Questar Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 1.13 | About: Questar Corporation (STR)

Questar (NYSE:STR)

Q1 2013 Earnings Call

May 01, 2013 9:30 am ET


Kevin W. Hadlock - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Ronald W. Jibson - Chairman, Chief Executive Officer, President, Chief Executive Officer of Questar Gas Company, Chief Executive Officer of Wexpro, President of Questar Gas Company and President of Wexpro

Craig C. Wagstaff - Executive Vice President and Chief Operating Officer of Questar Gas

James R. Livsey - Executive Vice President and Chief Operating Officer of Wexpro

R. Allan Bradley - Executive Vice President, Chief Executive Officer Questar Pipeline and President of Questar Pipeline


Michael Bates - D.A. Davidson & Co., Research Division

Timm Schneider - Citigroup Inc, Research Division


Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2013 Earnings Release Conference Call. [Operator Instructions] Thank you. Mr. Kevin Hadlock, you may begin your conference.

Kevin W. Hadlock

Thank you, Lisa. Good morning everyone, and thank you for joining us for Questar's First Quarter 2013 Earnings Conference Call. I am Kevin Hadlock, Questar's Chief Financial Officer. With me today are Ron Jibson, Chairman, President and CEO of Questar Corporation; Jim Livsey, Executive Vice President and COO of Wexpro; Allan Bradley, President and CEO of Questar Pipeline; and Craig Wagstaff, Executive Vice President and COO of Questar Gas.

During this call, we will be referring to our first quarter 2013 earnings presentation that can be found on our website at

Moving to Slide 2. 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 described in our SEC filings.

Also, this call may reference non-GAAP financial measures. Our slides in the appendix of the presentation provides reconciliations to these measures. Let's begin with a review of the first quarter on Slide 4.

Today, we reported first quarter 2013 net income of $72.9 million or $0.41 per diluted share. These results compared to net income of $75.2 million or $0.42 per diluted share in the first quarter of 2012. Adjusted EBITDA was strong in the first quarter totaling $183.8 million, an increase of about 5%, compared to last year's first quarter.

Combined O&M and G&A expense was down 4%, compared to the first quarter of 2012. Capital investment for the first quarter was $84 million, a decrease of about 19%, compared to the prior year.

Turning to Slide 5. All business units performed as expected in the first quarter. Consolidated net income was down $2.3 million or $0.01 per diluted share versus the first quarter of 2012. Corporate and other operations reported a net loss of $6.2 million in the first quarter of 2013, compared to a net loss of $600,000 in the first quarter of 2012. This was driven by higher estimated state income tax due to state tax law changes, higher mark to market valuations under deferred compensation due to the recent rise in Questar's share price and start-up losses at Questar Fueling, which are aggregated at the corporate level.

Moving to Slide 6. Questar Gas, our retail gas distribution utility showed a slight decrease in gross margin to $128 million. Adjusted EBITDA was higher by $2.8 million and net income was up by $2.1 million compared to the same period last year. This increase was due to higher recovery of infrastructure replacement investment and customer growth, partially offset by increase employee related and other cost.

Questar Gas' capital investment in the first quarter was $31.7 million, a decrease of $13.1 million, compared to the first quarter of 2012, driven primarily by the timing of capital investment as construction was delayed due to colder than normal weather in the first quarter this year.

Turning to Slide 7. Wexpro, our cost-of-service natural gas development company grew adjusted EBITDA to $62.4 million, up $7.9 million or about 14%, compared to the same period last year. Net income was up $2 million to $26.3 million, an increase of 8% over the first quarter of 2012. These results were driven largely by a higher 12-month average investment base, which increased $59.1 million. Wexpro invested capital of $37.8 million in the first quarter, down $5.6 million compared to last year's first quarter.

Moving to Slide 8. Revenue at Questar Pipeline, our interstate natural gas pipeline and storage business, was down $1.2 million in the first quarter, primarily due to lower revenues from natural gas liquids. Adjusted EBITDA was also slightly lower.

Questar Pipeline earned net income of $15.8 million, down $800,000 versus the first quarter of 2012. Capital investment in the first quarter was $14.1 million, which was $2 million higher than the prior year.

Moving to Slide 9. With regard to cost, Questar's consolidated operating and maintenance cost in the first quarter were down $8.5 million, compared to the same period last year, due largely to lower Questar Gas demand-side management costs, lower Questar Pipeline compressor maintenance spend and lower Wexpro well work over spend. General and administrative expenses were up $4.7 million, primarily due to higher employee-related costs.

