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Questar Corporation (NYSE:STR)

Q2 2014 Earnings Conference Call

July 31, 2014 9:30 AM ET

Executives

Ronald W. Jibson - Chairman, President and Chief Executive Officer

Kevin W. Hadlock – Chief Financial Officer and Executive Vice President

R. Allan Bradley – Executive Vice President

Craig C. Wagstaff – Executive Vice President

Analysts

Mike Hacke – Barclays Capital, Inc.

Operator

Good morning. My name is Steve, and I will be your conference operator today. At this time I would like to welcome everyone to the Questar Corporation’s Second Quarter 2014 Earnings 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.

Mr. Kevin Hadlock, you may begin.

Kevin W. Hadlock

Thank you, Steve. Good morning everyone and thank you for joining us for Questar’s second quarter 2014 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 Chief Operating Officer of Questar Gas. During this call, we will be referring to our second quarter 2014 earnings presentation that can be found on our website at www.questar.com.

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 describe in our SEC filings. Also, this call references non-GAAP financial measures. Our slides in the Appendix of the presentation provide reconciliations to these measures.

Let’s begin with a review of our second quarter on Slide 4. Yesterday we reported second quarter 2014 net income of $40.3 million, up 2% compared to net income of $39.4 million during the same period in 2013. On an earnings per share basis, we reported $0.23 per diluted share, an increase of 5% compared to $0.22 per diluted share in the second quarter of 2013.

Adjusted EBITDA was strong in the second quarter of 2014, totaling $137.3 million, an increase of 12% compared to the same period in 2013. Excluding demand-side management costs, combined O&M and G&A expense remained flat compared to the same period last year. Capital investment for the first six months of 2014 was $134.4 million compared to $192.9 million in the first six months of 2013.

Turning to Slide 5, Questar performed well coming off a strong first quarter. For the second quarter of 2014, consolidated net income was $40.3 million, which represents a 2% increase over the same period last year. Earnings in the second quarter of 2014 were up 5% to $0.23 per diluted share compared to $0.22 per diluted share in the second quarter of 2013.

Moving to Slide 6, Questar Gas, our local gas distribution utility, showed a $1.1 million increase in gross margin during the second quarter of 2014 to $57.8 million. Adjusted EBITDA was lower by $800,000. Questar Gas recognized a seasonal net loss of $3.3 million, compared to a net loss of $1.2 million in the same period last year. The increase in the loss was due primarily to higher interest expense and higher depreciation from capital spending.

Questar Gas’s capital investment in the second quarter was $38.9 million, a decrease of $3.5 million compared to the second quarter of 2013. Turning to Slide 7, Wexpro, our natural gas development and production company, grew adjusted EBITDA to $76.4 million in the second quarter of 2014, up $13.4 million or 21% compared to the same period in 2013.

Net income was up $1.7 million to $30.1 million, an increase of 6% over the second quarter of 2013. These results reflect the addition of the Trail field working interest in the Vermillion Basin and a higher 12-month average investment base that were primarily offset by lower oil sales. The 12-month average investment base grew by $82.6 million to $614.1 million. Wexpro invested capital of $12.5 million in the second quarter of 2014, which was $33.3 million dollars lower than the same period last year due to lower drilling activity.

Moving to Slide 8, revenue at Questar Pipeline, our interstate gas pipeline and storage business, was up $1.1 million in the second quarter of 2014 due to renegotiated processing agreements. During the quarter, Questar Pipeline delivered solid income of $15.7 million, up $1.2 million or 8% versus the second quarter of 2013.

Capital investment at Questar Pipeline in the second quarter of 2014 was $8.7 million, which was $9.5 million lower than the prior year. Moving to Slide 9, with regard to costs, Questar’s adjusted operating and maintenance costs in the second quarter of 2014 were up $1.7 million compared to the same period last year due to higher integrity management and contracted services expense.

General and administrative expenses were down $1.5 million compared to the second quarter of 2013, primarily due to lower employee-related expenses. Production and other taxes were $4 million higher, driven by higher natural gas prices and larger production volumes at Wexpro.

Depreciation in the second quarter of 2014 was up $9.3 million compared to the same period last year due to higher balances of property, plant, and equipment. Consolidated interest expense was $1.5 million higher due to the replacement of interim low-cost, short-term borrowings with long-term debt.

Turning to Slide 10, for the first six months of 2014, the company generated operating cash flow before working capital changes of $246 million, a decrease of 10% compared to the first six months of 2013. At the end of the second quarter, Questar had net available liquidity of $573 million in unused commercial paper capacity.

