General | Quarterly / Earnings Reports
Questar's Wexpro Deal, Southern Trails Project Headline Q2
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Questar Corporation reported second-quarter net income of $39.4 million, or $0.22 per diluted share compared to second-quarter 2012 net income of $39.2 million, or $0.22 per diluted share.
Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) for the quarter were up 1% to $122.7 million compared to $121.2 million in the year-ago period. Return on average common equity (ROE) was 19.5% for the 12 months ended June 30, 2013, compared to 19.6% for the same period in 2012.
Ronald W. Jibson, Questar chairman, president and CEO, commented: "I am pleased to report that Questar's performance for the quarter was on pace with last year's second quarter performance and in line with our 2013 earnings guidance. Questar Gas posted a small seasonal net loss, typical for the second quarter and slightly lower than last year's loss for the period. Wexpro posted a 10% increase in net income while Questar Pipeline's income was down 10% compared to the second quarter of 2012. Adjusted EBITDA in the second quarter of 2013 was about $123 million, up 1% from the same quarter in 2012.
"I am also pleased to confirm progress on two of our major 2013 initiatives. First, Wexpro has entered into a definitive agreement to acquire additional working interest within the Vermillion Basin, where we currently develop low-cost reserves for our utility customers. And second, Questar Pipeline is moving forward on the Southern Trails pipeline project to obtain the greatest value from the pipeline for shareholders. Both initiatives offer significant growth opportunities for Questar."
Recent highlights include:
- Questar Gas invested about $16 million in its infrastructure-replacement program in the quarter and $26 million in the first half of 2013.
- Questar Gas's customer growth rate increased to 1.5% over the past year, up from 1.2% a year ago.
- Questar Gas filed a general rate case with the Utah Public Service Commission on July 1st, requesting a modest revenue increase and continuation of its currently authorized ROE.
- Questar Gas priced $150 million of 30-year and 35-year maturity private placement notes to be issued on a delayed-draw basis in December 2013 at an average coupon rate of 4.80%.
- Wexpro's investment base grew by 6% over the past 12 months to $546.9 million, up from $517.7 million last year.
- Wexpro announced a $106 million acquisition of natural gas properties in western Wyoming and will submit those properties to Utah and Wyoming regulators for inclusion under the recently approved Wexpro II Agreement.
- Questar Pipeline completed the second phase of the strategic review of its Southern Trails pipeline assets resulting in new development options for the eastern and western segments of the pipeline.
- Questar Fueling continues to develop CNG refueling stations in Houston (Texas), Topeka (Kan.) and Killingly (Conn.), with the Houston location expected to be operational by September 2013.
Questar Gas
Questar Gas reported a seasonal net loss of $1.2 million, typical for the second quarter, and generated $15.9 million of Adjusted EBITDA compared to a net loss of $2.3 million and Adjusted EBITDA of $14.5 million for the 2012 quarter. On a financial basis, Questar Gas earned a 10.5% ROE for the 12 months ended June 30, 2013. Questar Gas, because of the seasonal nature of its business, usually reports losses in the second and third quarters of each year.
As of June 30, Questar Gas served over 938,300 customers, an increase of over 14,000 customers, or 1.5% over the past 12 months. This compares to 1.2% growth the prior year. Customer growth has continued to accelerate over the past few years. New customers increased margin by about $0.7 million for the quarter. Changes in margin from demand-side-management (DSM) cost-recovery revenues are offset by equivalent changes in the program's expenses. Combined operating and maintenance (O&M) and general and administrative (G&A) expenses, excluding DSM costs, were up 4% to about $74 per customer for the six months ended June 30, 2013, compared to $71 a year earlier. The increase was primarily due to higher employee, corporate allocated and bad-debt costs.
Questar Gas's ongoing multi-year infrastructure-upgrade program continues with its focus now shifted to replacing older high-pressure large-diameter steel pipe in less populated areas, having moved from the more urban focus of recent years. In the first half of 2013, Questar Gas invested about $25.5 million under this program and expects to spend about $55 million for all of 2013 and a similar amount annually for several more years. Expenditures under this program are recovered under an infrastructure-cost-tracking mechanism approved by Utah regulators in 2010, enabling timely inclusion in rate base. Questar Gas recognized about $1.1 million of increased margin under this tracker mechanism in the second quarter and $4.6 million in the first half of 2013. This cost-tracking mechanism will be reviewed by Utah regulators as part of the general rate case filed with the Utah Public Service Commission on July 1st. In the rate case filing, Questar Gas requested a $19 million increase in revenues and a continuation of its 10.35% authorized return on equity. A decision on the case is expected in the first quarter of 2014.
