• Residential, commercial, industrial and power generation growth and energy consumption in our service areas. The ability to grow our customer base, the pace of that growth and the levels of energy consumption are impacted by general business and economic conditions, such as interest rates, inflation, fluctuations in the capital markets and the overall strength of the economy in our service areas and the country, and fluctuations in the wholesale prices of natural gas and competitive energy sources.

• Deregulation, regulatory restructuring and competition in the energy industry. We face competition from electric companies and energy marketing and trading companies, and we expect this competitive environment to continue.

• The potential loss of large-volume industrial customers to alternate fuels or to bypass, or the shift by such customers to special competitive contracts or to tariff rates that are at lower per-unit margins than that customer's existing rate.

• Regulatory issues, customer growth, deregulation, economic and capital market conditions, the cost and availability of natural gas and weather conditions can impact our ability to meet internal performance goals.

• The capital-intensive nature of our business. In order to maintain growth, we must add to our natural gas distribution system each year. The cost of this construction may be affected by the cost of obtaining governmental approvals, compliance with federal and state pipeline safety and integrity regulations, development project delays and changes in project costs. Weather, general economic conditions and the cost of funds to finance our capital projects can materially alter the cost and timing of a project.

• Access to capital markets. Our internally generated cash flows are not adequate to finance the full cost of capital expenditures. As a result, we rely on access to both short-term and long-term capital markets as a significant source of liquidity for capital requirements not satisfied by cash flows from operations. Changes in the capital markets or our financial condition could affect access to and cost of capital.

• Changes in the availability and cost of natural gas. To meet firm customer requirements, we must acquire sufficient gas supplies and pipeline capacity to ensure delivery to our distribution system while also ensuring that our supply and capacity contracts allow us to remain competitive. Natural gas is an unregulated commodity

market subject to supply and demand and price volatility. Producers, marketers and pipelines are subject to operating and financial risks associated with exploring, drilling, producing, gathering, marketing and transporting natural gas and have risks that increase our exposure to supply and price fluctuations.

• Changes in weather conditions. Weather conditions and other natural phenomena can have a material impact on our earnings. Severe weather conditions, including destructive weather patterns such as hurricanes, can impact our suppliers and the pipelines that deliver gas to our distribution system. Weather conditions directly influence the supply of, demand for and the cost of natural gas.

• Changes in environmental, safety and system integrity regulations and the cost of compliance. We are subject to extensive federal, state and local regulations. Compliance with such regulations may result in increased capital or operating costs.

• Ability to retain and attract professional and technical employees. To provide quality service to our customers and meet regulatory requirements, we are dependent on our ability to recruit, train, motivate and retain qualified employees.

• Changes in accounting regulations and practices. We are subject to accounting regulations and practices issued periodically by accounting standard-setting bodies. New accounting standards may be issued that could change the way we record revenues, expenses, assets and liabilities, and could affect our reported earnings or increase our liabilities.

• Changes in tax law and regulations. New tax law and regulations may be passed that could affect our reported earnings or increase our liabilities. Producers, marketers and pipelines are subject to changes in tax laws and regulations that increase our exposure to supply and price fluctuations.

• Earnings from our equity method investments. We invest in companies that have risks that are inherent in their businesses, and these risks may negatively affect our earnings from those companies.

Other factors may be described elsewhere in this report. All of these factors are difficult to predict and many of them are beyond our control. For these reasons, you should not rely on these forward-looking statements when making investment decisions. When used in our documents or oral presentations, the words "expect," "believe," "project," "anticipate," "intend," "should," "could," "will," "assume," "can," "estimate," "forecast," "future," "indicate," "outlook," "plan," "predict," "seek," "target," "would" and variations of such words and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are only as of the date they are made, and we do not undertake any obligation to update publicly any forward-looking statement either as a result of new information, future events or otherwise except as required by applicable laws and regulations. Please reference our website at www.piedmontng.com for current information. Our reports on Form 10-K, Form 10-Q and Form 8-K and amendments to these reports are available at no cost on our website as soon as reasonably practicable after the report is filed with or furnished to the SEC.
Executive Overview
Piedmont Natural Gas Company, Inc., which began operations in 1951, is an energy services company whose principal business is the distribution of natural gas to over one million residential, commercial, industrial and power generation customers in portions of North Carolina, South Carolina and Tennessee, including 61,000 customers served by municipalities who are our

