PIEDMONT NATURAL GAS CO INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q


(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2004


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from to .

Commission file number 1-6196

Piedmont Natural Gas Company, Inc.

(Exact name of registrant as specified in its charter)


North Carolina (State or other jurisdiction of incorporation or organization)		56-0556998 (I.R.S. Employer Identification No.)

1915 Rexford Road, Charlotte, North Carolina (Address of principal executive offices)		28211 (Zip Code)

Registrant’s telephone number, including area code (704) 364-3120

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class Common Stock, no par value		Outstanding at September 3, 2004 38,328,506

Page 1 of 32

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

Piedmont Natural Gas Company, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands)


	July 31,			October 31,
	2004			2003
ASSETS
Utility Plant, at original cost	$	2,452,835		$	2,389,122
Less accumulated depreciation		618,861			576,823

Utility plant, net		1,833,974			1,812,299

Other Physical Property (net of accumulated depreciation of $1,873 in 2004 and $1,740 in 2003)		1,039			1,115

Current Assets:
Cash and cash equivalents		4,333			11,172
Restricted cash		12,586			6,749
Marketable securities, at fair market value (cost, $869)		1,538			—
Receivables (less allowance for doubtful accounts of $4,203 in 2004 and $2,743 in 2003)		84,204			58,662
Unbilled utility revenues		13,683			34,630
Gas in storage		103,285			121,723
Refundable income taxes		1,102			23,758
Prepayments		28,362			31,085
Other		21,766			19,865

Total current assets		270,859			307,644

Investments, Deferred Charges and Other Assets:
Investments in non-utility activities, at equity		64,864			96,191
Goodwill		48,130			50,924
Unamortized debt expense		5,381			3,748
Other		24,686			24,485

Total investments, deferred charges and other assets		143,061			175,348

Total	$	2,248,933		$	2,296,406

CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity:
Common stock, no par value, 100,000 shares authorized; outstanding, 38,313 in 2004 and 33,655 in 2003	$	562,906		$	372,651
Retained earnings		320,408			259,476
Accumulated other comprehensive income		(316	)		(1,932	)

Total common stock equity		882,998			630,195
Long-term debt		660,000			460,000

Total capitalization		1,542,998			1,090,195

Current Liabilities:
Current maturities of long-term debt and sinking fund requirements		—			2,000
Notes payable		27,000			109,500
Commercial paper		—			445,559
Accounts payable		83,055			90,901
Deferred income taxes		20,762			16,949
Income taxes accrued		22,304			612
General taxes accrued		12,404			19,594
Refunds due customers		709			5,382
Accrued gas cost on unbilled utility revenues		1,335			2,995
Other		27,403			31,670

Total current liabilities		194,972			725,162

Deferred Credits and Other Liabilities:
Deferred income taxes		201,705			188,503
Unamortized federal investment tax credits		4,630			5,042
Asset retirement obligations		262,298			245,879
Other		42,330			41,625

Total deferred credits and other liabilities		510,963			481,049

Total	$	2,248,933		$	2,296,406

See notes to consolidated financial statements.

Piedmont Natural Gas Company, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
(In thousands except per share amounts)


	Three Months Ended						Nine Months Ended						Twelve Months Ended
	July 31						July 31						July 31
	2004			2003			2004			2003			2004			2003
Operating Revenues	$	214,750		$	140,132		$	1,315,933		$	1,041,397		$	1,495,357		$	1,162,876
Cost of Gas		145,022			90,832			903,870			720,389			1,021,422			795,706

Margin		69,728			49,300			412,063			321,008			473,935			367,170

Operating Expenses:
Operations and maintenance		47,803			37,692			148,014			114,068			186,054			149,291
Depreciation		20,886			15,336			61,549			45,895			78,818			60,698
General taxes		6,974			6,032			20,397			18,779			26,028			24,720
Income taxes		(7,400	)		(7,890	)		57,385			43,889			53,535			35,653

Total operating expenses		68,263			51,170			287,345			222,631			344,435			270,362

Operating Income		1,465			(1,870	)		124,718			98,377			129,500			96,808

Other Income (Expense):
Non-utility activities, at equity		3,995			2,323			25,375			16,092			27,256			15,249
Gain on sale of equity investments		—			—			4,683			—			4,683			—
Allowance for equity funds used during construction		323			346			971			967			1,268			1,318
Non-operating income		1,008			782			2,098			1,938			2,720			1,993
Non-operating expense		—			(140	)		(956	)		(556	)		(1,263	)		(730	)
Income taxes		(2,259	)		(1,345	)		(12,896	)		(7,429	)		(14,045	)		(7,265	)

Total other income (expense), net of tax		3,067			1,966			19,275			11,012			20,619			10,565
Utility Interest Charges		12,664			9,773			36,199			30,070			46,463			39,875

Income Before Minority Interest in Income of Consolidated Subsidiary		(8,132	)		(9,677	)		107,794			79,319			103,656			67,498
Less Minority Interest in Income of Consolidated Subsidiary		25			—			70			—			889			—

