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PLUNGING GAS PRICES FORCE NATIONAL FUEL TO WRITE DOWN VALUE OF CANADIAN SITES

National Fuel Gas Co., stung by plunging natural gas and oil prices, will reduce the value of its Canadian oil and gas producing properties in a charge that will cut its fourth-quarter profits by $90 million to $110 million.

The Buffalo-based energy company, which has focused on building up its oil and gas drilling business in the last few years, also said it might cut its gas production by as much as 2 percent during the current quarter if prices continue to decline.

Natural gas prices have plunged by more than 75 percent this year, while oil prices are down 19 percent, including a 22 percent drop since the Sept. 11 terrorist attacks to a two-year low of $21.31 a barrel on Thursday.

The accounting methods that National Fuel uses require the company to set a value for its oil and gas reserves based on commodity prices at the end of the company's fiscal year, which in National Fuel's case, was at the end of September.

"In a quarter ending in low oil and gas prices, this type of write-down will not be unusual," said Philip C. Ackerman, National Fuel's president and chief executive officer. "Unfortunately, this snapshot approach to valuation focuses on the magnitude of the decline as of the fiscal year end and ignores the seasonal variability of energy prices."

The move does not affect National Fuel's oil and gas properties in the United States, which were written down in value three years ago. Most of National Fuel's Canadian oil and gas wells were acquired since then, through its purchase of oil producer Tri-Link Resources Ltd. in June 2000 and its acquisition of gas producer Player Petroleum Corp. this year.

"This is kind of a one-way street," said Julie Coppola Cox, a National Fuel spokeswoman. "You write down the value of the properties, but you don't write them up" when commodity prices rise.

Because of the write-down, one of the major credit rating agencies, Moody's Investors Service, placed National Fuel's $1.6 billion in debt under review Thursday for a possible downgrade.

The write-down reduces National Fuel's equity to the point where it equals about 38 percent of its debt and the total value of its stock. Moody's said the company's increased leverage was well above the levels that are appropriate for the investment grade A2 rating its debt now carries. The write-down also will delay the reduction in National Fuel's leverage that Moody's said it had been expecting. A downgrade could increase National Fuel's borrowing costs by forcing the company to pay higher interest rates.

Excluding the non-cash charge for the write-down of the oil and gas properties in Canada, analysts expect National Fuel to earn an average of 8 cents per share when it reports its fourth-quarter profits on Oct. 25, according to Thomson Financial/First Call.

If gas prices stay low, National Fuel said it will consider shutting down some production in the Gulf of Mexico and Canada during the current quarter, although the company said the cuts would be less than 2 percent of the equivalent of 100 billion cubic feet of gas that it expects to produce this year. Most of the production cuts would likely come from National Fuel's wells in Canada, based on current prices, Cox said.

"It's a point we recognize as a possibility, but it's not a lock yet," Cox said. "If prices get to the point where we think it makes more sense for us to shut in production, then we will."

e-mail: drobinson@buffnews.com

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