Questar Corporation (STR)

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Questar Corporation. (STR)

Q2 2010 Earnings Call

July 28, 2010 9:30 a.m. ET

Executives

Martin Craven - Vice President, CFO & Treasurer

Ronald Jibson - President & Chief Executive Officer

James Livsey - Executive VP & General Manager, Wexpro

Allan Bradley - Executive VP & President & CEO, Questar Pipeline

Analysts

Lasan Johong - RBC Capital Markets

Kevin Smith - Raymond James

Tim Schneider - Citigroup

Presentation

Operator

Good morning. My name is April and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2010 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the conference over to Mr. Martin Craven, Vice President and CFO. Please go ahead sir.

Martin Craven

Thank you, April. Good morning everyone and welcome. This is Martin Craven, Questar's Chief Financial Officer as of July 1st. We want to thank you for joining us today for Questar's second quarter 2010 earnings conference call.

What's a new era for Questar? On July 1st, we completed the spin-off of QEP Resources Questar's E&P and midstream field services businesses. And we returned to our roots as an integrated natural gas company comprised of three complimentary businesses, Wexpro, Questar Pipeline and Questar Gas.

With me today on the call is Ron Jibson, who became Questar's President and CEO on July 1st, following this spin. Ron succeeds Keith Rattie, who now serves Non-Executive Chairman of the Board for both Questar and QEP Resources. Also here today are Jim Livsey, EDP and General Manager of Wexpro, Allan Bradley, EDP and CEO of Questar Pipeline, Craig Wagstaff, VP and General Manager of Questar Gas and Sam Brothwell, VP Investor Relations for Questar.

We were very excited to meet with many of you and the investment community during our two week investor road show this past June. Since then we're pleased to report that in connection with the spin, release as front of safety credit rating with a stable outlook on Questar Pipeline and Questar Gas's debt and a P2 short-term rating up at the parent level.

In standing forces raised its credit ratings to noshes on both Questar Pipeline and Questar Gas debt from BBB+ to A with a stable outlook and we're pleased they also raised Questar's short-term rating from A2 to A1 helping our commercial paper program.

Yesterday, Questar reported second quarter 2010 earnings from continuing operation of 28.7 million, which included a one time after tax charge of 7.1 million or $0.04 per diluted share with Questar share of expense associated with the spin. Excluding these charges, earnings for the quarter totaled $0.20 per diluted share. We affirm 2010 earnings guidance of $1 to $1.5 per diluted share before these charges.

Now we will be making some forward-looking statements during our call today and I remind you that actual results could well vary defer from our estimates for a verity of reasons.

Questar income from continuing operations grew 8.5% in the second quarter compared to a year ago. Wexpro grew our net income 11% to 22 million in the quarter and this was driven by a 6% increase in investment base. As you know under the Wexpro contract, Wexpro develops natural gas and oil on a define set of producing properties in the Rocky's and typically earns about 19% after tax unleveled return on its net investment base.

Wexpro delivers its natural gas production from these properties to our utility Questar Gas at a cost of services that includes that return. So our Wexpro's production similar to that of an -- its operation is similar to that of an E&P company. Its economic model is structured more like a regulated utility.

Questar Pipeline, our inter-state natural gas pipeline and storage business grew net income 6% to 15.9 million in the second quarter. We benefited from higher transportation contract demand related to completion of an expansion project late last year and we also enjoy higher revenues from natural gas liquids sales.

Our retail natural gas distribution utility, Questar Gas, lost 2.2 million in the second quarter slightly more than a year ago. Remember though that Questar Gas typically generates all of its annual net income in the first and fourth quarters each year and reports a seasonal net loss in the second and third quarters. For the 12 months ended June 30th Questar Gas's net income rose about 3% driven by continued strong customer growth in our service area.

On the expense front combined operating and maintenance general and administrative expenses totaled $64.3 million in the quarter compared to 59.6 million in the second quarter of last year an almost 8% increase. Higher second quarter expense however was primarily the result of higher Demand Site Management or DSM cost that were incurred at Questar Gas. As well as higher overhead and employee cost of each company in the period.

Recall though that Questar Gas recovers these DSM cost dollar-per-dollar in rates. So excluding those higher cost, consolidated O&M and G&A expense rose a more moderate 3.7% quarter-over-quarter.

Production and other taxes rose 31% in the second quarter. This increase was driven by a 74% increase in the field price of natural gas which used to calculate taxes on Wexpro production. Again these taxes are recovered in Wexpro's cost to service do terms of the Wexpro agreement.

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