Questar Corp. plans to continue investing heavily in exploration and production (E&P) and reserve acquisitions in the Rocky Mountains and Midcontinent regions over the next few years to maintain its “good returns” on capital in its nonregulated businesses, and to lift the returns on its lagging regulated businesses. It also intends to sell off non-core energy assets to lighten its debt load, said the company’s new CEO Keith O. Rattie.

Salt Lake City-based Questar will pour its investment capital into subsidiary Questar Market Resources (QMR), which oversees the company’s nonregulated activities, including E&P, gathering and processing, and energy marketing and risk management, he said last week during an interview with The Wall Street Transcript.

“Returns on capital in QMR have been very good in recent years, and we will continue to allocate about 70% of our reinvestment capital to QMR over the next five years,” especially in the E&P area, noted Rattie. QMR “has grown reserves and production at a compound annual rate greater than 15% over the past decade. And projects such as our Uinta Basin gas and oil play and the Pinedale Anticline provide a solid platform for long-term growth across our entire value chain.” He said the company’s acquisition focus in the future will be on adding more reserves, primarily in the Rockies and Midcontinent regions.

An estimated one-third of QMR’s earnings comes from its subsidiary, Wexpro, which develops and operates gas properties for Questar’s regulated utility, Questar Gas. Under an agreement with Utah and Wyoming regulators, Wexpro is authorized to earn an after-tax return of 19%-20% of its net investment in these properties. At year-end 2001, Wexpro had a net investment base of $161 million.

Returns on Questar’s regulated businesses, such as Questar Pipeline, “have been okay, not league-leading, but above our cost of capital,” according to Rattie. “To improve returns in the future, we will need to capitalize on growing natural gas production in the Rockies.” Given the emergence of the Rockies as the swing supplier in the U.S. gas market, “there’s untapped value in our [pipeline/storage] system. We’re going after that value.”

One of Questar’s biggest challenges will be to boost returns in Questar Gas. The utility “has slashed costs and improved productivity over the past decade, but these improvements are not showing up in Questar Gas’s bottom line, in part because usage per customer is declining,” he told the Wall Street Transcript. “This is [an] unacceptable…problem we have to fix.”

Another challenge for Questar in the short-term is debt reduction, Rattie noted. “At year end 2001, our total (short-term plus long-term) debt stood at 59% of total capitalization. Our credit ratings remain strong, but debt reduction is necessary to ensure they remain strong,” Rattie noted.

He said the company plans to cut its debt by an estimated $200 million this year by selling noncore assets and, if necessary, issuing new equity. Additionally, Questar needs to resolve its court dispute with Kinder-Morgan over its failed investment in the TransColorado Pipeline, Rattie noted, adding a decision is expected in late June. “At issue is whether a Questar Pipeline subsidiary will be allowed to enforce its contract-based right to put its 50% interest in TransColorado to Kinder Morgan for an amount that exceeds $100 million.”

He believes the company also must cut its losses in Consonus, Questar’s unsuccessful data-center hosting business. “Consonus has taught us a lesson about investing outside of our core energy business. You won’t hear Questar talking about diversification outside of the energy business in the future.”

Rattie said Questar’s corporate objective is to grow earnings per share at a compound rate of at least 10% over the next five years.”Natural gas demand will grow over the next two decades, and Questar should capitalize on this growth. Our concentrated Rockies location, and our integrated mix of business, place us at the center of the action.”

Although it’s been a tough year for energy companies in the wake of the Enron scandal, Rattie remains optimistic. “There’s a silver lining for companies like Questar; it’s a return to the basics movement. Enron’s ‘asset-lite’ theory, the notion that assets do not matter, that you can manufacture ever-increasing earnings by just trading paper and marking-to-market gains that have not yet been realized has been exposed for what it was — a fantasy,” he said.

“Investors have gained a greater appreciation for the value of regulated businesses…Investors are also weary of management hype, spin and puffery. Investors want management to talk straight, look the facts in the eye and tell the truth, even when the truth is inconvenient.”

As for the company’s hedging strategy, Rattie said QMR “will continue to deliver very solid financial results if we can hedge 50%-75% of our production at prices in the upper end” of a $2.50-$3.50 range.

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