Utilities are predictable businesses, but not entirely risk free. That's especially true in the case of a company like Piedmont Natural Gas (NYSE:PNY) where a lot of the company's future growth is predicated on customers switching over to gas. While Piedmont does enjoy a constructive regulatory environment and has been a very consistent dividend payer, buying the shares with a yield below 4% doesn't seem to make all that much sense.

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Weather Takes a Toll Again in Second Quarter
With two straight quarterly misses, Piedmont isn't helping its "utilities are reliable" case. Weather continues to be a significant factor in the company's results, even though the company has normalization adjustments in place for both Tennessee and South Carolina.

Despite a nearly 40% drop in the cost of natural gas, Piedmont reported an 8% drop in operating income and another miss relative to analysts' expectations. While the company saw a 22% increase in residential customer additions and a 15% increase in commercial additions, the number of billed customers increased only 1%. Moreover a 19% decline in the number of "average degree days" led to a definite decline in usage or consumption.

SEE: Natural Gas Industry: An Investment Guide

Can Supplying Utility Plants Fill the Gap?
Residential natural gas usage should be a long-term growth market for Piedmont. Natural gas isn't commonplace in North Carolina, South Carolina or Tennessee, and this region has also seen net population growth. As the housing bubble and warm weather have both demonstrated, though, this growth is not guaranteed over any particular timeline.

In addition to its traditional business, Piedmont is looking to take advantage of the shift in electricity generation from coal to natural gas. The company has projects underway with Duke Energy (NYSE:DUK) and Progress Energy (NYSE:PGN) (and Duke is in the process of acquiring Progress) and the fixed-variable contracts should be meaningful contributors to Piedmont so long as natural gas remains an economically attractive generating fuel for the electrical utilities.

SEE: A Natural Gas Primer

More M&A on the Way
Management has been fairly clear that it would like to make further acquisitions as conditions allow. Given the existing infrastructure synergies and the favorable rate environment, buying up more distribution assets in the Carolinas would be helpful. That could prove challenging, though, as SCANA (NYSE:SCG) serves most of the areas that Piedmont does not.

At the same time, there could be other opportunities to acquire assets. Piedmont gets most of its supply from pipelines operated by El Paso (NYSE:EPB) and Williams (NYSE:WMB), but there could be opportunities in storage, midstream and other sorts of assets.

SEE: How To Profit From Natural Gas

The Bottom Line
I accept that interest rates are quite low today, but the reality is that buying Piedmont shares when they yield less than 4% has not really worked out all that well. That means that investors should target an entry point of no more than $30 for these shares. While the long-term outlook for a natural gas utility serving the Carolinas is fairly positive, price discipline is important here. Investors should also note, though, that the company offers a direct purchase and dividend reinvestment plan that currently gives a 5% discount (without fees) to reinvestment purchases, so buying these shares directly through the company may make more sense for some investors.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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