While we did not repurchase any Questar Corporation common stock during the first six months of 2014, we plan to be opportunistic in repurchasing shares under our existing Board authorization to buy up to 1 million shares per year.

With that, let me turn the time over to Ron to discuss operations and Questar’s outlook.

Ronald W. Jibson

Good morning everyone, and thanks Kevin for that summary. On the heels of our strong first quarter, I am pleased to report that Questar's earnings per share were again up for the second quarter. In addition to growing earnings, we made important progress on several key initiatives. Each of Questar's business units performed very well in the second quarter and delivered results consistent with our 2014 earnings guidance. I am proud of the accomplishments that our employees have achieved so far this year and their clear focus on controlling costs and delivering results.

Let’s review highlights from the second quarter beginning on Slide 12. Questar Gas continues to successfully advance key initiatives and execute in line with our forecast. Importantly, we are seeing strong customer growth, which continues at an annual rate of 1.6%, amounting to over 15,000 net new customers over the past 12 months. I am also pleased to report that, during the second quarter, Questar Gas reached an agreement with Eagle Mountain City to purchase its natural gas system.

Additionally, Questar Gas filed a general rate case in Wyoming. We are requesting an increase in revenues of $1.9 million and an authorized return on equity of 10.05%. Hearings are expected to begin in the fourth quarter of 2014. At Wexpro, we see the full benefit in the second quarter of the Trail acquisition completed last year.

With the approval of the $103.7 million Trail acquisition for inclusion under the Wexpro II agreement, year-over-year investment base increased by $127.6 million. This new property is now producing cost-of-service natural gas for the benefit of our Questar Gas customers.

Questar Pipeline continues to control costs, with combined operating and maintenance and general and administrative costs down 2% compared to the second quarter of 2013. Questar Fueling is expanding its nationwide footprint to design, build, and manage compressed natural gas fueling stations. During the second quarter, Questar Fueling commenced construction on three new compressed natural gas stations: two in Texas and one in Kansas. We continue to have a healthy backlog of projects under development around the nation.

Let’s turn to Slide 13, Last month Questar Gas reached an agreement with Eagle Mountain City to purchase the municipality’s natural gas system. Eagle Mountain is located southwest of Salt Lake City and is one of the largest cities geographically in the state of Utah.

While the municipal natural gas system currently serves about 6,000 homes, the city is one of Utah’s fastest-growing areas, with estimated annual population growth above 4%. Eagle Mountain’s natural gas system is about 15 years old and consists of six miles of high-pressure natural gas pipeline and 120 miles of intermediate high-pressure mains and service lines. The acquisition is contingent on meeting the purchase-agreement terms and obtaining final approvals. We expect the transaction to be completed by the beginning of 2015.

Moving to Slide 14, in 2012, we formed Questar Fueling to meet the needs of an expanding market for compressed natural gas for transportation. The market continues to develop and provide opportunities for us to invest in the growing demand for low-cost transportation fuel.

Our strategic focus has been on meeting the fueling requirements of medium and heavy duty trucking fleet operators in high-traffic corridors. We believe this strategy will allow us to prudently and profitably grow this emerging business. With this strategy, Questar Fueling is evolving into a leader in the development of CNG-fueling stations for trucking fleet operators and motorists who drive natural gas vehicles. Facilities in Houston, Texas, and Topeka, Kansas, are currently operating.

During the second quarter of 2014, Questar Fueling began construction on three new fueling sites, two in the Texas cities of Dallas and DeSoto, and one in Kansas City, Kansas. Additional locations are in various stages of development in the states of Arizona, California, Connecticut, Nevada, Texas and Utah.

Questar continues to see significant long-term growth potential for the use of natural gas for transportation and expects to spend about $25 million annually to develop high-capacity CNG fueling facilities.

Turning to Slide 15, Questar’s return on equity continues to be industry-leading. For the 12-months ended June 30, 2014, we delivered an adjusted consolidated return on equity of 18.7%, excluding the impairment charge for the eastern segment of Southern Trails Pipeline. This superior return is supported by Wexpro, which provided an ROE of 18.7%.

On a financial basis, Questar Gas delivered an ROE of 9.9%. Questar Pipeline’s adjusted return on equity was 10.2%, excluding the impairment. Moving to Slide 16, with a strong first half of 2014 behind us, we have increasing confidence in our ability to achieve our 2014 EPS guidance range of $1.18 to $1.28 per share.