Net Income	$	(8,157	)	$	(9,677	)	$	107,724		$	79,319		$	102,767		$	67,498

Average Shares of Common Stock:
Basic		38,218			33,461			36,797			33,327			35,989			33,239
Diluted		38,218			33,461			36,888			33,439			36,088			33,368
Earnings Per Share of Common Stock:
Basic	$	(0.21	)	$	(0.29	)	$	2.93		$	2.38		$	2.86		$	2.03
Diluted	$	(0.21	)	$	(0.29	)	$	2.92		$	2.37		$	2.85		$	2.02
Cash Dividends Per Share of Common Stock	$	0.43		$	0.42		$	1.275		$	1.23		$	1.69		$	1.63
Pro Forma Effect of the Declared Two-for-One Stock Split:
Average Shares of Common Stock:
Basic		76,436			66,921			73,594			66,653			71,977			66,478
Diluted		76,436			66,921			73,776			66,879			72,177			66,735
Earnings per Share of Common Stock:
Basic	$	(0.11	)	$	(0.14	)	$	1.46		$	1.19		$	1.43		$	1.02
Diluted	$	(0.11	)	$	(0.14	)	$	1.46		$	1.19		$	1.42		$	1.01
Cash Dividends Per Share of Common Stock	$	0.215		$	0.21		$	0.6375		$	0.615		$	0.845		$	0.815

See notes to consolidated financial statements.

Piedmont Natural Gas Company, Inc. and Subsidiaries
Condensed Statements of Consolidated Cash Flows (Unaudited)
(In thousands)


	Three Months						Nine Months						Twelve Months
	Ended						Ended						Ended
	July 31						July 31						July 31
	2004			2003			2004			2003			2004			2003
Cash Flows from Operating Activities:
Net income	$	(8,157	)	$	(9,677	)	$	107,724		$	79,319		$	102,767		$	67,498
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		21,465			15,578			63,014			46,603			80,572			61,614
Undistributed earnings from equity investments		(3,995	)		(2,323	)		(25,375	)		(16,092	)		(27,256	)		(15,249	)
Gain on sale of equity investments		—			—			(4,683	)		—			(4,683	)		—
Change in operating assets and liabilities		(81,203	)		(47,839	)		35,433			(13,895	)		(4,049	)		(10,898	)
Other, net		(187	)		16,486			10,843			26,824			16,452			24,000

Net cash provided by (used in) operating activities		(72,077	)		(27,775	)		186,956			122,759			163,803			126,965

Cash Flows from Investing Activities:
Utility construction expenditures		(24,413	)		(18,976	)		(69,067	)		(53,531	)		(93,472	)		(73,418	)
Capital contributions to equity investments		—			—			—			(2,223	)		—			(3,485	)
Capital distributions from equity investments		1,277			1,752			24,761			8,940			26,009			11,039
Proceeds from sale of equity investments		—			—			36,096			—			36,096			—
Purchase of gas distribution system		—			—			—			2,153			—			(23,847	)
Purchase of NCNG and EasternNC, net of cash received		4,212			—			2,724			—			(447,444	)		—
Other		(10	)		(15	)		(56	)		(92	)		(82	)		(101	)

Net cash used in investing activities		(18,934	)		(17,239	)		(5,542	)		(44,753	)		(478,893	)		(89,812	)

Cash Flows from Financing Activities:
Increase (Decrease) in notes payable, net		27,000			45,000			(82,500	)		(1,500	)		(18,000	)		45,000
Decrease in commercial paper		—			—			(445,559	)		—			—			—
Issuance of long-term debt		—			—			200,000			—			200,000			—
Retirement of long-term debt		(2,000	)		(47,000	)		(2,000	)		(47,000	)		(2,000	)		(47,000	)
Proceeds from issuance of common stock, net of expenses		—			—			173,828			—			173,828			—
Issuance of common stock through dividend reinvestment and employee stock plans		5,401			4,572			14,769			13,885			18,809			18,846
Dividends paid		(16,429	)		(13,882	)		(46,791	)		(40,980	)		(60,725	)		(54,165	)

Net cash provided by (used in ) financing activities		13,972			(11,310	)		(188,253	)		(75,595	)		311,912			(37,319	)

Net Increase (Decrease) in Cash and Cash Equivalents		(77,039	)		(56,324	)		(6,839	)		2,411			(3,178	)		(166	)
Cash and Cash Equivalents at Beginning of Period		81,372			63,835			11,172			5,100			7,511			7,677

Cash and Cash Equivalents at End of Period	$	4,333		$	7,511		$	4,333		$	7,511		$	4,333		$	7,511

Cash Paid During the Period for:
Interest	$	20,452		$	16,099		$	39,090		$	35,895		$	43,462		$	39,602
Income taxes	$	9,627		$	354		$	19,549		$	32,632		$	25,798		$	36,841
Noncash Investing and Financing Activities Related to Purchase of NCNG and EasternNC:
Fair value/book value of assets acquired	$	(11,416	)				$	(10,039	)				$	501,096
Cash paid		—						(271	)					(457,624	)
Adjustment of estimated working capital to actual		(819	)					(819	)					1,191

Liabilities assumed	$	(12,235	)				$	(11,129	)				$	44,663

See notes to condensed consolidated financial statements.