Production and other taxes were $1 million higher, driven by higher Questar Gas property taxes. Depreciation in the first quarter of 2013 was up $4.3 million, compared to the same period last year due to higher capital investment. Consolidated interest expense was essentially flat versus the first quarter of 2012.

Turning to Slide 10. The company continues to generate strong cash flow. For the first quarter of 2013, operating cash flow, before working capital changes, totaled about $152.2 million, a decrease of about 6%, compared to the first quarter of 2012, reflecting lower net income and lower deferred taxes.

At the end of the quarter, Questar had net available liquidity of $305 million, comprised of about $7 million of cash and $298 million of unused commercial paper capacity. Last month, Questar Corporation closed an amended 5-year revolving credit facility. The facility increased from $500 million to $750 million and maturity was extended to April 2018, providing additional financial and operational flexibility. With that, let me turn this time over to Ron to discuss operations and Questar's outlook.

Ronald W. Jibson

Good morning, everyone, and thanks, Kevin for that summary. Each of Questar's business units performed as expected in the first quarter. I'm proud of the accomplishments our employees achieved so far this year and our clear focus on delivering results. Let's review some of these accomplishments beginning on Slide 12.

First, Questar Gas continues to perform very well and is executing in line with our forecast. The infrastructure replacement program, which is currently focused on replacing the high-pressure, recondition pipe in our distribution system increased gross margin by $3.5 million in the first quarter. We are also seeing acceleration in customer growth, which is currently running about 1.5%.

Looking forward, Questar Gas will file a General Rate Case in Utah in the next few months.

One of the primary focuses of the case will be to review the infrastructure-cost-tracking mechanism. We expect the process will take about 270 days, which means that any increase in revenue would primarily affect results after 2013.

I'm also pleased to report that Utah and Wyoming regulators recently approved Wexpro II, allowing us an opportunity to replicate the long-term success of the original Wexpro Agreement by acquiring properties for future cost-of-service gas development. I will provide some more detail on the Wexpro II later in the presentation.

From an operational perspective, Wexpro continues to grow its investment base. Wexpro's ending investment base increased by $34.3 million or 7% over the past 12 months. This increase in investment base is translating into greater production, which benefits Questar Gas customers. Wexpro produced 16.4 Bcfe in the first quarter of 2013, an increase of about 2%, compared to the first quarter last year. With Wexpro's focus on reducing cost, coupled with the recent increase in the natural gas forward curve, we are forecasting purchased gas cost at Questar Gas to be equal to cost of service gas provided by Wexpro in 2013.

Questar Pipeline is performing in line with expectations and is effectively controlling cost. Combined O&M and G&A costs were down 4%, compared to the first quarter of 2012.

In addition, Questar Pipeline received FERC approval to construct and operate 2 system expansion projects, which are important for Questar Pipeline's customers and to meet our growth objectives. Let's turn to Slide 13.

As I mentioned, regulators recently approved Wexpro II. This historic event could prove to be the most significant development for Wexpro since the signing of the original Wexpro Agreement in 1981. The new agreement is modeled on provisions of the original Wexpro Agreement. Wexpro will earn the utilities cost of capital on the upfront investment. All successful post-acquisition development costs will earn Wexpro's after-tax return on its investment base. Wexpro will evaluate and purchase properties at its own risk and submit these properties for inclusion on a case-by-case basis.

Given the current low natural gas price environment, we believe this is the right time to add new assets for future development. We have dedicated resources in Wexpro to review potential property acquisitions in or near the areas where we currently operate. We would not expect that adding properties in Wexpro would materially change our current 5-year drilling plan, but it would accomplish our objective of extending the life of cost-of-service production.

Moving to Slide 14. Let me provide an update on the strategic review of Southern Trails Pipeline, which appears to offer a potential opportunity to convert the pipeline back to crude oil service.

During the first quarter, we received a number of compelling, nonbinding indications of interest in the first round of proposals. Because we put few limitations on bidders and partners, we received a wide range of potential transaction structures and alternatives. We are now in the second round of proposals and expect to reach a decision on the direction of southern trails about mid-year. We continue to manage the project to achieve the greatest value for our shareholders. Turning to

Slide 15. Last year, we formed Questar Fueling to meet the needs of an expanding market for compressed natural gas for transportation. We have begun to see success in our efforts of this. During the first quarter, Questar Fueling announced that it has signed an agreement to build, own and operate a CNG fueling facility in Houston, Texas that will serve up to 200 natural gas powered trucks, operated by Swift Transportation and Central Freight Lines. When completed, this location will be the largest CNG fueling facility in the United States today. These trucks are projected to use about 5 million gallon equivalents of natural gas per year. The facility will also offer public refueling to other CNG-powered vehicles.

