Questar Corp.’s board of directors on Tuesday authorized its management team to proceed with a tax-free spin-off of the firm’s exploration and production (E&P) and midstream field services businesses to form an independent, publicly traded company to be named QEP Resources Inc.

The Salt Lake City-based company announced the separation proposal in April (see Daily GPI, April 22). Earlier this month the Internal Revenue Service issued a private letter ruling that the proposed spin-off would qualify as a tax-free transaction for federal income tax purposes.

Following the announced approval by the board, Questar’s shares traded up early Tuesday to as high as $48.93, compared with Monday’s closing price of $46.96 .

The transaction “is subject to market conditions, successful restructuring of certain credit facilities and final approval of certain material agreements by the boards of both companies,” but Chairman Keith O. Rattie predicted it would be a “momentous” transaction. He spoke at the company’s annual meeting Tuesday.

“This transaction is a logical step in a long-term strategy that has served all Questar stakeholders well,” he said. “The spin-off would create two top-tier companies. QEP Resources would be a high-growth, diversified E&P business with operations in several of the most economic natural gas plays in the United States.

“Questar would be a uniquely integrated natural gas company with a track record of solid returns on capital, visible growth, and the capacity to pay and grow a competitive dividend.”

The spin-off, expected to be completed within the next three months, would allow Questar to remain an integrated natural gas company comprised of subsidiaries Wexpro Co., Questar Pipeline Co. and Questar Gas Co. Corporate headquarters would remain in Salt Lake City.

QEP Resources Inc., formerly Questar Market Resources, would be comprised of subsidiaries Questar Exploration & Production, Questar Gas Management, and Questar Energy Trading. The QEP Resources subsidiaries would be renamed QEP Energy, QEP Field Services, and QEP Marketing, respectively. QEP Resources would be headquartered in Denver.

The number of outstanding shares of Questar held by existing stockholders would not change as a result of the spin-off. Questar common stock would continue to trade on the New York Stock Exchange (NYSE) under the symbol “STR.” QEP Resources has applied to have its common stock listed on the NYSE under the symbol “QEP.”

Rattie, who is also Questar’s president and CEO, would chair both companies.

Charles B. Stanley was approved by the board as president and CEO of QEP Resources. Richard J. Doleshek would serve as CFO. Ronald W. Jibson is to become president and CEO of Questar. Martin H. Craven would be named CFO.

The two companies basically would split Questar’s debt, with QEP Resources total debt estimated at about $1.2 billion on the spin date, with no outstanding balance under its revolving credit facility. Questar also would have about $1.2 billion of total debt outstanding on the spin date.

Moody’s Investors Service said the ratings for the proposed new company QEP Resources “remain under review for possible downgrade” based on the planned transfer of Wexpro and debt outstanding. Wexpro also is an E&P company, but it operates as a low-risk subsidiary, and its production is used to generate gas for the utility company.

“The planned debt reduction does not fully offset the benefits that Wexpro provided [QEP Resources] in terms of asset scale and lower business risk,” said Moody’s Vice President Pete Speer. “However, the company’s leverage metrics and competitive cost structure following the spin-off support a ‘Ba1’ rating.”

QEP Resources’ “pro forma leverage metrics will increase modestly since the loss of Wexpro’s production and proved reserve volumes will be greater than the proposed debt reduction,” said Speer. The new company also would no longer benefit “from the stability provided by Wexpro and from being associated with the other Questar regulated subsidiaries, which were critical components” of its stronger “Baa3” rating.

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