?All Questar business units are off to a good start in 2011,? said Ronald W. Jibson, Questar president and CEO. ?Wexpro and Questar Gas reported record first quarter net income, while Questar Pipeline completed the Overthrust Loop Expansion project on time and under budget. Accordingly, we remain on track to deliver net income of $1.07 - $1.11 per diluted share in 2011, unchanged from prior guidance,? Jibson said.
Other highlights include the following:
Wexpro?s 2011 capital expenditure budget has been increased by $8 million to $108 million, taking advantage of increased efficiencies and reduced finding costs that further reduce the price of cost-of-service gas. Questar?s overall 2011 capital expenditure budget has been increased to $349 million; Questar Pipeline?s completion of the Overthrust Loop Expansion project added 325 Mdth per day of firm-transportation contracts in March 2011, bringing the total net firm-transportation contracts to 4,954 Mdth per day; Questar Gas recognized $2.5 million of increased margin from customer growth and from the infrastructure-tracking mechanism in the first quarter of 2011; and In April 2011, Questar executed a fixed-to-floating interest rate swap on $125 million of its 2.75% fixed-rate notes to take advantage of the current steep yield curve, which could reduce 2011 interest expense by up to $2 million, depending on short-term interest rate fluctuations.Wexpro
Wexpro grew first-quarter 2011 net income to $22.3 million, an increase of 5% from the first quarter of 2010 and generated $50.9 million of EBITDA in the quarter, driven by a higher average investment base. Wexpro earned a 20.3% after-tax return on average investment base for the 12 months ended March 31, 2011, while growing its investment base to $445.3 million, compared to $427.8 million in the prior-year period, a 4% increase. Wexpro continues to deliver about half of Questar Gas Company?s annual gas-supply needs. Wexpro produced 12.7 Bcf of cost-of-service gas during the first quarter of 2011 compared to 13.0 Bcf in the 2010 period. Under a long-standing agreement with the states of Utah and Wyoming, Wexpro recovers its costs and earns an unlevered after-tax return of approximately 20% on its investment base ? the investment in commercial wells and related facilities, reduced for deferred income taxes and accumulated depreciation. The investment base grew in the first quarter of 2011, but the growth was partially offset by increased deferred taxes due to 100% bonus depreciation allowed for income tax purposes. Wexpro should continue to grow its average investment base and net income in 2011 as bonus depreciation helps lower the price of cost-of-service gas. A summary of changes in Wexpro?s investment base is provided below:
Wexpro continues its efforts to reduce finding costs by pursuing drilling efficiencies, including moving two dedicated drilling rigs to its lowest-cost development plays in the Vermillion Basin and Powder Wash. The benefit has been that finding costs of recently completed wells have averaged less than $1 per Mcfe, which increases the competitiveness of cost-of-service gas in the current low-price environment. Resulting efficiency improvements and lower finding costs will enable additional development drilling during 2011. Therefore, Wexpro?s capital expenditure budget has been increased to $108 million from $100 million for 2011.
Questar Pipeline
Questar Pipeline?s first-quarter 2011 net income was $15.3 million, down 11% from $17.2 million in the first quarter of 2010, and generated $43.3 million of EBITDA in the 2011 quarter. Questar Pipeline?s net income decrease was largely driven by higher operating, maintenance, general and administrative costs. Questar Pipeline earned an 11.4% return on average equity for the 12 months ended March 31, 2011. A summary of Questar Pipeline revenues is provided below:
At March 31, 2011, Questar Pipeline held net firm-transportation contracts totaling 4,954 thousand decatherms (Mdth) per day, compared to 4,683 Mdth per day at March 31, 2010, a 6% increase. Transportation revenues increased due to completion of the Overthrust Loop Expansion that was completed on time and under budget and put into service in March 2011. The project added long-term firm-transportation contracts of 325 Mdth per day and currently generates an ROE of about 12.9%. It has additional unsubscribed capacity of 300 Mdth per day that may be utilized when the Ruby Pipeline comes on line later this year, which could result in a higher return.
