Questar : Reports Second-Quarter 2014 Earnings of $40.3 Million

Questar Corporation (NYSE:STR) reported second-quarter 2014 net income of $40.3 million, or $0.23 per diluted share compared to second-quarter 2013 net income of $39.4 million, or $0.22 per diluted share. Earnings per diluted share for the quarter were up 5% compared to 2013. Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) for the quarter were up 12% to $137.3 million compared to $122.7 million in the year-ago period. Return on average common equity (ROE) was 18.7% for the 12 months ended June 30, 2014, excluding a $52.4 million after-tax impairment charge taken in the third quarter of 2013. Including the impairment charge, Questar’s ROE was 14.7%.

^(a) Management defines Adjusted EBITDA as net income (loss) before gains and losses from asset sales, interest expense, depreciation, depletion and amortization, abandonments and impairments, other special items and income taxes. See computations on the last page of the attached financial statements.

“On the heels of our strong first quarter, I am pleased to report that Questar's earnings per share were up for the second quarter,” said Ronald W. Jibson, Questar chairman, president and CEO. “Questar Gas posted a small seasonal net loss, typical for the second quarter. Wexpro posted a 6% increase in net income, while Questar Pipeline's income was up 8% compared to the second quarter of 2013. Adjusted EBITDA in the second quarter of 2014 also rose significantly. For the first six months of 2014, consolidated earnings per share and Adjusted EBITDA were up 11% and 12%, respectively, compared to last year. Given our strong year-to-date performance, we reiterate our confidence in our current 2014 earnings guidance range of $1.18 to $1.28 per diluted share.”

Recent highlights include:

• Questar Gas reached an agreement, subject to final approval, to acquire the high-growth, 6,000-customer municipal gas distribution system from Eagle Mountain City, located southwest of Salt Lake City.
• Questar Gas's customer growth rate was 1.6%, amounting to nearly 15,500 net new customers over the past 12 months.
• Questar Gas invested $19.3 million in its infrastructure-replacement program in the quarter and $32.9 million for the first six months of 2014, up 24% and 29%, respectively, over the same periods in 2013.
• Wexpro's investment base grew by 23% over the past 12 months to $674.5 million, up from $546.9 million last year. The increase included $103.7 million associated with the Trail acquisition.
• Wexpro earned an 18.8% return on its average investment base for the 12 months ended June 30, 2014.
• Questar Pipeline’s and Questar Gas’s Lake Side 2 expansion project went into service April 1, 2014.
• Questar Fueling commenced construction on three new compressed natural gas (CNG) stations, including two in Dallas, Texas, and one in Kansas City, Kansas, in the second quarter.

Questar Gas

Questar Gas reported a seasonal net loss of $3.3 million and generated $15.1 million of Adjusted EBITDA compared to a net loss of $1.2 million and Adjusted EBITDA of $15.9 million for the 2013 quarter. On a financial basis, Questar Gas earned a 9.9% ROE for the 12 months ended June 30, 2014. Questar Gas, because of the seasonal nature of its business, usually reports losses in the second and third quarter each year. Changes in Questar Gas margin (revenues less cost of gas sold) are summarized in the following table:

As of June 30, 2014, Questar Gas served over 953,800 customers, an increase of nearly 15,500 customers, or 1.6%, compared to 1.5% growth a year ago. New customers increased margin by $0.7 million for the quarter. Transportation service growth increased margin by $1.4 million from the addition of new transportation customers and higher demand at Rocky Mountain Power’s new and existing Lake Side power-generation facilities. The largest upward change in margin was from demand-side-management (DSM) cost-recovery revenues, which 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 down 3% to $35 per customer for the three months ended June 30, 2014, compared to $36 a year earlier, primarily due to higher customer growth and continuing cost-containment efforts.

Questar Gas's safety and reliability-driven infrastructure-upgrade program continues to replace older large-diameter high-pressure pipe. Expenditures under this program are recovered via an infrastructure-cost-tracking mechanism that allows the investment in completed projects to be placed into rate base and earned on without going through a general rate case. In February of this year, the Public Service Commission of Utah issued an order that extended and enhanced the infrastructure-replacement-tracker program to include intermediate high-pressure belt mains. The recent order reset the recovery of costs under the infrastructure-upgrade program, resulting in $2.3 million lower margin in the quarter compared to the year-ago quarter. Going forward, the order allows recovery of up to $65 million annually, increased from $55 million. Questar Gas expects to spend the full $65 million allowed under the tracker in 2014, and to maintain annual replacement spending near that level for the next several years. The general rate case order, effective March 1, also authorized an allowed ROE of 9.85% and provided an annual revenue increase of $7.6 million, or 2.6%.