wholesale customers. We are invested in joint venture, energy-related businesses, including unregulated retail natural gas marketing, interstate natural gas storage and intrastate natural gas transportation.
In 1994, our predecessor, which was incorporated in 1950 under the same name, was merged into a newly formed North Carolina corporation for the purpose of changing our state of incorporation to North Carolina.
In the Carolinas, our service area is comprised of numerous cities, towns and communities. We provide service to Anderson, Gaffney, Greenville and Spartanburg in South Carolina and Charlotte, Salisbury, Greensboro, Winston-Salem, High Point, Burlington, Hickory, Indian Trail, Spruce Pine, Reidsville, Fayetteville, New Bern, Wilmington, Tarboro, Elizabeth City, Rockingham and Goldsboro in North Carolina. In North Carolina, we also provide wholesale natural gas service to Greenville, Monroe, Rocky Mount and Wilson. In Tennessee, our service area is the metropolitan area of Nashville, including wholesale natural gas service to Gallatin and Smyrna.
We have two reportable business segments, regulated utility and non-utility activities. The regulated utility segment is the largest segment of our business with approximately 97% of our consolidated assets. Factors critical to the success of the regulated segment include a safe, reliable natural gas distribution system and the ability to recover the costs and expenses of the business in the rates charged to customers. For the six months ended April 30, 2009, 80% of our earnings before taxes came from our regulated utility segment. The non-utility activities segment consists of our equity method investments in joint venture, energy-related businesses that are involved in unregulated retail natural gas marketing, interstate natural gas storage and intrastate natural gas transportation. For further information on business segments, see Note 6 to the consolidated financial statements in this Form 10-Q. For information about our equity method investments, see Note 7 to the consolidated financial statements in this Form 10-Q.
Our utility operations are regulated by the NCUC, the PSCSC and the TRA as to rates, service area, adequacy of service, safety standards, extensions and abandonment of facilities, accounting and depreciation. We are also regulated by the NCUC as to the issuance of securities. We are also subject to or affected by various federal regulations. These federal regulations include regulations that are particular to the natural gas industry, such as regulations of the FERC that affect the purchase and sale of and the prices paid for the interstate transportation and storage of natural gas, regulations of the Department of Transportation that affect the construction, operation, maintenance, integrity, safety and security of natural gas distribution and transmission systems, and regulations of the Environmental Protection Agency relating to the use and release into the environment of hazardous wastes. In addition, we are subject to numerous regulations, such as those relating to employment practices, which are generally applicable to companies doing business in the United States of America.
Our regulatory commissions approve rates and tariffs that are designed to give us the opportunity to generate revenues to cover our gas and non-gas costs and the opportunity to earn a fair rate of return for our shareholders. In North Carolina, a margin decoupling mechanism provides for the recovery of our approved margin from residential and commercial customers independent of consumption patterns. The margin decoupling mechanism results in semi-annual rate adjustments to refund any over-collection of margin or recover any under-collection of margin. We have weather normalization adjustment (WNA) mechanisms in South Carolina and Tennessee that partially offset the impact of colder- or warmer-than-normal weather on bills rendered during the months of November through March for residential and commercial customers. The WNA formula calculates

the actual weather variance from normal, using 30 years of history, which results in an increase in revenues when weather is warmer than normal and a decrease in revenues when weather is colder than normal. The gas cost portion of our costs is recoverable through PGA procedures and is not affected by the margin decoupling mechanism or the WNA.
We continually assess the nature of our business and explore alternatives in our core business of traditional regulated utility service. Non-traditional ratemaking initiatives and market-based pricing of products and services provide additional opportunities and challenges for us. We also regularly evaluate opportunities for obtaining natural gas from different supply regions to diversify our natural gas portfolio.
We are seeing the impacts of the economic recession in our market area with a decline in customer growth in our new construction market and continued customer conservation practices. We are also experiencing a decline in margin in our commercial and industrial markets from lower energy consumption related to company closings and reduced production and business activities. We continue to pursue customer growth opportunities, including residential customer conversions, in our service areas. A further weakening of the economy in our service areas could result in a greater decline in customer additions and energy consumption which could adversely affect our revenues or restrict our future growth.
We have deferred the development and construction of our previously announced LNG peak storage facility in Robeson County, North Carolina based on our current growth projections. Our current growth projections indicate that we may need to resume development of the project in 2011 to prepare for construction in 2012 in order to provide service in 2015. With the uncertain economic outlook, we will monitor customer growth trends in our markets and plan for the development of the project when needed to meet future customer requirements.
Our current customer growth projections for fiscal 2009 are gross customer additions in the range of 1-1.5% and an increase of .5-1% in the number of net customers billed. This compares to fiscal year 2008 gross and net customer increases of approximately 2%.
Under current economic conditions, it may become more difficult for customers to pay their gas bills, leading to slower collections and higher-than-normal levels of accounts receivable and ultimately increasing the non-gas bad debt expense. With a slower turnover of accounts receivable, our level of borrowings could increase in order to meet our working capital needs.
Our strategic focus is on our core business of providing safe, reliable and quality natural gas distribution service to our customers in the growing Southeast market area. Part of our strategic plan is to responsibly manage our gas distribution business through control of our operating costs, implementation of new technologies and sound rate and regulatory initiatives. We are working to enhance the value and growth of our utility assets by good management of capital spending, including improvements for current customers and the pursuit of profitable customer growth opportunities in our service areas. We strive to provide excellent customer service by investing in technology, processes and people. We work with our state regulators to maintain fair rates of return and balance the interests of our customers and shareholders.
We seek to maintain a long-term debt-to-capitalization ratio within a range of 45% to 50%. We also seek to maintain a strong balance sheet and investment-grade credit ratings to support our operating and investment needs.

