Fitch Affirms National Fuel Gas IDR at 'A-'; Short-Term at 'F2'

Business Wire, Feb 5, 2008

NEW YORK -- Fitch has affirmed the following ratings for National Fuel Gas Company's (NFG):

--Issuer Default Rating (IDR) at 'A-';

--Short-Term IDR at 'F2';

--Senior unsecured debt at 'A-';

--Commercial Paper at 'F2'.

The Rating Outlook is Stable.

NFG's ratings and Stable Outlook primarily reflect the predictable performance of its natural gas utility segment operations in New York and Pennsylvania as well as Federal Energy Regulatory Commission (FERC)-regulated regional operations of its pipeline and storage segment. Also considered were NFG's strong near-term liquidity position and generally conservative operating practices of oil and natural gas exploration and production (E&P) activities at Seneca Resources Corporation (Seneca) and NFG's other non-regulated businesses.

In its analysis, Fitch also recognizes NFG's economic sensitivity to changing commodity prices, the potential financial effect of a board authorized common share repurchase plan, the long-term implications of an evolving federal and state regulatory landscape and a possible change in the strategic direction of Seneca's E&P activities as management actively reviews its operating alternatives.

On Jan. 24, 2008, NFG and New Mountain Vantage GP, L.L.C. et.al. (New Mountain), controlling nearly a 10% interest in the company, announced that they had reached a settlement in a proxy contest relating to the election of directors. As part of the settlement, NFG has agreed to increase the size of its board from 10 to 11 and to nominate New Mountain's candidate. The parties also agreed to several other actions including more regular disclosure of information by NFG in the future. NFG also agreed to evaluate the divestiture of Seneca's oil and gas assets in the Gulf of Mexico and to proceed with the development of its Appalachian acreage at reasonable speed. Fitch believes the settlement lowers the potential event risk associated with a hostile proxy fight. However, any material change in NFG's capital investment strategy or legal structure, such as forming a Master Limited Partnership, could result in rating actions.

NFG's key cash flow derived credit measures remain strong and are consistent with expectations. For fiscal 2007, funds from operations (FFO) interest coverage was 6.3 times (x) and FFO-to-debt was 40%. Commodity price exposure from Seneca's unhedged production remains a potential source of volatility in financial performance. However, economic projections using a conservative commodity price deck result in cash flow credit measures that remain appropriate with the rating

Utility operations continue to contribute reliable, low-risk earnings and cash flow. However, in recent years, financial results have been affected by lower customer usage, particularly in Pennsylvania, which unlike New York does not have a weather-normalization or a revenue decoupling mechanism to minimize the effect of conservation. Current trends in customer conservation and increased bad debt expense should remain an issue in a high and volatile natural gas price environment. In a December 21, 2007 Rate Order, the New York Public Service Commission (NYPSC) authorized a $1.8 million rate increase based on a 9.1% return on equity (ROE) for NFG's New York utility division, well below the $52 million rate increase requested by the company. However, the company was supported in its request for a revenue decoupling mechanism through a $10.8 million surcharge which will enable it to recover lost margin associated with customer conservation. Therefore the relatively low ROE is somewhat balanced by low cash flow volatility and high certainty of cost recovery.

Pipeline and storage assets operated by National Fuel Gas Supply Corp. and Empire State Pipeline are well positioned between growing supply sources and increasing demand for natural gas in eastern markets. NFG is constructing the $175 million 78-mile Empire Connector pipeline connecting NFG's Empire Pipeline with the Millennium Pipeline now under construction. The Empire Connector has a target completion date of November 2008.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.