Piedmont Natural Gas Company, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)


	Three Months						Nine Months
	Ended July 31						Ended July 31
	2004			2003			2004			2003
Net Income	$	(8,157	)	$	(9,677	)	$	107,724		$	79,319
Other Comprehensive Income:
Unrealized gain on marketable securities, net of tax of $265 in the three and nine months ended July 31, 2004		404			—			404			—
Unrealized gain (loss) on equity investments hedging activities, net of tax of $353 and $(318) in the three months ended July 31, 2004 and 2003, respectively, and net of tax of $352 and $(611) in the nine months ended July 31, 2004 and 2003, respectively		515			(493	)		506			(937	)
Reclassification adjustment for loss on equity investments hedging activities included in net income, net of tax of $6 and $75 in the three months ended July 31, 2004 and 2003, respectively, and net of tax of $465 and $1,364 in the nine months ended July 31, 2004 and 2003, respectively		1			117			706			2,087

Total Comprehensive Income	$	(7,237	)	$	(10,053	)	$	109,340		$	80,469

Reconciliation of Accumulated Other Comprehensive Income:
Balance, beginning of period	$	(1,236	)	$	(1,457	)	$	(1,932	)	$	(2,983	)
Current period change		919			(493	)		910			(937	)
Current period reclassification to net income		1			117			706			2,087

Balance, end of period	$	(316	)	$	(1,833	)	$	(316	)	$	(1,833	)

See notes to consolidated financial statements.

Piedmont Natural Gas Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

1. Independent auditors have not audited the consolidated financial statements. These financial statements should be read in conjunction with the Notes to Consolidated Financial Statements included in our 2003 Annual Report.

2. In our opinion, the unaudited consolidated financial statements include all normal recurring adjustments necessary for a fair statement of financial position at July 31, 2004 and October 31, 2003, and the results of operations and cash flows for the three, nine and twelve months ended July 31, 2004 and 2003.

We make estimates and assumptions when preparing the consolidated financial statements. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates.

3. We follow Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation” (Statement 71). Statement 71 provides that rate-regulated public utilities account for and report assets and liabilities consistent with the economic effect of the manner in which independent third-party regulators establish rates. In applying Statement 71, we capitalize certain costs and benefits as regulatory assets and liabilities, respectively, pursuant to orders of the state regulatory commissions, either in general rate proceedings or expense deferral proceedings, in order to provide for recovery from or refund to utility customers in future periods.

4. All of our goodwill is attributable to the regulated utility segment. The balance in goodwill as of October 31, 2003 and July 31, 2004, and the changes for the nine months ended July 31, 2004, are presented below.


In thousands
Balance as of October 31, 2003	$	50,924
Purchase price allocation adjustments for North Carolina Natural Gas Corporation (NCNG)		(2,724	)
Minority interest in Eastern North Carolina Natural Gas Company (EasternNC)		(70	)

Balance as of July 31, 2004	$	48,130

Effective at the close of business on September 30, 2003, we purchased for $417.5 million in cash 100% of the common stock of NCNG and for $7.5 million in cash a 50% equity interest in EasternNC. The purchase price allocation was completed during the third quarter of 2004. The decrease of $2.7 million in goodwill is primarily due to the recording of $5 million in deferred taxes from book and tax basis differences of the purchase price, partially offset by unrecorded liabilities and the true-up of working capital. All of the goodwill arising from this acquisition and the acquisition of the natural gas distribution assets and liabilities of North Carolina Gas Service in September 2002 have been allocated to the North Carolina operating unit for purposes of impairment testing under SFAS No. 142, “Goodwill and Other Intangible Assets.”

1.		Independent auditors have not audited the consolidated financial statements. These financial statements should be read in conjunction with the Notes to Consolidated Financial Statements included in our 2003 Annual Report.

2.		In our opinion, the unaudited consolidated financial statements include all normal recurring adjustments necessary for a fair statement of financial position at July 31, 2004 and October 31, 2003, and the results of operations and cash flows for the three, nine and twelve months ended July 31, 2004 and 2003.

		We make estimates and assumptions when preparing the consolidated financial statements. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates.

3.		We follow Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation” (Statement 71). Statement 71 provides that rate-regulated public utilities account for and report assets and liabilities consistent with the economic effect of the manner in which independent third-party regulators establish rates. In applying Statement 71, we capitalize certain costs and benefits as regulatory assets and liabilities, respectively, pursuant to orders of the state regulatory commissions, either in general rate proceedings or expense deferral proceedings, in order to provide for recovery from or refund to utility customers in future periods.

4.		All of our goodwill is attributable to the regulated utility segment. The balance in goodwill as of October 31, 2003 and July 31, 2004, and the changes for the nine months ended July 31, 2004, are presented below.