Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
PNY > SEC Filings for PNY > Form 10-K on 23-Dec-2013All Recent SEC Filings

Show all filings for PIEDMONT NATURAL GAS CO INC

Form 10-K for PIEDMONT NATURAL GAS CO INC


23-Dec-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report, as well as other documents we file with the Securities and Exchange Commission (SEC), may contain forward-looking statements. In addition, our senior management and other authorized spokespersons may make forward-looking statements in print or orally to analysts, investors, the media and others. These statements are based on management's current expectations from information currently available and are believed to be reasonable and are made in good faith. However, the forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the statements. Factors that may make the actual results differ from anticipated results include, but are not limited to the following, as well as those discussed in Item 1A. Risk Factors:

Economic conditions in our markets

Wholesale price of natural gas

Availability of adequate interstate pipeline transportation capacity and natural gas supply

Regulatory actions at the state level that impact our ability to earn a reasonable rate of return and fully recover our operating costs on a timely basis

Competition from other companies that supply energy

Changes in the regional economies, politics, regulations and weather patterns of the three states in which our operations are concentrated

Costs of complying or effect of noncompliance with state and federal laws and regulations that are applicable to us

Effect of climate change, carbon neutral or energy efficiency legislation or regulations on costs and market opportunities

Weather conditions

Operational interruptions to our gas distribution and transmission activities

Inability to complete necessary or desirable pipeline expansion or infrastructure development projects

Elevated levels of capital expenditures

Our credit ratings

Availability and cost of capital

Federal and state fiscal, tax and monetary policies

Ability to generate sufficient cash flows to meet all our cash needs


Table of Contents
Ability to satisfy all of our outstanding debt obligations

Ability of counterparties to meet their obligations to us

Costs of providing pension benefits

Earnings from the joint venture businesses in which we invest

Ability to attract and retain professional and technical employees

Risk of cyber-attack, acts of cyber-terrorism, or failure of technology systems

Ability to obtain and maintain sufficient insurance

Change in number of outstanding shares

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 place undue reliance on these forward-looking statements when making investment decisions. When used in our documents or oral presentations, the words "expect," "believe," "project," "anticipate," "intend," "may," "should," "could," "assume," "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 based on information available to us 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. 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 at www.piedmontng.com as soon as reasonably practicable after the report is filed with or furnished to the SEC.

Overview

Piedmont Natural Gas Company, Inc. 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 customers served by municipalities who are our wholesale customers. We are invested in joint venture, energy-related businesses, including unregulated retail natural gas marketing, regulated interstate natural gas transportation and storage and regulated intrastate natural gas transportation businesses.

We operate with two reportable business segments, regulated utility and non-utility activities, with the regulated utility segment being the largest. Our utility operations are regulated by the North Carolina Utilities Commission (NCUC), the Public Service Commission of South Carolina and the Tennessee Regulatory Authority as to rates, service area, adequacy of service, safety standards, extensions and abandonment of facilities, accounting and depreciation. The NCUC also regulates us as to the issuance of long-term debt and equity securities. Factors critical to the success of the regulated utility include operating a safe and reliable natural gas distribution system and the ability to recover the costs and expenses of the business in the rates charged to customers. The non-utility activities segment consists of our equity method investments in joint venture, energy-related businesses. For further information on equity method investments and business segments, see Note 12 and Note 14, respectively, to the consolidated financial statements in this Form 10-K.


Table of Contents

Executive Summary

A summary of our annual results is as follows:

                   Comprehensive Income Statement Components

                                                                                                       Percent Change
                                                                                                  2013 vs.         2012 vs.
In thousands except per share amounts        2013               2012               2011             2012             2011

Operating Revenues                       $  1,278,229       $  1,122,780       $  1,433,905            13.8 %          (21.7 )%
Cost of Gas                                   656,739            547,334            860,266            20.0 %          (36.4 )%

 Margin                                       621,490            575,446            573,639             8.0 %            0.3 %

Operations and Maintenance                    253,120            242,599            225,351             4.3 %            7.7 %
Depreciation                                  112,207            103,192            102,829             8.7 %            0.4 %
General Taxes                                  34,635             34,831             38,380            (0.6 )%          (9.2 )%
Utility Income Taxes                           77,334             69,101             64,068            11.9 %            7.9 %

 Total Operating Expenses                     477,296            449,723            430,628             6.1 %            4.4 %

Operating Income                              144,194            125,723            143,011            14.7 %          (12.1 )%
Other Income (Expense), net of tax             15,161             14,221             14,549             6.6 %           (2.3 )%
Utility Interest Charges                       24,938             20,097             43,992            24.1 %          (54.3 )%

Net Income                               $    134,417       $    119,847       $    113,568            12.2 %            5.5 %


