The Pennsylvania Public Utility Commission (PUC) last Thursday voted unanimously to look into the possible change of control of National Fuel Gas Distribution Corp. and the actions of New Mountain Vantage and others acting in concert with New Mountain.

Last month National Fuel filed a petition requesting that the PUC investigate New Mountain to determine if the company violated the Public Utility Code by acquiring control of National Fuel and whether New Mountain and others should be required to apply for a certificate of public convenience, which is required for operation as a public utility in Pennsylvania. New Mountain has said it believes the allegations are "without merit and merely an attempt to interfere with the rights of shareholders."

"The commission has examined [the Public Utility Code] and determined that the transfer of stock or other voting interest of a utility's parent is jurisdictional regardless of the remoteness of the transaction if the effect of the transaction is to change control of a utility," said commission Vice Chairman James H. Cawley in a motion that ordered the inquiry to proceed. "Protecting the public interest and 'maximizing shareholder value' may not always be complementary goals."

National Fuel serves about 210,000 natural gas customers in 14 Pennsylvania counties.

New Mountain, an institutional asset management firm, began purchasing National Fuel shares in early 2006. The firm believes itself to be National Fuel's largest shareholder, currently representing 8.1 million shares, about 9.5% of shares outstanding.

The PUC vote came one day after National Fuel said it was filing a petition with the New York State Public Service Commission (PSC) seeking an order compelling New Mountain and its affiliates to disclose the full extent of their holdings of shares of National Fuel stock. National Fuel, which serves 500,000 natural gas customers in western New York, said it wants the PSC to determine whether New Mountain violated the public service saw by securing "a significant ownership position" in National Fuel, "advanced its business strategy and presented a list of candidates it wishes to be elected to the company's board of directors" without first taking certain required action with the PSC.

If the PSC determines that New Mountain violated the Public Service Law, NFG said it will ask that New Mountain be required to file for PSC permission to acquire NFG shares and for the PSC to hold hearings as to whether acquisition of the shares is in the public interest.

According to NFG, "the Public Service Law requires that if an entity is pursuing a controlling interest, either directly or indirectly, in a regulated public utility, then it must first secure the approval of the PSC. Such a requirement...is designed to give the public and regulatory agencies an opportunity to determine if that entity will be qualified to manage the assets that deliver essential energy services to the citizens of New York." According to NFG, New Mountain is "advancing a business plan for all of NFG's operating segments that [NFG] believes not in the best interest of the company's utility customers."

"We are proud of our long history of providing safe and reliable service to our customers and we believe that any entity that is putting itself in a position to have substantial influence and control over the way that important service is provided, should have first sought the necessary commission review and approval," said NFG CEO Philip C. Ackerman.

Over the past 18 months New Mountain has made several strategic suggestions to NFG, asking the utility to develop, communicate and execute a plan to maximize its Appalachian exploration and production (E&P) assets, explore master limited partnership structures for its pipeline, storage, California E&P and Appalachian E&P assets, and explore the sale of noncore operations. The recommendations are "flawed by inadequate analysis," according to NFG.

"We believe that New Mountain's interests are focused on short-term gains derived principally from the company's exploration and production segment and that it has conveniently ignored the fundamental rules for this vital operation," Ackerman said.

New Mountain has also nominated three candidates -- including former Ultra Petroleum CFO F. Fox Benton -- to NFG's 10-member board of directors. The NFG board has recommended that shareholders vote for a different slate of candidates at the company's annual meeting, scheduled to be held in February.

New Mountain said NFG's New York petition was "merely another tactic being employed by NFG's entrenched board to frustrate the federal securities laws and to disenfranchise shareholders from electing the board representatives they desire."

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