Rising natural gas prices in Pennsylvania are giving a big boost to National Fuel Gas Co.
The Amherst-based energy company's first-quarter earnings from its operations jumped by 33 percent and topped analyst forecasts by a wide margin after stronger natural gas pricing in Pennsylvania allowed the company to increase production from its wells there.
And National Fuel expects the improvement to continue, with the company raising its earnings forecast for this year by about 7 percent and disclosing that it plans to start expanding its well-drilling program in Pennsylvania by the end of September.
Ronald J. Tanski, National Fuel's president and CEO, said the utility is also readying a response "taking exception" to a judicial recommendation that the state Public Service Commission reduce the size of its proposed rate increase.
The recommendation by Administrative Law Judge Dakin D. Lecakes would reduce the amount of money that National Fuel would be allowed to raise through higher rates to $8.5 million, rather than the $41.7 million in additional money the company sought when it filed for a rate increase last April. Lecakes' recommendation is not binding on the Public Service Commission, which can raise or lower the size of the increase at their discretion. A decision is expected in March or April.
Tanski noted that National Fuel, which has not had a rate increase since 2007, has steadily lowered its operating costs in recent years and improved its efficiency. But Lecakes' recommendation, if adopted by the PSC, would leave the utility with a rate structure that would allow National Fuel to earn returns that are unusually low by national standards.
"The recommended decision is disappointing in that it suggests that our utility should be allowed an 8.6 percent return on equity, the lowest return on equity in recent memory in the entire U.S., notwithstanding testimony in the case indicating that we are the most efficient utility in the state and that our residential rates are the lowest among the [natural gas utilities] in the state," Tanski said during a conference call Friday.
National Fuel's utility business, which includes customers in both New York and Pennsylvania, accounts for about 20 percent of the company's operating cash flow and, over the years, has been dwarfed by growth in its drilling and pipeline units, each of which generates more cash flow than the utility. National Fuel's utility profits, including its Pennsylvania operations, were up 14 percent during the first quarter, mainly because colder weather in Pennsylvania led to greater gas use.
The higher natural gas prices, which have increased about 13 percent in Pennsylvania over the past year, allowed National Fuel, which had curtailed production on several wells while prices were low, to bring those wells back on line during the fall. That allowed the company to increase its oil and natural gas production by 18 percent from a year ago.
With prices on the rise, National Fuel, which had cut its drilling program to just a single rig more than a year ago, now plans to add a second drilling rig by the end of September.
The company also began producing natural gas from several wells that already had been drilled. A year ago, the company voluntarily curtailed production at wells with a capacity to produce about 14.6 billion cubic feet of natural gas. During the quarter that ended in December, it had reduced its curtailments by more than 75 percent to just 3.5 billion cubic feet.
The company expects its natural gas production in Pennsylvania to rise by about 3 percent this year.
Overall, National Fuel's profits improved to $88.9 million, or $1.04 per share, easily topping the 87 cents per share that analysts were expecting. The earnings also were a big improvement from the $189 million loss it reported a year ago, when the company had to take a massive write-down in the value of its natural gas assets because of the plunge in energy prices. Excluding that write-down and other one-time items, National Fuel's earnings improved from $66.2 million, or 78 cents per share.
With production rising and natural gas prices firming, National Fuel said it now expects to earn between $3.10 and $3.30 per share during its fiscal year that ends in September, up from its previous guidance of $2.85 to $3.15 per share.