On May 1, 2014, Questar Gas filed a general rate case in Wyoming 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. Any resulting rate changes would be effective March 1, 2015.

Questar Gas agrees to acquire municipal gas distribution assets

In June, Questar Gas reached an agreement with Eagle Mountain City to purchase the municipality’s natural gas system, contingent on meeting the purchase-agreement terms and final approvals. The gas system is about 15 years old and consists of six miles of steel high-pressure pipeline and 120 miles of intermediate high-pressure main lines and service lines. The purchase is expected to be completed by the beginning of 2015.

“We’re pleased to have this agreement with Eagle Mountain,” said Craig Wagstaff, Questar Gas executive vice president and COO. “Located southwest of Salt Lake City, this municipal natural gas system serves more than 6,000 homes in one of Utah’s fastest-growing areas. The purchase will provide Questar Gas with operational advantages and a competitive return on our investment.”

Wexpro

Wexpro's second-quarter 2014 net income rose 6% to $30.1 million, compared to $28.4 million in the second quarter of 2013. Adjusted EBITDA grew 21% to $76.4 million in the current quarter versus $63.0 million last year. Wexpro's total investment base at quarter-end was $674.5 million, 23% higher than the year-ago quarter-end. The increase was due to investment in commercial wells and the addition of the Trail acquisition properties to the investment base in the first quarter of 2014. Wexpro earned an 18.8% after-tax return on its average total investment base for the 12 months ended June 30, 2014. This included a 19.6% return on the original Wexpro investment base and an 8.4% return on the recently acquired assets in the Wexpro II investment base. The 1981 Wexpro Agreement with the states of Utah and Wyoming allows Wexpro to recover its costs and earn an unlevered after-tax return of about 20% on its average investment base. The Wexpro II Agreement, approved in 2013, allows Wexpro to make acquisitions of energy-development properties and earn the utility’s cost of capital, currently 8.4%, on the cost of approved acquisitions. Subsequent successful development spending on those acquisitions will earn the same 20% return as under the original 1981 Wexpro Agreement.

Wexpro produced 17.7 Bcf of cost-of-service gas for Questar Gas in the second quarter of 2014, up 20% from 14.8 Bcf in the year-ago quarter. Cost-of-service production for the year-to-date and trailing 12 months ended June 30, 2014, amounted to 36.2 Bcf and 65.2 Bcf, respectively, compared to 30.2 Bcf and 58.4 Bcf over the same periods in 2013. Wexpro's natural gas production currently provides over 60% of the utility's annual gas-supply requirements. Revenues from oil and natural gas liquids (NGL) sales decreased 13% in the quarter compared to the same period in 2013 due to lower production volumes. These revenues are shared with Questar Gas customers after production expenses and the allowed returns are covered. A summary of changes in Wexpro's investment base is provided below:

Wexpro's revenues were up 24% in the second quarter of 2014, reflecting the impact of the Trail acquisition. Operating and maintenance expenses were down 3% in the second quarter of 2014, primarily due to lower water-disposal and workover expenses. Other operating expenses, such as production taxes and depreciation, were higher due to the addition of the Trail assets. In the second quarter, Wexpro also recorded a $2 million abandonment and impairment charge for its share of the remaining investment in the Brady field, which has reached the end of its productive life.

Wexpro continues to look for opportunities to acquire additional development properties that fit the cost-of-service model in the Wexpro II Agreement. Wexpro plans to spend an average of $50 million annually on acquisitions that can provide long-lived and low-cost natural gas production. The opportunity for Wexpro to acquire and develop such properties located close to Questar’s utility markets can provide significant long-term benefits to both customers and shareholders. Future acquisitions and their subsequent development as cost-of-service properties will help insure the long-term growth of Wexpro’s investment base and earnings beyond the productive life of the company’s current properties.

Questar Pipeline

Questar Pipeline’s second-quarter 2014 net income increased 8% to $15.7 million, compared to $14.5 million a year ago. Questar Pipeline generated $45.0 million of Adjusted EBITDA in the second quarter and earned a 10.2% ROE for the 12 months ended June 30, 2014, excluding the $52.4 million after-tax non-cash impairment charge from 2013. The growth in net income was primarily due to lower employee-related costs and improved earnings from renegotiated processing agreements. Depreciation and amortization expenses were down due to lower property, plant and equipment levels compared to a year ago. Questar Pipeline's combined O&M and G&A costs were down 2% for the recent quarter when compared to the same quarter in 2013. A summary of changes in Questar Pipeline revenues is provided below:

At June 30, 2014, Questar Pipeline held net firm-transportation contracts totaling 5,060 thousand decatherms (Mdth) per day, up slightly from 5,028 Mdth per day at June 30, 2013. Revenues were up about 2% for the quarter and included the addition of transportation revenues from the Lake Side 2 expansion project. Storage, NGL sales, and energy services revenues remained steady in the second quarter of 2014 compared to the same period in 2013. Other revenues increased by $0.9 million, primarily reflecting receipt of incentive payments under revised processing agreements to manage gas interchangeability on Questar Pipeline’s system.

