National Fuel Gas said it expects subsidiary Seneca Resources to write down at the end of the fourth quarter the cost of its Canadian oil and gas producing properties and in the first quarter of 2002 to determine if gas production curtailments are necessary because of plummeting wholesale prices.

Based upon pricing on Sept. 30, Seneca expects the write-down to result in a non-cash charge to earnings in the range of US$90-$110 million after-tax. No write down of Seneca’s United States oil and gas properties is required.

“In a quarter ending in low oil and gas prices, this type of write-down will not be unusual,” said National Fuel CEO Philip C. Ackerman. “Unfortunately, this ‘snapshot’ approach to valuation focuses on the magnitude of the decline as of fiscal year end, and ignores the seasonal variability of energy prices. The arbitrary nature of the full cost accounting rules forces us to ignore the value of our hedge positions and the reality of higher prices in the futures market when calculating the magnitude of this write-down.”

In addition, if commodity prices for natural gas continue to decline, Seneca will consider curtailing some of its production of natural gas in the Gulf of Mexico and Canada in the first quarter of fiscal 2002. Seneca will evaluate the situation during the first quarter. The potential impact on production is expected to be less than 2 Bcfe of the 100 Bcfe of anticipated production for fiscal 2002, the company said.

“While we’ve experienced unprecedented ups and downs in commodity prices recently, Seneca’s position remains solid and we remain committed to a deliberate, long-term strategy for growth. Seneca’s reserves at the end of the fourth quarter [will] exceed 1 Tcfe, on-shore oil production remains strong, we expect to meet production estimates for both the fourth quarter and the fiscal year that ended Sept. 30, and established hedge positions will ensure a stable revenue stream from Seneca for fiscal 2002,” Ackerman said.

Significant changes in market conditions since last year, including abundant domestic supplies and storage inventories of natural gas and declining demand for all energies as economic growth has slowed, have caused natural gas prices to drop to their lowest level in more than a year. At the same time, crude oil prices have declined since the Sept. 11 terrorist attacks on the United States.

Following National Fuel’s announcement, Moody’s Investors Service placed the company’s securities ratings on review for possible downgrade. National Fuel’s reduction in equity increases the company’s leverage to above 62, well above levels appropriate for its rating, and delays the improvement in its leverage that the rating agency had been expecting, Moody’s said. Although Moody’s recognizes that the writedown is non-cash, this is the second time that National Fuel has recorded a sizable writedown related to Seneca. The first was in fiscal 1998, which had the effect of increasing its leverage to 58. In its review, Moody’s will review the potential for further writedowns, the company’s plans and projections for its E&P business, and the effect of this growing segment on the overall creditworthiness of National Fuel.

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