We will continue our efforts to promote natural gas and to inform consumers about the environmental benefits of using natural gas directly in their homes and businesses for the most efficient use of natural gas. This positions us, now and into the future, as an environmentally responsible energy choice for our customers.
We remain focused on implementing and improving our underlying business processes while at the same time monitoring economic and other ongoing developments in order to ensure that our operations and business plan stay in step with these developments.
We invest in joint ventures to complement or supplement income from our regulated utility operations if an opportunity aligns with our overall business strategies and allows us to leverage our core competencies. We analyze and evaluate potential projects with a major factor being a projected rate of return greater than the returns allowed in our utility operations due to the higher risk of such projects. We participate in the governance of our ventures by having management representatives on the governing boards. We monitor actual performance against expectations, and any decision to exit an existing joint venture would be based on many factors, including performance results and continued alignment with our business strategies, or in the case of SouthStar, the exercise of an option by a member to purchase our interest. For further information, see Note 7 to the consolidated financial statements in this Form 10-Q.
Results of Operations
We reported net income of $53.5 million for the three months ended April 30, 2009 as compared to $48.6 million for the same period in 2008. The following table sets forth a comparison of the components of our consolidated statements of income for the three months ended April 30, 2009 as compared with the three months ended April 30, 2008.

                          Income Statement Components

                                             Three Months Ended April 30                        Percent
In thousands, except per share amounts        2009                 2008           Variance       Change
Operating Revenues                       $      455,432       $      634,178     $ (178,746 )      (28.2 )%
Cost of Gas                                     285,479              472,897       (187,418 )      (39.6 )%

Margin                                          169,953              161,281          8,672          5.4 %

Operations and Maintenance                       53,352               53,282             70          0.1 %
Depreciation                                     24,306               22,893          1,413          6.2 %
General Taxes                                     8,657                8,407            250          3.0 %
Income Taxes                                     28,287               24,877          3,410         13.7 %

Total Operating Expenses                        114,602              109,459          5,143          4.7 %

Operating Income                                 55,351               51,822          3,529          6.8 %
Other Income (Expense), net of tax               10,086               10,315           (229 )       (2.2 )%
Utility Interest Charges                         11,912               13,513         (1,601 )      (11.8 )%

Net Income                               $       53,525       $       48,624     $    4,901         10.1 %


Average Shares of Common Stock:
Basic                                            73,239               73,418           (179 )       (0.2 )%
Diluted                                          73,514               73,677           (163 )       (0.2 )%


Earnings Per Share of Common Stock:
Basic                                    $         0.73       $         0.66     $     0.07         10.6 %
Diluted                                  $         0.73       $         0.66     $     0.07         10.6 %

We reported net income of $134.4 million for the six months ended April 30, 2009 as compared to $130.9 million for the same period in 2008. The following table sets forth a comparison of the components of our consolidated statements of income for the six months ended April 30, 2009 as compared with the six months ended April 30, 2008.

                          Income Statement Components

                                           Six Months Ended April 30                       Percent
In thousands, except per share amounts        2009             2008          Variance       Change
Operating Revenues                       $    1,235,076     $ 1,422,648     $ (187,572 )      (13.2 )%
Cost of Gas                                     844,440       1,034,341       (189,901 )      (18.4 )%

Margin                                          390,636         388,307          2,329          0.6 %

Operations and Maintenance                      104,077         105,859         (1,782 )       (1.7 )%
Depreciation                                     48,448          45,598          2,850          6.3 %
General Taxes                                    17,394          17,153            241          1.4 %
Income Taxes                                     77,235          75,938          1,297          1.7 %

Total Operating Expenses                        247,154         244,548          2,606          1.1 %

