Piedmont Natural Gas Earnings Call Insights: Weather and Guidance, Post Power Generation

On Friday, Piedmont Natural Gas Company (NYSE:PNY) reported its second quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Weather and Guidance:

Travis Miller – Morningstar: A question on the weather issue here. Could you give a number for what the normalized weather earnings or margin would have been? Then kind of on that topic, you guys have that decoupling mechanisms throughout the territories. How was that such a big, or was it a big, it looked like a pretty big detriment to the quarter results?

Karl W. Newlin – SVP and CFO: I’ll start with – when we provided the guidance range of $1.58 to $1.68, that assumes normal weather. So, I think as you look within that range, probably towards the midpoint of that range, we’d assume a very normal type weather year. As the weather deviates from that it’s going to make us skew a little bit within the range. So, we don’t give quarterly guidance but hopefully that gives you a little bit of a color as to where the weather variations could move us away from the original guidance. Secondly, I mean you’re right I mean we’ve definitely had benefited from both the WNA clause in Tennessee and the mechanism in South Carolina as well as obviously decoupling in North Carolina. The one thing I would say is WNA is not a perfect mechanism. It definitely aids the Company on the residential and commercial side when the weather is warmer than normal, but it’s not perfect and when the weather is so far out of phase than the mechanism just has trouble keeping up and that’s unfortunately what we experienced in the first quarter.

Travis Miller – Morningstar: Then interpreting on the guidance range, could we think about anywhere from call it $0.03 to $0.05 if we think about the $0.10 range normal to below normal, am I reading into your answer correctly there?

Thomas E. Skains – Chairman, President and CEO: I’m not really sure I’m following the question.

Travis Miller – Morningstar: The $0.03 to $0.05 impact?

Thomas E. Skains – Chairman, President and CEO: Because of warmer than normal weather?

Travis Miller – Morningstar: Warmer than normal weather it’s the midpoint is normal and…

Thomas E. Skains – Chairman, President and CEO: I think we’re comfortable guiding towards the lower end of the range. If the range is $0.10 then assuming its lower half of that’s probably a safe assumption.

Travis Miller – Morningstar: One other one on the Wayne Country what kind of quarterly contribution going forward here should we look for?

Thomas E. Skains – Chairman, President and CEO: We haven’t broken out historically what the contribution would be from individual power generation projects for individual contracts. What we have said publicly is that the contract provides us utility-like rate of return and again that wouldn’t be reflected in the second quarter that just finished because it was still under construction and it contributed AFUDC. But going forward we would expect to start booking margin on that Wayne project which as Tom mentioned go into service on June 1.

Thomas E. Skains – Chairman, President and CEO: We’re a little restrained or constrained here what we can address our contracts with Progress are proprietary and subject to confidentiality provisions. So, we really can’t break out the margin contribution for each of those contracts. I guess what I would encourage you to do is to take a look at the power generation CapEx numbers that we’ve provided in our Q and in the materials related to this call, and then if you — on an annual basis, and then start applying some AFUDC factors as well as some utility return type factors to those investments and you can probably create an approximate revenue stream for the projects overall on an annual period.

Post Power Generation:

Heike Doerr – Robert W. Baird: I wonder if we could talk about the CapEx outlook post power generation, how should we be thinking about 2014.

Thomas E. Skains – Chairman, President and CEO: Great question. We have that information in the Q and Karl is opening up the Q now, and I’ll let him respond. Karl?

Karl W. Newlin – SVP and CFO: If you look at the projection around the capital expenditures I mean first of all, in 2013, you’ll notice that we still have a pretty substantial utility CapEx number around that year 310 to 340, and it’s for power gen which should be Sutton reminder at this point, 105 to 115 for ’13. Getting into 2014, it gets more difficult to predict obviously the further out times zero you get, but we continue to see certain amount of investment in our system that’s required, especially as it relates to pipeline integrity and so there is an assumption within the utility capital expenditure number around pipeline integrity programs that we expect to need to spend on going forward. Right now we don’t have an entry for power generation related capital expenditures in that year because we have nothing to announce on that front, but I can tell you the organization continues to look for opportunities on that front on a constant basis.

Heike Doerr – Robert W. Baird: Can you talk a little bit Karl how we should be thinking about O&M expense here in the second half of the year?

Karl W. Newlin – SVP and CFO: As we came out with guidance in November, we talked about O&M expense being about 9% higher from the prior year period, and so far we have been tracking pretty close that. I will say that the Company in its entirety is making a concerted effort to try and control the O&M expense were possible internally and that’s not just a management effort, I mean that’s everyone of our employees throughout the organization doing I think a wonderful job trying to clamp down some of the O&M expenses. So , hat is off to them for the efforts around that front. So, that being said I think there will be some discipline going forward for the rest of the year, but it’s not something that’s going to encourage us to move our guidance, but I do think that we will continue to be disciplined on that item going forward. In subsequent years, let me just say that I don’t want give guidance for a future period, but I will say that if you look at the guidance that we provided in November ’11, we tried to break out items that were within our control and some of the items that are outside of our control stemming from discount rates, et cetera. I think again the items under our control we will have a concerted effort around and the items that are outside of our control such as discount rates and the like we will have to just see where the market ends up as we get closer to the end of our fiscal year.