Fitch Affirms National Fuel Gas Debt at 'A-'.

NEW YORK -- National Fuel Gas Company's (NFG) senior unsecured debt and Issuer Default Ratings (IDR) are affirmed by Fitch at 'A-'. In addition, NFG's short-term debt rating, which applies to its commercial paper program, is affirmed at 'F2'. The Rating Outlook for NFG is Stable.

NFG's rating and Stable Outlook primarily reflect the predictable performance of its natural gas utility segment operations in New York and Pennsylvania and regulated regional operations of its pipeline and storage segment. Also considered are NFG's improved consolidated credit measures, a strong near-term cash position, and the generally conservative operating practices of its oil and natural gas activities at Seneca Resources Corporation (Seneca) and the company's other non-regulated businesses.

NFG's utility operations continue to contribute reliable, low-risk earnings and cash flow. However, in recent years financial results for the utility segment have been affected by lower customer usage, particularly in Pennsylvania, which unlike New York does not have a weather normalization mechanism to minimize the effect in warm weather periods. Current trends in customer conservation and increased bad debt expense should remain an issue in a high and volatile natural gas price environment. On May 31, 2006, NFG filed a rate case in Pennsylvania seeking a $25.9 million rate increase to recover its increasing costs. The filing follows shortly after NFG's most recent Pennsylvania rate case that became effective in April 2005. As part of the current filing the company has requested a revenue decoupling mechanism that would protect against customer conservation and provide further financial stability.

Fitch expects positive near-term results from NFG's expanding interstate pipeline and storage operations. However, the in-service date for the 83-mile Empire Connector pipeline connecting NFG's Empire Pipeline with the proposed Millennium Pipeline to serve eastern markets, has recently been delayed a year to November 2008. The expected cost of the project is approximately $150 million and Fitch will consider the type and timing of financing for the new pipeline and the quality of its contractual support in its future rating deliberations. Of more immediate interest is a complaint filed with the Federal Energy Regulatory Commission (FERC) on April 7, 2006 by the New York Public Service Commission, the Pennsylvania Public Utility Commission, and the Pennsylvania Office of Consumer Advocate claiming that the rates of National Fuel Gas Supply Corporation (Supply) are unjust and unreasonable, and that the company is permitted to retain more gas from shippers than is necessary for fuel and loss. The complainants allege excess annual earnings for Supply of $30 million-$35 million. FERC recently ruled in favor of the company and denied a request for summary judgment for refunds relating to prior periods. The parties are currently in settlement discussions relating to future periods. An adverse ruling by FERC could weaken the segment's long-term financial outlook.

A matter of ongoing concern is the business risk associated with non-regulated activities. In July 2005, NFG sold its electric generation/steam heating assets in the Czech Republic for $116 million, recognizing a net gain of $25.8 million. Oil and natural gas exploration and production operations at Seneca prospectively represent between one-third to one-half of NFG's consolidated earnings and cash flow. Seneca's hedging policy is relatively conservative. In past years Seneca would hedge 60%-70% of the next year's production. However, due to difficulties in effectively hedging basis exposure, Seneca is no longer hedging its California oil production. Future earnings should increase as hedges fall off and future hedges are set at higher prices. Seneca should comfortably operate within its internal cash flows based on a recently increased 2006 capital budget of $207 million. Capital spending will be directed toward lower risk and higher success rate developmental drilling activity, which had a 98% success rate in fiscal 2005.

The exploration and production segment recorded a loss in earnings for the third fiscal quarter of 2006, due to a non-cash $39.5 million after-tax impairment of its Canadian producing properties. While commodity price exposure from Seneca's unhedged production remains a potential source of volatility in financial performance, economic projections done by Fitch using a conservative commodity price deck result in cash flow credit ratios that remain appropriate for the rating category.

NFG's key consolidated company credit ratios remain strong and are consistent with expectations. For the 12 months ended June 30, 2006, funds from operations interest coverage was 6.5 times (x) and debt to EBITDA was 2.1x. Near-term liquidity is strong with no significant long-term debt maturities until 2008. Free cash flow from operations should comfortably exceed expected capital expenditures through fiscal 2007, with little need to access commercial paper markets for seasonal gas supply purchases. However, NFG has instituted a stock buy-back program and through July has purchased about 2.3 million shares of a total of 8 million shares authorized for repurchase. Depending on the stock repurchase activities NFG could be required to borrow short term.

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