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National Fuel uses red tape as weapon

National Fuel Gas Co. fired back at its biggest shareholder on Friday, asking Pennsylvania utility regulators to investigate whether New Mountain Ventures is violating the state's utility laws and refuting many of the changes it wants the Amherst-based energy company to make.

National Fuel asked the Pennsylvania Public Utility Commission to order New Mountain Ventures, a hedge fund that controls nearly 10 percent of the company's stock, to obtain a certificate of public convenience because it is seeking to gain a controlling interest. National Fuel said the certificate would give regulators and the public the chance to see if New Mountain is qualified to manage the company's utility business in Pennsylvania.

"We play by a set of rules and everyone who steps their toe in these same waters should have to play by these rules as well," said Julie Coppola Cox, a National Fuel spokeswoman. If New Mountain is ordered to meet the standard, it could create further obstacles in the hedge fund's efforts to win three seats on National Fuel's board of directors, sell some of its businesses and accelerate its natural gas drilling plans in Appalachia.

Cox said New York has different regulatory rules and standards than Pennsylvania. "We're looking at the laws to see what steps can be taken" in New York, she said.

National Fuel's top executives also used a conference call with analysts on Friday to refute many of the changes that New Mountain wants the company to make and rebut suggestions that management is not moving fast enough to take advantage of opportunities to expand the business.

"Although time may be money, haste for its own sake is seldom a virtue," said Philip C. Ackerman, National Fuel's chairman and chief executive officer.

"Every member of senior management has an overwhelming interest in the performance of our stock," he said. "If their [New Mountain Ventures] claims were consistent with our own knowledge and experience, we would be implementing them."

New Mountain has urged National Fuel to speed up its drilling program on land it controls in New York and Pennsylvania to tap into what it believes is a significant source of natural gas. National Fuel, which increased its drilling program in Appalachia by 53 percent last year, has advocated a more conservative, studied approach.

"We will continue to accelerate drilling, but do so in a considered, comprehensive and sequential manner," said David F. Smith, National Fuel's president and chief operating officer.

"We're pleased they're increasing their investment in Appalachia, which is something we've been pushing all along," said Nina Devlin, a New Mountain spokeswoman. "But we want to make sure they take a comprehensive look at everything we've recommended."

One of those recommendations is that National Fuel form master limited partnerships for some of its businesses, which could reduce the tax burden on those operations.

Ackerman, however, said the company's investigation into the potential of master limited partnerships, which has been ongoing for several months, is raising questions about whether that type of ownership structure would produce significant savings.

The change would be unlikely to produce significant tax savings for the company's pipeline and storage business because of the low tax basis for much of its assets, Ackerman said. In addition, the high degree of integration between the pipeline business and National Fuel's utility operations could pose a significant risk to the utility business if the ownership structure was changed.

Ackerman also raised concerns that an MLP for its California oil fields might not be sustainable, since new reserves would have to be added constantly to make up for the oil produced and provide the income stream needed to fund its cash distributions to investors. The company's Appalachian business could be suited for an MLP if those lands eventually produce as much gas a executives hope.

Smith also said National Fuel has no intention of selling its National Fuel Resources energy marketing business, as New Mountain has suggested, because its business is heavily integrated into the company's utility operations. National Fuel Resources is the largest retail marketer on the National Fuel system and is the third-largest customer of its pipeline and storage business.


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