Why Piedmont Earnings Suffer Through the Slow Season

Piedmont Natural Gas (PNY) will release its quarterly report on Monday, and investors don't have high expectations for the company during its traditional weak season. With no need for gas-utility customers to use natural gas for heating during the summer months, Piedmont earnings typically turn negative until winter comes around again.

Even with the dramatic shift resulting from huge increases in natural gas production in recent years, the impact on Piedmont and other gas utilities hasn't gotten much attention from investors. As customers seek ways to take advantage of lower nat-gas prices, Piedmont has an opportunity to benefit from increasing demand and the resulting jumps in distribution volumes. Let's take an early look at what's been happening with Piedmont Natural Gas over the past quarter and what we're likely to see in its report.

Stats on Piedmont Natural Gas

Source: Yahoo! Finance.

Can Piedmont earnings surprise investors this quarter?
In recent months, analysts haven't changed their short-term views on Piedmont earnings, with no changes to July quarter or current fiscal year projections. But they do see better times ahead, boosting earnings expectations by $0.03 per share in fiscal 2014. The stock hasn't responded well, though, falling by about 5% since early June.

The regulated gas utility industry is a lot different from what investors in natural-gas producers are used to seeing. Piedmont and its peers typically pass through their costs of acquiring natural gas to customers, and so Piedmont hasn't directly benefited from the low natural-gas prices that have prevailed for years now. Indirectly, though, greater demand for natural gas can help boost Piedmont's prospects as customers implement energy strategies that lead to higher gas usage and therefore more revenue for Piedmont's transmission network.

What's frustrating for some investors is the length of time it takes to get proposed projects through the approval and construction process. For instance, in June, Constitution Pipeline, in which Piedmont owns a 24% stake, filed an application to build a 122-mile pipeline to move gas from the Marcellus shale play to existing gas-pipeline infrastructure. The project would also help Constitution co-owners Cabot Oil & Gas (CTRA -0.10%) and Williams Partners (NYSE: WPZ), as Cabot is a substantial producer in the area and Williams runs the gathering system that would be the Marcellus terminus of the pipeline. With the potential to serve 3 million homes, utility customers would also benefit, yet Constitution doesn't expect to finish the project until 2015.

Another reason why Piedmont shares have suffered has to do with the relationship between utilities and the bond market. Many investors buy utility stocks for their dividends, and as bond yields rise, stock investors want better yields on their dividends as well. That often pressures share prices, and Midwestern gas company Laclede Gas (NYSE: LG) has seen similar stock declines in light of the run-up in interest rates that we've seen in recent months.

In the Piedmont earnings report, watch to see how the company plans to handle higher rates while trying to boost gas demand. If nat-gas prices stay low, it could spur further development that will make new growth opportunities easier to find even during the summer months.

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