Questar Corporation (STR)

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Questar Corp. (STR)

Q3 2010 Earnings Call

October 27, 2010 9:30 am ET

Executives

Martin Craven - VP and CFO

Ron Jibson - President and CEO

Jim Livsey, EVP and GM of Wexpro Company

Allan Bradley - EVP and President & CEO of Questar Pipeline Company

Craig Wagstaff - VP and GM of Questar Gas Company

Analysts

Carl Kirst - BMO Capital Markets

Lasan Johong - RBC Capital Markets

Steve Maresca - Morgan Stanley

Mahesh Joshi - Spin-Off Advisors

Kevin Smith - Raymond James

Holly Stewart - Howard Weil

Michael Bates - D.A. Davidson & Company

James Bellessa - D.A. Davidson & Company

Tim Schneider - Citigroup

Ron Barone - UBS

Operator

At this time, I would like to welcome everyone to the Third Quarter 2010 Earnings Release Conference Call. All lines have been place on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

At this time I would like to turn the call over to the Vice President and CEO of Questar Corporation, Mr. Martin Craven. Sir, you may begin your conference.

Martin Craven

Thank you. I am actually the Chief Financial Officer and I want to welcome everyone who joined us to. This is Questar's third-quarter 2010 earnings conference call. With me today are Ron Jibson, Questar's President and CEO, Jim Livsey, Executive Vice President, and General Manager of Wexpro Company, Allan Bradley, Executive Vice President, and President & CEO of Questar Pipeline Company, and Craig Wagstaff, Vice President and General Manager of Questar Gas Company.

Before we begin, let me remind you that we will be making forward-looking statements during our call today and actual results could differ from our estimates for a variety of reasons that we describe in our quarterly and annual SEC filings. Also this call may reference non-GAAP financial measures. And our earnings release put out yesterday provides reconciliations to these measures.

Yesterday we reported third-quarter earnings results and increased by $0.02 cents our 2010 earnings per share guidance for continuing operations before separation costs. We also initiated 2011 earnings guidance in the range of $1.07 to $1.10 per average diluted share, and released a 2011 capital forecast totaling $342 million.

Questar’s third-quarter earnings from continuing operations totaled $27.7 million, including an additional after-tax charge of $1.7 million or $0.01 cent per diluted share for expenses associated with the June 30, 2010 spin-off of QEP Resources.

This additional expense came about as a result of a reduction in our estimate of the portion of separation costs that will be ultimately deductible for income tax purposes.

Pre-separation cost earnings per share were $0.16 in the quarter, unchanged from the 2009 quarter, reflecting an increase in shares outstanding, primarily associated with share-based compensation.

Consolidated income from continuing operations before separation costs grew 10% in the third quarter compared to last year. Wexpro’s net income rose 8% to $22.2 million in the quarter. This was supported by a year-over-year 6% increase in Wexpro’s investment base.

Questar Pipeline, our interstate natural gas pipeline and storage business, grew net income 16% to $16.3 million in the quarter. Pipeline benefitted from higher transportation contract demand related to completion of an Overthrust compression expansion late last year and from continued strong natural gas liquids volumes and prices in the quarter.

Our retail gas distribution utility, Questar Gas, reported a seasonal loss of $9.1 million in the quarter, $1.0 million or a 12% higher loss than a year ago. For the 12 months-ended September 30, Questar Gas’s net income was down about 1%. This decline in quarterly and 12 month results is primarily a result of increased employee-related costs.

Questar Gas typically generates all of its net income in the first and fourth quarters and reports a net loss in the second and third quarters due to seasonal gas usage.

On the expense front, Questar’s operating and maintenance plus general and administrative expenses totaled $64.0 million in the quarter, compared to $55.4 million in the third quarter of 2009, an almost 16% increase. Higher third-quarter 2010 expense was the result of higher demand side management costs incurred at Questar Gas, which are recovered in rates; higher employee costs and increased operating and maintenance expense.

Questar Pipeline incurred some higher than usual compressor maintenance costs in the quarter and Questar Gas saw a return to more normal levels of labor cost and bad debt expense compared to lower than usual costs recorded in the third-quarter of 2009. Excluding Demand Side Management costs, O&M plus G&A costs rose 13% quarter over prior-year quarter. For the nine months and 12 months-ended September, these costs rose 4% and 3% respectively.

Production and other taxes rose 18% in the quarter. This increase was driven primarily by an increase in the field price of natural gas used to calculate taxes on Wexpro production. These taxes are recovered in Wexpro’s cost of service under the Wexpro Agreement.

Depreciation expense rose 6% in the quarter on net property plant and equipment that also grew 6%.

Cash capital expenditures totaled $71 million in the current quarter and $210 million for the first nine months of 2010. Of the quarterly amount spent, Wexpro accounted for $22 million Questar Pipeline $20 million, and Questar Gas $29 million.

With regard to cash flows; for the first nine months, cash flow from operations before working capital changes totaled $308 million, unchanged from the 2009 result. After working capital changes, investing activities, and dividend requirements, Questar’s cash flow for the first nine months was a negative $193 million. This reflected a $250 million cash contribution made to QEP Resources prior to the spin-off.

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