In addition to the Houston facility, Questar Fueling has signed 2 new contracts to build similar fueling facilities for a Consumer Products manufacturer in 2 other locations to fuel a CNG-powered delivery fleet. All 3 facilities are expected to be operational later this year. While not expected to make meaningful earnings or cash flow contributions in the early years, we are excited about Questar Fueling's long-term growth potential as the use of natural gas per transportation expands.

Moving to Slide 16. Questar's return on equity continues to be industry-leading. For the 12 months ended March 31, 2013, we delivered a consolidated return on equity of 19.4%. This superior return is supported by Wexpro, which provided an ROE of 20.5%. Questar Pipeline delivered an ROE of 10.6%, which is very near its authorized return. And on a financial basis, Questar Gas' return on equity was 10.1%.

Moving to Slide 17. We have previously stated that 2013 would be a relatively flat earnings year, though we remain confident in our EPS guidance range of $1.12 to $1.20 per diluted share. We plan to continue to invest for long-term growth and expect to maintain an industry competitive growth rate with industry-leading returns.

Wexpro continues to demonstrate an ability to grow its investment base, production and earnings with its existing properties and can now perpetuate that model under the new Wexpro II agreement.

At Questar Gas, strong customer growth and the infrastructure replacement program should support long-term earnings and rate base growth. Questar Pipeline's strategic review is identifying new long-term growth opportunities. Our commitment to customers and shareholders is to continue delivering superior service while profitably investing in and growing our businesses. These growth opportunities should help us maintain a Compound Annual Growth Rate averaging 4% to 6% over the planning horizon.

We are targeting a long-term dividend payout ratio of about 60%, which means we still have room to grow the dividend faster than earnings near term.

Following the completion of our $100 million share repurchase program in 2012, the Board of Directors recently approved an ongoing share repurchase program of up to 1 million shares per year. The focus of this ongoing program is to offset dilution from shares issued in company incentive plans.

Wrapping up on Slide 18. In conclusion, I want to emphasize Questar's unique strengths. Our integrated operations span the entire natural gas value chain from wellhead to burner tip. Our constructive regulatory relationships produce appropriate risk-adjusted returns. Questar has an attractive organic growth outlook and we're excited about the new opportunities for Questar Pipeline, Wexpro II and Questar Fueling.

Finally, our conservative balance sheet supports our earnings growth, dividend and share repurchase program. And with that, we'd be happy to take your questions. And Lisa, we'll turn the time back to you.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Michael Bates.

Michael Bates - D.A. Davidson & Co., Research Division

Can you walk us through your expectations as how the infrastructure tracker will be addressed in the upcoming rate case?

Ronald W. Jibson

You bet. We're looking forward to that. The model has worked exceptionally well in the past and I'll ask Craig Wagstaff who heads up Questar Gas Company to brief you on that as far of our upcoming case.

Craig C. Wagstaff

Yes, Michael. Thanks for the question. As indicated, we've been in a test period on this, a review period on this. All indications are in discussions that we had with regulators to date and have been very positive. Likely we'll certainly pursue extension of this and we're also potentially looking in a slight enhancement of it as well for another infrastructure that we feel is due for replacement as well. So at this point, it appears from the customer perspective, the regulator's perspective and the company's perspective that this is favorable.

Michael Bates - D.A. Davidson & Co., Research Division

Do you see much potential for a pushback as the mechanism is evaluated?

Craig C. Wagstaff

To date right now we have not seen any reason for pushback on that at all, Michael.

Michael Bates - D.A. Davidson & Co., Research Division

Okay. One other thing is as we look at the increase in corporate cost in the quarter, can you walk us through what happened there and give us a feel for what should be recurring as opposed to onetime impact in the quarter?

Ronald W. Jibson

Yes, Michael, we appreciate that question and anticipated that. I'm going to ask Kevin if he will review that with you.