Average Shares of Common Stock:
 Basic                                         74,884             71,977             72,056             4.0 %           (0.1 )%
 Diluted                                       75,333             72,278             72,266             4.2 %              - %

Earnings per Share of Common Stock:
 Basic                                   $       1.80       $       1.67       $       1.58             7.8 %            5.7 %
 Diluted                                 $       1.78       $       1.66       $       1.57             7.2 %            5.7 %




                                                 Margin by Customer Class

In thousands                                 2013                           2012                           2011
Sales and Transportation:
Residential                         $    331,920          54 %    $     321,056          56 %    $     319,675          56 %
Commercial                               155,065          25 %          150,306          26 %          150,681          26 %
Industrial                                52,268           8 %           46,993           8 %           47,176           8 %
Power Generation                          56,312           9 %           32,289           6 %           23,970           4 %
For Resale                                 7,477           1 %            7,465           1 %            8,550           2 %

Total                                    603,042          97 %          558,109          97 %          550,052          96 %
Secondary Market Sales                     8,979           1 %            9,681           2 %           14,016           2 %
Miscellaneous                              9,469           2 %            7,656           1 %            9,571           2 %

Total                               $    621,490         100 %     $    575,446         100 %     $    573,639         100 %


Table of Contents

     Gas Deliveries, Customers, Weather Statistics and Number of Employees



                                                                                                 Percent Change
                                                                                            2013 vs.        2012 vs.
                                              2013            2012            2011            2012            2011
Deliveries in Dekatherms (in
thousands):
Residential                                    55,283          43,788          57,778          26.3 %         (24.2)%
Commercial                                     39,602          33,774          40,749          17.3 %         (17.1)%
Industrial                                     95,019          89,234          90,842           6.5 %          (1.8)%
Power Generation                              190,862         151,675          83,522          25.8 %          81.6 %
For Resale                                      6,834           5,829           6,870          17.2 %         (15.2)%

Throughput                                    387,600         324,300         279,761          19.5 %          15.9 %

Secondary Market Volumes                       41,605          48,373          48,835         (14.0)%          (0.9)%


Customers Billed (at period end)              979,909         969,239         958,307           1.1 %           1.1 %
Gross Residential and Commercial
Customer Additions                             14,274          13,274          10,522           7.5 %          26.2 %
Degree Days
Actual                                          3,336           2,668           3,662          25.0 %         (27.1)%
Normal                                          3,276           3,310           3,318          (1.0)%          (0.2)%
Percent colder (warmer) than normal             1.8 %         (19.4)%          10.4 %             n/a             n/a

Number of Employees (at period end)             1,795           1,752           1,782           2.5 %          (1.7)%

Financial Performance - Fiscal 2013 Compared with Fiscal 2012

We closed the fiscal year with a 12% increase in net income. Margin increased 8% primarily due to increased transportation services from new contracts for power generation customers and higher volumes delivered to residential, commercial and industrial customers due to colder weather and customer growth. Operations and maintenance (O&M) expenses and depreciation expense increased 4% and 9%, respectively. The increase in O&M expenses was related to higher costs for contract labor related to process improvement and pipeline integrity programs, payroll from short-term incentive plans, bad debt expense and regulatory amortizations, partially offset by a decrease in employee benefits costs. Depreciation was higher due to increases in plant in service from our capital expansion programs for customer growth, power generation, pipeline delivery projects and system integrity and infrastructure investments. Other Income (Expense) increased 7% with an increase in income from equity method investments, including additional markets served by one of our investments and a new pipeline venture investment on November 1, 2012, partially offset by the cumulative amortization of non-real estate costs related to the allowed deferral of a regulatory asset for certain non-real estate costs included in the 2013 settlement agreement as approved by the NCUC in December 2013. Utility interest charges increased 24% due to increases in long-term debt, partially offset by an increase in capitalized interest income and lower balances of short-term debt used from our commercial paper (CP) program at lower interest rates.

Business Summary - Fiscal 2013 Compared with Fiscal 2012

Our fiscal 2013 performance reflects our continued execution of our long-term business strategy. As discussed above, financial performance was solid for the year with increased earnings and an increase in our dividend rate per share to our investors.

Financial Strength and Flexibility - In order to prudently fund our investment in growth and our ongoing capital needs, we executed our financing programs to optimize and reduce our cost of capital, preserve our liquidity and strong balance sheet and protect our high quality credit ratings with a goal of maintaining a long-term debt to capital ratio between 45% and 50%. To meet our short-term liquidity needs, we continue to rely on our CP program.