NGL sales decreased 10% in the first quarter of 2011 due to a new third-party processing plant upstream of Questar Pipeline?s Price, Utah, processing facilities. In the first quarter of 2011, the average price rose 11% from the prior-year quarter to $1.66 per gallon. NGL volumes decreased 18% in the first quarter of 2011 over the same 2010 period. However, increased transportation revenues more than offset the drop in NGL sales. The sum of operating, maintenance, general and administrative expense for the quarter ended March 31, 2011, totaled $0.11 per decatherm transported, compared to $0.09 in the same 2010 period. Questar Pipeline continues to generate strong cash flows that will support corporate-wide capital projects as well as additional dividend growth.
Questar Gas
Questar Gas grew first-quarter 2011 net income to $33.4 million, up 1% from the first quarter of 2010 and generated $71.3 million of EBITDA in the 2011 quarter. Questar Gas earned a 10.2% return on average equity for the 12 months ended March 31, 2011. Changes in Questar Gas?s margin (revenues less cost of gas sold) are summarized in the following table:
As of March 31, 2011, Questar Gas served 914,054 customers, an increase of more than 10,000 customers, or 1.1%, from the same time last year. Customer growth and an increase in rates associated with the company?s revenue-decoupling mechanism contributed to higher margins in the 2011 period. Changes in margin from demand-side-management (DSM) cost-recovery revenues are offset by equivalent changes in the program?s expenses. Operating, maintenance, general and administrative expenses, excluding DSM costs, were $141 per customer for the 12 months ended March 31, 2011, compared to $133 per customer in the prior-year period.
On April 8, 2010, the Public Service Commission of Utah approved a settlement in Questar Gas?s Utah general rate case that indefinitely extended the existing revenue-decoupling mechanism and authorized an increase in the utility?s allowed return on equity from 10% to 10.35%. The stipulation increased customer rates by $5 million annually and approved an infrastructure-cost-tracking mechanism that allows the company to place into rate base and earn on capital expenditures for a multi-year pipeline-replacement program once the new facilities are in service.
2011 EPS guidance affirmed
Questar management estimates that 2011 net income could range between $1.07 and $1.11 per diluted share, unchanged from prior guidance, despite anticipated increases in interest expense, higher deferred taxes and lower NGL revenues. Even with the impact of bonus depreciation, Wexpro expects its average investment base and earnings to grow. Questar Pipeline?s growing transportation capacity could offset the impact of expected lower NGL revenues and generate strong cash flows that will support Questar?s capital requirements and growing dividend. Questar Gas?s multi-year pipeline-replacement program and strong customer growth will support growing rate base and returns. Finally, higher interest expense in 2011 will be mitigated by the recently executed $125 million fixed-to-floating interest rate swap that allows the company to convert a portion of its fixed rate interest payments to today?s historically low short-term interest rates.
2011 earnings teleconference
Questar management will discuss first-quarter 2011 results from continuing operations and the outlook for the remainder of 2011 in a conference call with investors Wednesday, April 27, beginning at 9:30 a.m. ET. The call can be accessed at www.questar.com.
About Questar Corporation
Questar is a Rockies-based integrated natural gas company with an enterprise value of about $4.4 billion, operating through three principal subsidiaries:
Wexpro develops and produces natural gas on behalf of Questar Gas; Questar Pipeline operates interstate natural gas pipelines and storage facilities in the western U.S. and provides other energy services; and Questar Gas provides retail natural gas distribution in Utah, Wyoming and Idaho. Forward-Looking StatementsThis document may contain or incorporate by reference information that includes or is based upon "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. Any or all forward-looking statements may turn out to be wrong. These statements are based on current expectations and the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. Actual results could differ materially from those expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to the following:
general economic conditions, including the performance of financial markets and interest rates; changes in industry trends; changes in laws or regulations; and other factors, most of which are beyond Questar?s control.Questar undertakes no obligation to publicly correct or update the forward-looking statements in this document, in other documents, or on the website to reflect future events or circumstances. All such statements are expressly qualified by this cautionary statement.
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