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

NEW YORK -- Fitch affirms National Fuel Gas Company's (NYSE:NFG) ratings as follows:

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

--Senior unsecured debt 'A-';

--Commercial Paper 'F2'.

The Rating Outlook for NFG is Stable.

The affirmations and Stable Rating Outlook primarily reflect the predictable performance of NFG's 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 improved cash flow credit measures, a 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.

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 mechanism to minimize the effect of 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 Nov. 30, 2006, the Pennsylvania Commission approved a settlement to increase non-gas revenues by $14.3 million. The settlement did not cover changes in NFG's rate structure as requested by the company. However, the commission is undertaking a generic proceeding to investigate customer conservation and ratemaking mechanisms. In addition, in early 2007, NFG's New York utility division filed for increased rates and a change in rate design that would incorporate a revenue decoupling component.

On Feb. 9, 2007, FERC approved a settlement agreement that resolves a complaint that the rates of National Fuel Gas Supply Corporation (Supply) were unjust and unreasonable and that the company was permitted to retain more gas from shippers than was necessary for fuel and loss. Under the settlement, gas retention allowances were reduced and adjustments were made to certain recoverable expenses. On balance, the settlement will modestly depress Supply's future operating results. Following several delays, with a FERC order in hand, NFG is poised to begin construction of the 78-mile Empire Connector pipeline connecting NFG's Empire Pipeline with the proposed Millennium Pipeline. The initial cost projection for the project was $152 million. However, due to escalations in labor and other construction costs, the final cost could be as much as 10% to 20% higher.

Seneca's fiscal 2007 budget is estimated at $212 million with a high percentage of spending dedicated to high success rate developmental drilling. The East is currently Seneca's smallest region for production but a consultant hired by the company is conducting a comprehensive study of its proved and unproved Appalachian reserves. Moreover, Seneca is participating in a joint venture with EOG Resources to explore and drill for natural gas in the Devonian Shale horizon on Seneca's acreage which may have significant development potential. In addition, the company is reviewing its activities in Canada after several years of sub-par performance. Major strategic changes in Seneca's operations and risk profile could have an effect on NFG's ratings.

NFG's key cash flow derived credit measures remain strong and are consistent with expectations. However, earnings were negatively impacted in fiscal 2006, from E&P impairment charges. For fiscal 2006, funds from operations (FFO) interest coverage was 6.3 times (x) and FFO-to-debt was 37%. 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 for the rating.

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.