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18 Dec 2007
Moody's changes Questar Gas and Pipeline's outlook to negative
About $660 million of debt affected
New York, December 18, 2007 -- Moody's Investors Service changed the rating outlook on Questar
Gas Company (Gas) and Questar Pipeline Company (Pipeline) to negative
from stable and affirmed their debt ratings (both A2 sr. uns.).
Moody's affirmed with a stable outlook the debt ratings of their
sister company Questar Market Resources, Inc. (QMR,
Baa3 sr. uns.) and parent company Questar Corporation (Questar,
Prime-2). These actions follow Moody's review of Questar's
latest three-year plan, which shows continued growth of its
unregulated businesses (dominated by unregulated E&P conducted at
QMR) over the next few years, coupled with higher capital expenditures
that will deepen negative free cash flow that will be primarily debt financed.
"Questar Gas and Questar Pipeline's negative outlook is a
result of their affiliation with a growing E&P company that has higher
business risk, rather than a shift in their standalone credit qualities,"
says Moody's Vice President Mihoko Manabe.
The negative outlook indicates the potential for Gas and Pipeline's
ratings being lowered over the coming 24 months if Questar's overall
credit profile continues to become riskier from the execution of the company's
plan or a major acquisition (most likely E&P), which in turn
would put downward pressure on Gas and Pipeline's ratings.
Questar's overall corporate credit quality is the primary driver
for Gas and Pipeline's ratings. The credit quality of the
Questar family is the basis off which its subsidiary ratings are notched.
Their ratings are closely linked, because of Questar's centralized
cash management practices and the vertical integration that makes its
affiliates operate much as a unit.
Questar has no long-term rating, but Gas and Pipeline's
A2 ratings imply Questar's rating at as high as A3, which
may not hold for a company that is becoming substantially E&P.
Unregulated E&P at QMR is approaching 60% of Questar's
consolidated operating income, higher than most of its diversified
gas company peers. Much further exposure to E&P and ancillary
unregulated businesses could cause Moody's to reassess Questar's
implicit rating, and consequently, the notching of Gas and
Gas and Pipeline's ratings could drift toward QMR's as the
center of gravity of Questar's credit profile gradually shifts from
the regulated to the unregulated businesses. Upward movement in
QMR's Baa3 rating is not expected for some time without additional
scale and diversity, and this indirectly puts potential downward
pressure on Gas and Pipeline's ratings in the interim.
Moody's notes that Gas and Pipelines are solid mid-sized
regulated entities, but they would each be rated lower on a standalone
basis without the rating uplift given for their Questar affiliation.
According to Moody's rating methodologies, Pipeline maps to
a Baa1 if it were ring-fenced; Gas maps to an A3. Ratings
for each of Questar's subsidiaries reflect some uplift from the
integration synergies that makes each of the parts stronger than the sum,
sound financial policies, and a good operating record.
Pipeline is enjoying a cycle of organic expansion not seen for a few years,
spurred by heightened demand for takeaway capacity from the Rockies.
Last month, it completed Phase II of the Southern System Expansion
project and next month, it expects to put in service the Overthrust-Wamsutter
Expansion that will serve as the western-most segment of the Rockies
Express Pipeline. Unlike some past projects, these projects
are fully subscribed by long-term agreements, which help
ensure future returns. Questar injected $175 million of
equity this year to maintain Pipeline's debt/capitalization ratio
in the low 40% range. Moody's expects Pipeline's
credit metrics to remain relatively flat, with incremental earnings
from projects put online being offset by the incremental costs of follow-on
Gas's credit profile has been maintained by the company's
efforts to keep its returns in line with allowed levels. The company
is stabilized from weather normalization (though at customers' option)
and a decoupling mechanism, which was recently extended through
2009. Gas faces near-term regulatory risk with the rate
case that it will file this month, with new rates expected to be
in place next fall. Its metrics could also temporarily weaken if
expenditures increase as part of a line replacement program.
Questar Pipeline Company and Questar Gas Company are subsidiaries of Questar
Corporation, headquartered in Salt Lake City, Utah.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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