Two medium-size natural gas companies in the Southwest drew negative attention from the rating agencies last week, with Moody’s Investor Services reviewing Salt Lake City-based Questar Corp. for a possible downgrade and Standard & Poor’s assigning a negative outlook to Las Vegas, NV-based Southwest Gas Corp., noting its “strong, diverse and growing gas market” is offset by what S&P called “a highly political regulatory environment.”

Moody’s said all the Questar companies — Questar Gas Co., Questar Pipeline Co., and unregulated marketer Questar Market Resources — are under review for possible downgrade because the parent company’s leverage “rose sharply last year” with debt taken on in its $403 million purchase of Shenandoah Energy Inc., an exploration and production company.

“In its review, Moody’s will assess Questar’s plan to reduce its leverage and to manage its increased business risk and commodity price exposure,” Moody’s said in its formal announcement, noting more than $965 million of debt securities are affected and the company has now made its unregulated holdings of interstate pipelines, marketing and E&P operations collectively the majority of its business interests.

The ratings under review are all relatively high: Prime-1 commercial paper for Questar; A1 for the gas pipeline and separately the natural gas utility; and Baa2 for Questar Market Resources, Inc.

Regarding Southwest Gas, S&P said it has assigned a negative outlook as a reflection of the company’s financial profile including “high leverage, lagging regulatory recovery, elevated capital expenditures from rapid customer growth, and complications from lagging regulatory mechanisms.” The rating agency said that Southwest’s current rating would be helped by “efforts to buoy the balance sheet and increase cash flow.

“Ratings stability is predicated on support from regulatory bodies, less reliance on debt to finance system expansion, and cash generation commensurate with current rents.”

In a recent interview with NGI, the chairman of the Nevada Public Utilities Commission, Donald Soderberg, called Southwest “very healthy at the moment” (see Power Market Today, April 25).

Because of the high customer growth in the three states in which it operates (Nevada, California and Arizona), Southwest Gas must stay ahead of the growth, and do it by efficiently and economically hooking up new customers, S&P said in its announcement. “Debt leverage is expected to remain high as the company continues its aggressive capital investment program,” S&P’s John Kennedy wrote. “The stressed balance sheet, coupled with weak debt service coverage, is pressuring ratings.”

Part of the stress, S&P’s noted, was caused by the spike in wholesale natural gas prices last year, along with retail rate caps, leaving Southwest with deferred gas costs unrecovered in the rates its was charging customers. “The net effect was added stress to an already weakened financial profile resulting from significant capital outlays,” said S&P’s Kennedy, noting regulatory-approved recovery mechanisms should allow the utility to be caught up for the most part by the end of this month.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.