Gas Company Earnings Call Insights: O&M Growth Rate and Secondary Offering Details

Piedmont Natural Gas Company (NYSE:PNY) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

O&M Growth Rate

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.

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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.

Secondary Offering Details

Spencer Joyce – Hillard Lyons: I guess (indiscernible) 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 that 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?

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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 (settle) $3 million regular way, so because shares are time weighted and the EPS calculation you will see that share count accrete if you will over time through the remainder of all fiscal year. That still leaves the amount outstanding of the forward settlement agreements, and 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’s get 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 grow through a 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.

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