Questar Gas’ customer growth and the enhanced infrastructure-replacement program support long-term earnings and rate base growth at the utility. Wexpro is actively looking to acquire new natural gas properties, to grow its investment base, and to replicate the Wexpro model in other areas.

Questar Pipeline continues to develop projects, like Inland California Express, to maximize the benefit of its business for shareholders. And, Questar Fueling is on its way to becoming a major player in the developing market of CNG fueling for trucking fleet operators throughout the United States.

We continue to invest for the long-term with the goals of providing superior service to our customers and strong growth with industry-leading returns for our shareholders. These growth opportunities should help us maintain a compound annual earnings growth rate averaging 4% to 6% over the planning horizon. We will update you on our performance and earnings guidance throughout the year.

We understand the importance of maintaining a competitive dividend and are committed to continuing a healthy dividend growth rate. We are near our target dividend payout ratio of about 60%. Going forward, we expect dividends to grow in line with earnings over the coming years.

Concluding on Slide 17. I want to emphasize Questar’s unique strengths. Our integrated operations span the entire natural gas value chain from “well head to burner tip.” Our constructive regulatory relationships produce appropriate risk-adjusted returns. Questar has an attractive growth outlook, and we’re excited about the new opportunities for Questar Gas, Wexpro, Questar Pipeline, and Questar Fueling.

Finally, our conservative balance sheet supports our earnings growth and long-term strategic plan. While we are pleased with our year-to-date performance, our goal is to consistently outperform. Competitive and consistent growth in earnings, dividends and especially Questar’s share price will be the ultimate measure of our success.

And with that, we would be happy to take your questions. Steve.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Hacke with Barclays Capital, Inc. Your line is open.

Mike Hacke – Barclays Capital, Inc.

Good morning, guys.

Ronald W. Jibson

Good morning, Mike.

Mike Hacke – Barclays Capital, Inc.

So, two quick questions for you. On the capital spending front, why was the $40 million of Pipeline CapEx delayed and pushed out to next year?

Ronald W. Jibson

We'll ask Allan Bradley, head of our pipeline business.

R. Allan Bradley

Happy to, Mike. Two projects specifically were the reason for the delay. Obviously Inland California Express, our 50-50 joint venture with Spectra, is a big piece of that. When we put the budget together, we were targeting a 2016 in-service date, and that project has slipped as have the attendant expenditures that we are going to ramp up later this year. So we hope to, as we said in our earnings release, secure a site and start the permitting process by year-end.

And as a result, we're just not going to hit the start of construction expenditures that were in that budget. And the other one was an LNG liquefier, we were working on in Price, Utah, and that is currently in the hands of the customer as we negotiate an agreement to solidify the cost of service and long-term arrangements around that plant and it's taken a little longer than we had expected as well. So we are optimistic about the projects, the expenditures will be pushed out a year likely in our 2015 budget.

Mike Hacke – Barclays Capital, Inc.

Okay, great. And then with the Eagle Mountain City acquisition, how many people live on or near the main that you think you guys can convert? I think there's probably some 20,000 additional households in the area that aren't being serviced by you guys right now?

Ronald W. Jibson

Yeah. I'm not aware of that. I think, again, with the initial city, there's about 6000 homes that we'll be serving. Craig, any – as far as let me just say before Craig jumps in here, that area is, like I mentioned, one of fastest-growing areas of the state. There's a lot of land around Eagle Mountain that can be developed in the future; but as far as converting other homes, there aren't a lot of additional homes right there ready to convert. Craig, do you have anything additional?

Craig C. Wagstaff

No.

Mike Hacke – Barclays Capital, Inc.

I think I might have misspoke when I said 25,000 homes, I think it was a population of 25,000. Does the 6,000 homes cover substantially all of the population or do you think that there's incremental customers that you can capture via conversion?

Ronald W. Jibson

You're correct. And it is 25,000 population out there and it is 6,000 homes. And a high, high percentage, nearly 100% of the homes are natural gas out there. So it’s the 6,000 homes that we're referring to.

Mike Hacke – Barclays Capital, Inc.

Okay, great. Thank you. That’s it for me.

Ronald W. Jibson

Thank you, Mike.

Operator

(Operator Instructions) There are no further questions at this time.

Ronald W. Jibson

All right. Again, thank you very much for joining us this morning. We always appreciate the opportunity to visit with you and we'll look forward to one-on-one visits over the next several months as we get out in your areas. Thank you again and have a great morning.

Operator

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

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Source: Questar's (STR) CEO Ronald W. Jibson On Q2 2014 Results - Earnings Call Transcript

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