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13 Mar 2008
Moody's confirms QMR, downgrades Questar Gas and Pipeline
Approximately $1.5 billion of debt affected
New York, March 13, 2008 -- Moody's Investors Service confirmed the Baa3 senior unsecured ratings
of Questar Market Resources, Inc. (QMR) and downgraded the
senior unsecured ratings of Questar Gas Company (Gas) and Questar Pipeline
Company to A3 from A2. The outlook for all three entities is stable.
This concludes our review initiated in February in response to the announcement
of $655 million of debt-funded natural gas property acquisitions
in Louisiana by QMR. The Prime-2 rating of the parent company,
Questar Corporation (Questar) was not affected by this review.
"Moody's confirmed QMR's Baa3 rating based on the potential
diversification benefits of the acquired properties and management's
plans to reduce the elevated leverage levels at QMR and Questar consolidated
over the medium term," said Pete Speer, Moody's
Vice-President/Senior Analyst. "However, the
transaction increased the overall business and financial risk of the Questar
family and lowered its consolidated credit profile, resulting in
the downgrade of Questar Gas and Questar Pipeline to A3."
QMR's Baa3 rating is supported by its track record of growing production
and reserves at competitive costs, its integration with Gas and
Pipeline, and the stability and attractive returns provided by its
Wexpro operations. The rating is restrained by QMR's relatively
small reserve and production scale in comparison to most investment grade
E&P's and its high concentration of reserves and production
in the Pinedale Anticline in western Wyoming. The acquired properties
are located in northwest Louisiana, near QMR's existing operations
in the Elm Grove Field, and provide potential diversification of
production and reserves outside of its core Rockies base. However,
these properties are largely undeveloped and will require $500
million of future development costs for the acquired proved undeveloped
reserves.
The acquisitions only included 55 Bcfe of proved developed reserves and
therefore the transaction effectively doubled QMR's debt/PD reserves
to around $4.30/boe. Including the estimated future
development costs the transaction also increased leverage on total proved
reserves to approximately $6.30/boe. These increased
leverage levels still compare favorably to Baa rated peers, but
QMR's historically conservative capital structure has provided an
important offset to its Ba sized scale and low diversification.
Management expects leverage on PD reserves to decline over the medium
term through development activities yielding reserve replacement meaningfully
in excess of production.
Although the transactions' strategic benefits and management's
plan to reduce the acquisition leverage enabled QMR to retain its existing
ratings, the transaction further increased the proportion of unregulated
businesses in Questar's overall operations. The E&P operations
are Questar's growth engine and will likely continue to receive
most of its capital budget and resources. This growing business
and financial risk has lowered Questar's consolidated credit quality
to a level that no longer supports Gas and Pipeline's A2 ratings.
Consequently, we have downgraded Gas and Pipeline to A3 which is
more in line with their stand alone credit quality.
The acquisitions were funded with a $700 million bank term loan
credit facility that matures on August 15, 2008. QMR recently
expanded its long-term revolving credit facility from $182
million to $800 million and plans to issue up to $500 million
of long-term debt to retire the $700 million term loan.
This additional long-term debt will be necessary for QMR to fund
its substantial capital expenditure plans for 2008, otherwise management
could have to substantially reduce capital expenditures to maintain adequate
liquidity for the overall Questar family.
The stable outlook for QMR is based on the expectations of management
achieving their plans for production and PD reserves growth and thereby
reducing leverage on PD and total proved reserves over the medium term.
Any additional significant E&P acquisitions should have meaningful
equity funding relative to the overall purchase price and to the amount
of PD reserves acquired.
Gas' stable outlook incorporates some potential weakening in free
cash flow and debt metrics as it implements a multi-year feeder
line replacement program. Gas faces near-term regulatory
risk with a rate case that it recently filed with new rates expected in
the fall of this year. An unfavorable outcome with allowed returns
below industry norms could pressure the ratings.
The stable outlook for Pipeline is based on our expectations of its credit
metrics staying relatively flat, with incremental earnings from
recently completed expansions being offset by follow-on projects.
Questar Pipeline Company, Questar Gas Company and Questar Market
Resources are subsidiaries of Questar Corporation, headquartered
in Salt Lake City, Utah.
New York
Steven Wood
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Peter Speer
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
No Related Data.
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