Table of Contents

We issued long-term debt and equity during fiscal 2013 for total proceeds of $389.8 million. In February 2013, we issued 3 million shares of our common stock and entered into forward sale agreements (FSAs) related to the future issuance of up to an additional 1.6 million shares. Early in fiscal 2014, we issued 1.6 million shares on December 16, 2013 under the FSAs, receiving proceeds of $47.3 million. In August 2013, we issued $300 million of 30-year, unsecured senior notes. In November 2013, we entered into an agreement with our revolving credit facility lenders to increase our borrowing capacity to $850 million. For further information on these transactions, see Note 4, Note 5 and Note 6 to the consolidated financial statements in this Form 10-K and the following discussion of "Cash Flows from Financing Activities."

Managing Gas Supplies and Prices - Our gas supply acquisition strategy is regularly reviewed and adjusted to ensure that we have adequate and reliable supplies of competitively-priced natural gas to meet the needs of our utility customers. In November 2012, in order to provide additional diversification, reliability and gas cost benefits to our customers, we signed long-term contracts to source more of our gas supplies from the Marcellus shale basin in Pennsylvania for our markets in the Carolinas. These new capacity and supply arrangements are scheduled to begin in late 2015.

Customer Growth - We have added more customers in our service areas each year during our last three fiscal years. Affordable and stable wholesale natural gas costs continued to favorably position natural gas relative to other energy sources. With continued improvement in economic conditions and targeted marketing programs on the benefits of natural gas, total residential and commercial customer additions increased 8% in 2013 compared to 2012. Customer gains in our residential new construction and conversion markets increased 9% in 2013 compared to 2012. Commercial customer additions decreased 2% in 2013 compared to 2012, reflecting a slight reduction in new commercial construction activity coupled with a longer sales cycle for conversions.

Capital Expenditures - We continued to execute our large capital expansion programs that will provide benefits to our customers through safe and reliable natural gas service while providing our shareholders a fair and reasonable return on invested capital. Our increased capital expenditures are currently being driven by increased expenditures for pipeline integrity, safety and compliance programs, and investments for customer growth and systems and technology infrastructure, specifically a new comprehensive work and asset management system.

We completed pipeline expansion projects over our last three fiscal years that provide natural gas delivery service to new power generation facilities in our market area. We currently provide service to a total of 23 power generation customer accounts and two power generation fuel tracker customer accounts. See the discussion of our forecasted capital investments in "Cash Flows from Investing Activities" in Item 7 of this Form 10-K in Management's Discussion and Analysis of Financial Condition and Results of Operations.

As we incur significantly higher capital costs under our system integrity programs, we have sought new regulatory mechanisms that will allow us to recover and earn on those investments in a timely manner. In December 2013, the NCUC approved the settlement of our 2013 general rate application, including the implementation of an integrity management rider (IMR)


Table of Contents

to separately track and recover the costs associated with capital expenditures in order to comply with federal pipeline safety and integrity requirements. Under the IMR tariff, we will make annual filings every November to capture such costs closed to plant through October with revised rates effective the following February. With its approval of the settlement, the NCUC continued to allow regulatory asset treatment of our external pipeline integrity management O&M costs and recovery of these costs through future amortization in rates. In August 2013, we filed for an IMR in Tennessee to recover the costs of our capital investments associated with federal and state mandated safety and integrity programs, the settlement of which was approved by the TRA in December 2013. The effective date is January 1, 2014 for the first rate adjustment under the rider based on capital expenditures incurred through October 2013 with annual rate updates thereafter.

Business Process and Technology Improvements - We are in the process of a multi-year, multi-project program designed to bring additional technology and automation to our field operations by providing systems, tools and information to enable operations employees to more effectively and efficiently manage our pipeline assets, ensure operating efficiencies and facilitate compliance with pipeline safety and integrity regulations.

Regulatory and Legislative Activity - We continue our regulatory strategy to implement rate structures that better align and balance the interests of shareholders and customers. As discussed above with the NCUC approval of the settlement of our 2013 general rate application, we will make an adjustment in our rates and charges to provide incremental annual total revenues of $30.7 million, an increase of 3.58% over pre-existing rates, with an annual pre-tax income increase of $24.2 million, effective January 1, 2014. This revenue increase is a .7% annual rate increase for our customers since the last general rate proceeding in 2008. The new rates are based on a rate base in North Carolina of $1.8 billion as of September 30, 2013, an equity capital structure component of 50.7% and a return on common equity of 10%.

An important outcome from the NCUC approved rate settlement discussed above was the agreement for implementation of an IMR in North Carolina allowing an annual true up and recovery on and of our capital investments related to federal pipeline integrity compliance. With the IMR mechanism, we will avoid having to file costly and more frequent future general rate proceedings, consuming both our resources and the resources of the NCUC and its staff. As also discussed above, we have a similar IMR that was approved in Tennessee.

In June 2013, legislation was passed in North Carolina that increased criminal penalties and fines for interference with natural gas, water and electric lines in the state. This law will help us and all utility providers protect the integrity and safety of their system infrastructures as well as protect the general public.