Operating Income                                143,482         143,759           (277 )       (0.2 )%
Other Income (Expense), net of tax               15,844          15,785             59          0.4 %
Utility Interest Charges                         24,925          28,651         (3,726 )      (13.0 )%

Net Income                               $      134,401     $   130,893     $    3,508          2.7 %


Average Shares of Common Stock:
Basic                                            73,280          73,348            (68 )       (0.1 )%
Diluted                                          73,582          73,617            (35 )          - %


Earnings Per Share of Common Stock:
Basic                                    $         1.83     $      1.78     $     0.05          2.8 %
Diluted                                  $         1.83     $      1.78     $     0.05          2.8 %

Key statistics are shown in the table below for the three months ended April 30, 2009 and 2008.
Gas Deliveries, Customers, Weather Statistics and Number of Employees

                                                  Three Months Ended
                                                       April 30                                  Percent
                                                2009             2008           Variance          Change
Deliveries in Dekatherms (in thousands):
Sales Volumes                                    34,870           34,869                1               - %
Transportation Volumes                           22,583           19,593            2,990            15.3 %

Throughput                                       57,453           54,462            2,991             5.5 %

Secondary Market Volumes                          9,576           16,052           (6,476 )         (40.3 )%


Customers Billed (at period end)                964,623          963,266            1,357             0.1 %
Gross Customer Additions                          2,337            4,481           (2,144 )         (47.8 )%


Degree Days
Actual                                            1,204            1,163               41             3.5 %
Normal                                            1,212            1,226              (14 )          (1.1 )%
Percent warmer than normal                          0.7 %            5.1 %            n/a             n/a


Number of Employees (at period end)               1,829            1,859              (30 )          (1.6 )%

Key statistics are shown in the table below for the six months ended April 30, 2009 and 2008.
Gas Deliveries, Customers, Weather Statistics and Number of Employees

                                                   Six Months Ended
                                                       April 30                                   Percent
                                                2009              2008           Variance          Change
Deliveries in Dekatherms (in thousands):
Sales Volumes                                    87,246            84,064            3,182             3.8 %
Transportation Volumes                           46,738            42,952            3,786             8.8 %

Throughput                                      133,984           127,016            6,968             5.5 %

Secondary Market Volumes                         22,968            32,137           (9,169 )         (28.5 )%


Customers Billed (at period end)                964,623           963,266            1,357             0.1 %
Gross Customer Additions                          6,250            11,644           (5,394 )         (46.3 )%


Degree Days
Actual                                            3,148             2,918              230             7.9 %
Normal                                            3,068             3,095              (27 )          (0.9 )%
Percent (colder) warmer than normal                (2.6 )%            5.7 %            n/a             n/a


Number of Employees (at period end)               1,829             1,859              (30 )          (1.6 )%

Operating Revenues
Operating revenues decreased $178.7 million for the three months ended April 30, 2009 compared with the same period in 2008 primarily due to the following decreases:
• $109.8 million from revenues in secondary market transactions due to decreased activity and gas costs. Secondary market transactions consist of off-system sales and capacity release arrangements and are a part of our regulatory gas supply management program with regulatory-approved sharing mechanisms between our utility customers and our shareholders.

• $56.1 million primarily from commodity and demand costs passed through to sales customers.

• $9.2 million from revenues under the margin decoupling mechanism.

• $2.5 million of commodity gas costs related to volumes delivered to sales customers.

• $1.2 million from a decrease in volumes delivered to transportation customers other than power generation.

• $.8 million from revenues under the WNA in South Carolina and Tennessee.

Operating revenues decreased $187.6 million for the six months ended April 30, 2009 compared with the same period in 2008 primarily due to the following decreases:
• $146.8 million from revenues in secondary market transactions due to decreased activity and gas costs.

• $30.2 million from revenues under the margin decoupling mechanism.

• $22.5 million primarily from commodity and demand costs passed through to sales customers.

• $7.6 million from revenues under the WNA in South Carolina and Tennessee.

• $2.6 million from a decrease in volumes delivered to transportation customers other than power generation.

These decreases were partially offset by an increase of $22.9 million of commodity gas costs from higher volume deliveries to sales customers. Cost of Gas
Cost of gas decreased $187.4 million for the three months ended April 30, 2009 compared with the same period in 2008 primarily due to the following decreases:
• $108.9 million from commodity gas costs in secondary market transactions due to decreased activity and gas costs.

• $57.6 million from commodity and demand costs passed through to sales customers.

• $2.5 million of commodity gas costs related to volumes delivered to sales customers.

Cost of gas decreased $189.9 million for the six months ended April 30, 2009 compared with the same period in 2008 primarily due to the following decreases:
• $147.1 million from commodity gas costs in secondary market transactions due . . .