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Rating Action:

Moody's changes Questar Gas and Pipeline's outlook to negative

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 Pipelines' ratings.

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 projects.

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.

New York
John Diaz
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Mihoko Manabe
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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