Equity Method Investments - Our investments in complementary energy-related businesses continue to be an attractive way to generate earnings growth and long-term shareholder returns. In November 2012, we became a 24% equity member of Constitution Pipeline Company, LLC (Constitution). To date, this is our largest investment in a natural gas infrastructure venture for the development and construction of a new pipeline that will transport natural gas produced from the Marcellus shale basin in Pennsylvania to northeast markets. With an estimated total cost of $680 million, we expect our total 24% equity contributions will be an estimated $163 million through 2015. We contributed $15.9 million during our first year of ownership in 2013.


Table of Contents

We also made additional investments in our existing ventures during the year. In July 2013, we purchased an incremental 5% equity ownership stake in Pine Needle LNG Company, L.L.C. (Pine Needle) from Hess Corporation (Hess) for $2.9 million, increasing our overall ownership percentage to 45%. In September 2013, we contributed $22.5 million to SouthStar Energy Services LLC (SouthStar), maintaining our 15% equity ownership, with our partner contributing retail natural gas marketing assets and related customers located in Illinois. We expect this investment to be accretive to our 2014 earnings.

Strategy and Focus Areas

Our long-term strategic directives shape our annual business objectives and focus on our customers, our communities, our employees and our shareholders. They also reflect what we believe are the inherent advantages of natural gas compared to other types of energy. Our seven foundational strategic priorities are as follows:

Promote the benefits of natural gas,

Expand our core natural gas and complementary energy-related businesses to enhance shareholder value,

Be the energy and service provider of choice,

Achieve excellence in customer service every time,

Preserve financial strength and flexibility,

Execute sustainable business practices, and

Enhance our healthy, high performance culture

We believe that by focusing on these priorities, we will enhance long-term shareholder value. For a full discussion of our strategy and focus areas, see Item 1. Business.

Additional information on operating results for the years ended October 31, 2013, 2012 and 2011 follows.


Table of Contents

Results of Operations

Operating Revenues

Changes in operating revenues for 2013 and 2012 compared with the same prior periods are presented below.

         Changes in Operating Revenues - Increase (Decrease)

                                         2013 vs.         2012 vs.
In millions                                2012             2011
Residential and commercial customers   $     136.2      $     (275.4)
Industrial customers                          18.0              (9.8)
Power generation customers                    28.1               7.1
Secondary market                              23.8            (104.4)
Margin decoupling mechanism                  (40.8)              53.7
WNA mechanisms                               (10.4)              18.2
Other                                           .5               (.5)

Total                                  $     155.4      $     (311.1)

2013 compared to 2012:

Residential and commercial customers - the increase is primarily due to higher consumption from colder weather, customer growth and higher wholesale gas costs passed through to customers.

Industrial customers - the increase is primarily due to colder weather and customer growth.

Power generation customers - the increase is primarily due to increased transportation services due to new contracts that began in June 2012 and June 2013.

Secondary market - the increase is primarily due to higher commodity gas costs, partially offset by decreased activity. Secondary market transactions consist of off-system sales and capacity release arrangements and are part of our regulatory gas supply management program with regulatory-approved margin sharing mechanisms between our utility customers and our shareholders.

Margin decoupling mechanism - the decrease is due to colder weather in North Carolina. As discussed in "Financial Condition and Liquidity," the margin decoupling mechanism in North Carolina adjusts for variations in residential and commercial use per customer, including those due to weather and conservation.

Weather normalization adjustment (WNA) mechanisms - the decrease is due to colder weather in South Carolina and Tennessee. As discussed in "Financial Condition and Liquidity," the WNA mechanisms partially offset the impact of colder- or warmer-than-normal weather on bills rendered.

2012 compared to 2011:

Residential and commercial customers - the decrease is primarily due to lower consumption from warmer weather and lower wholesale gas costs passed through in rates.

Industrial customers - the decrease is primarily due to lower consumption and lower wholesale gas costs passed through to sales customers.


Table of Contents
Power generation customers - the increase is due to increased transportation services.

Secondary market - the decrease is due to lower secondary market margins in the wholesale market.

Margin decoupling mechanism - the increase is due to warmer weather in North Carolina.

WNA mechanisms - the increase is due to warmer weather in South Carolina and Tennessee.

Cost of Gas

Changes in cost of gas for 2013 and 2012 compared with the same prior periods
are presented below.



                    Changes in Cost of Gas - Increase (Decrease)
                                                         2013 vs.         2012 vs.
In millions                                                2012             2011
Commodity gas costs passed through to sales customers   $     96.8      $     (194.3)
Commodity gas costs in secondary market transactions          24.5            (100.1)
Pipeline demand charges                                       22.3              (7.0)
Regulatory approved gas cost mechanisms                      (34.2)            (11.5)

Total                                                   $    109.4      $     (312.9)
. . .
  Add PNY to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for PNY - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.