Kevin W. Hadlock

Sure, Michael. Really there are 2 large items. One is related to a state tax issue and the way that we are structured corporately with activities in states like Wyoming that has 0 state tax and how Utah looks at that state tax issue through apportionment factor. Given that we've just moved or planning to move out of an NOL position to become a taxpayer, this issue has been highlighted as we look at paying taxes in the state of Utah going forward. This will be, looks to be a larger item moving from that NOL position. We are evaluating other ways to reduce the tax itself or potentially seek recovery in certain circumstances to reduce that burden, but that was approximately 1/2 of the increase. The other 1/2 is related to the recent move up in Questar's stock price. There are a number of deferred comp plans that look at that stock price. And because of that move, we had to incur some cost related to that mark-to-market. Of course, that's going to be harder to forecast. It's an issue where the stock price moves up, we recognize the larger mark-to-market. But fortunate the state tax issue was a little bit of a catch-up from what we needed to book and we'll be moving forward at a slightly lower rate than what we saw in the catch-up in the first quarter.

Michael Bates - D.A. Davidson & Co., Research Division

All right and then just 2 quick question on Wexpro if I could. Do you have any expectation at this point as to how long it might take to secure commission approval for an intended property purchase?

Ronald W. Jibson

Well, obviously, with the approval of the Wexpro II in both Utah and Wyoming, our endeavor now will be to find those properties. We've been working on those prior to the approval. And maybe Jim, you could give some update on where we're at?

James R. Livsey

Yes, the language in the Wexpro II agreement calls for a 60-day turnaround from the commission once we submit an application for property approval. So we negotiated that to give us a pretty quick decision that way. And so as we bring something forth, we'll work our way through that.

Michael Bates - D.A. Davidson & Co., Research Division

Great. And then finally as I was looking at Wexpro's investment base, it looks like capital attributable to successful development wealth has trended significantly lower over the last 12 months or so. Can you talk to us a little about what's driving that trend?

James R. Livsey

That's a bit of a timing issue. And as we transitioned from 2 rigs to 1 rig in Vermillion, it's just more or less the timing associated with closing the investment. But on an overall basis, we see comparable capital this year and it's just when we end up closing those wells.


[Operator Instructions] Your next question comes from the line of Timm Schneider.

Timm Schneider - Citigroup Inc, Research Division

Quick question on Southern Trails. When I realized you guys are somewhat limited as to what you can say, I'm assuming, but just from a macro perspective, there's been a lot of talk about rail. There's been talk of a competing project. I was just wondering if you guys think there's enough capacity for both these potential projects to coexist and for Southern Trails to potentially coexist with rail.

Ronald W. Jibson

Timm, I appreciate the question and I'll ask Allan Bradley if he'll give you that update.

R. Allan Bradley

Timm, I think the answer is yes to all of your questions quite simply. As Ron said, we've moved into round 2. Round 2 is the final marketing phase and the bidders are actively in the data room. And because of the wide range of proposals, all those issues are being evaluated, which is about all I can say. Remember that market in Southern California is over 1 million barrels a day. Our view is that there is enough interest that certainly the projects that you're referring to are not mutually exclusive. Everything we see suggest that the attributes that Southern Trails has in that market are very strategic, solid and put us on a good path going forward, and we're doing everything we can to manage the project to maintain that 2016 in-service date.

Timm Schneider - Citigroup Inc, Research Division

Got it. And I think initially you guys, as you know, the number of proposals you had was quite large that you were going to narrow it down. Are you guys at a stage yet where you maybe have it narrowed down to 4, 5 different things and then you'll have the final decision by kind of mid-year or there are still maybe 10 proposals up in the air and you're still going through everything?

R. Allan Bradley

Well, I'm not going to comment on the number of proposals. We're still on track. Our original schedule to have a decision, as Ron said in his remarks, by the end of June. The bidders were selected based on the quality of their first-round bids, and quite frankly, their ability to add strategic value to the project going forward.


And there are no further questions in queue. I'll turn the call back to the presenter.

Ronald W. Jibson

Okay, thank you Lisa. And again, let me just thank all of you for being on this morning. We're very excited about some of these growth opportunities and the things that are going on. Obviously, it's nice to be able to tell you that Wexpro II is approved. We've been talking about this for a while. And again, this is something that we feel is going to be tremendous as far the value it will create over time. Again, with Southern Trails Pipeline, things are moving forward very well.

So we're very optimistic about the year. We're looking forward to being with all of you soon. We'll be out on the road a lot in the next month or so. And I know we'll be seeing quite a few of you at the AGA Financial Forum next week. So again, thanks for taking the time this morning, and we look forward to talking to you soon and call us as always if you have any questions. Thank you.


This concludes today's conference call. You may now disconnect.

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