Wexpro
Wexpro grew second-quarter 2013 net income 10% to $28.4 million, compared to $25.8 million in the second quarter of 2012. Adjusted EBITDA grew 6% to $63.0 million in the current quarter versus $59.6 million a year earlier. Wexpro earned a 19.9% after-tax return on its average investment base for the 12 months ended June 30, 2013. Wexpro's investment base at quarter end was $546.9 million, 6% higher than the 2012 quarter end. Revenues from oil and natural gas liquids (NGL) sales increased 4% in the quarter compared to the same period in 2012. Under the terms of the 1981 Wexpro Agreement between Wexpro and the states of Utah and Wyoming, Wexpro recovers its costs and earns an unlevered after-tax return of approximately 20% on its average investment base. Oil and NGL revenues are shared with Questar Gas customers. Wexpro's efficient operations have resulted in low finding costs and a cost-of-service gas price on new production that is competitive with market prices. Wexpro's natural gas production provides more than half of the annual gas-supply requirements of Questar Gas.
Wexpro Acquisition
This week, Questar announced that its Wexpro subsidiary entered into a definitive agreement to acquire an additional working interest in the Trail Unit of the Vermillion Basin in western Wyoming for about $106 million. This is essentially a "bolt-on" to Wexpro's current assets in the Trail Unit. Wexpro estimates that the acquisition could add about 118 billion cubic feet equivalent (Bcfe) of net proved natural gas reserves, about 45% of which (53 Bcfe) are proved-developed. Proved plus probable and possible reserves attributable to the properties are estimated at 195 Bcfe. In addition to 78 producing wells, Wexpro identified 172 additional well locations for future development. Under the terms of the recently signed Wexpro II Agreement, all Wexpro property acquisitions within the footprint of the original Wexpro Agreement assets must be offered to the public service commissions of Utah and Wyoming for inclusion as "cost-of-service" properties benefitting Questar's utility customers.
Jibson adds: "We are excited to add this acquisition to our portfolio. It is in the heart of our operations and adds value to one of our premier assets. This purchase offers the potential to significantly add to the low-cost gas supplies available to our Utah and Wyoming customers for years to come.” The transaction is expected to close by the end of August."
Questar Pipeline
Questar Pipeline reported second-quarter 2013 net income of $14.5 million, down 10% from $16.1 million a year ago. Questar Pipeline generated $43.5 million of Adjusted EBITDA in the quarter and earned a 10.3% ROE for the 12 months ended June 30, 2013. Lower NGL revenue in the quarter was the most significant contributor to the drop in net income. NGL revenues were down 49% in the second quarter of 2013 compared to the prior-year period, reflecting both lower NGL sales volumes and lower prices. Depreciation and amortization expenses were up 4% in the quarter, reflecting higher property, plant and equipment levels compared to the 2012 period. Combined O&M and G&A costs were down 9% for the recent quarter when compared to the same quarter in 2012 reflecting lower maintenance and processing costs.
At June 30, Questar Pipeline held net firm-transportation contracts totaling 5,028 thousand decatherms (Mdth) per day, up 1% from 4,969 Mdth per day at June 30, 2012. The decrease in transportation revenues for the second quarter of 2013 was driven by a renewed contract on Southern Trails Pipeline at a reduced rate and the transition to summer volumes for Questar Gas's seasonal transportation contract. New contracts from a Uinta Basin liquid project partially offset these decreases.
Questar Pipeline Announces Southern Trails Pipeline Strategy
Questar Pipeline has entered into an agreement with an affiliate of Spectra Energy Corp. to evaluate the potential conversion of the western portion of the Southern Trails pipeline to crude oil service. If market conditions and economics enable the project to move forward, the project could be in service by late 2015.
Additionally, on Southern Trails' eastern end, Questar Pipeline is in confidential discussions with undisclosed parties, one of whom has signed a letter of intent to purchase or contract for the full capacity of Southern Trails' eastern segment beginning in 2016. Discussions with those parties are continuing.
Corporate and other
Corporate and other operations reported a net loss of $2.3 million in the second quarter of 2013, compared to a net loss of $0.4 million in the second quarter of 2012. The variance was driven primarily by higher estimated state income taxes due to state tax law changes, higher mark-to-market valuations on deferred compensation and start-up costs at Questar Fueling Company.
Outlook
Questar management maintained its 2013 guidance range for earnings of $1.12 to $1.20 per diluted share, unchanged from previously provided guidance.
Jibson concluded: "While pleased that Questar is performing in line with our expectations and guidance, our goal is to continue to find ways to exceed expectations, yours and ours. With the Wexpro acquisition, Southern Trails developments, Questar Fueling and other opportunities, we hope to do exactly that. We want to be the stock that you can count on to provide steady growth in earnings, share price and dividends at appropriate risk."