Questar Pipeline’s Inland California Express project update

Questar Pipeline and its partner, a unit of Spectra Energy, are continuing development work on the Inland California Express (ICE) project to potentially recommission the western segment of Southern Trails Pipeline to transport crude oil. The western segment extends 96 miles from Whitewater to Long Beach, California. The project would include the development of a rail terminal to offload up to 120,000 barrels per day of crude into the pipeline for delivery to refineries in Southern California. Preliminary environmental survey work has been completed on the existing pipeline corridor, preliminary engineering is underway on preferred unloading terminal sites and city, county, state and federal agency meetings have been conducted. The partners continue to market the project and are currently working with refiners to outline the general framework for potential service agreements. It is anticipated that over the next several months a preferred unloading terminal site will be selected, preliminary engineering will be complete and conditional land-use applications will be submitted to maintain an early-2017 in-service schedule.

Questar Fueling

Questar Fueling Company is evolving into a leader in the development of high-capacity fast-fill and time-fill 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 Dallas, Texas, 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.

Corporate and other

Corporate and other operations, which include Questar Fueling, reported a net loss of $2.2 million in the second quarter of 2014, compared to a net loss of $2.3 million in the second quarter of 2013. Questar Fueling represented about $0.3 million of that loss in the recent quarter.

2014 EPS and capital guidance

Questar maintained its 2014 EPS guidance range at $1.18 to $1.28 per diluted share. Questar also updated its 2014 capital investment forecast. Consolidated capital investment for 2014 was reduced from $440 million to $400 million. The change reflects the delay of $40 million of Questar Pipeline's capital spending. Full year capital spending has been allocated to its lines of business as follows:

“We have had a strong first half of 2014 and expect to deliver solid performance for the full year,” Jibson said. “We remain confident in our integrated strategy to deliver consistent growth and returns to shareholders. Questar Gas's customer growth and capital spending should remain strong for many years. This, together with Wexpro’s acquisition and development activities, Questar Pipeline's continuing development of future growth projects, such as ICE, and Questar Fueling’s evolution as a major player in the new CNG-fueling-for-trucking market bode well for Questar's future growth. We will continue to invest for the long-term and strive to provide exceptional service to our customers and superior returns for our shareholders year after year."

Second-Quarter 2014 earnings teleconference

Questar management will discuss second-quarter 2014 results and the outlook for the remainder of 2014 in a conference call with investors Thursday, July 31, beginning at 9:30 a.m. ET. The call can be accessed on the company website at www.questar.com.

About Questar Corporation

Questar is a Rockies-based integrated natural gas company with an enterprise value of about $5.6 billion, operating through three principal subsidiaries:

• Questar Gas Company provides retail natural gas distribution in Utah, Wyoming and Idaho;
• Wexpro Company develops and produces natural gas from cost-of-service reserves for Questar Gas customers; and
• Questar Pipeline Company operates interstate natural gas pipelines and storage facilities in the western U.S. and provides other energy services.

Forward-Looking Statements

This 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:

• the risk factors discussed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2013;
• general economic conditions, including the performance of financial markets and interest rates;
• changes in energy commodity prices;
• changes in industry trends;
• actions of regulators;
• 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.

For more information, visit Questar's website at www.questar.com.

QUESTAR CORPORATION
NON-GAAP FINANCIAL MEASURES
(Unaudited)

In addition to financial measures calculated in accordance with generally accepted accounting principles (GAAP), this press release contains non-GAAP financial measures. The Company believes that these non-GAAP financial measures are useful to investors because they provide alternative methods for assessing the Company's ongoing operating results. The Company's management uses these non-GAAP financial measures for the same purposes, and for planning and forecasting purposes. The presentation of non-GAAP financial measures is not meant to be a substitute for financial measures calculated in accordance with GAAP.

1. Management believes that net income, diluted earnings per common share and return on average common equity (ROE) before the third-quarter 2013 impairment of the eastern segment of Questar Pipeline's Southern Trails Pipeline are useful measures to assess ongoing results of operations because of the impairment charge's infrequent and nonrecurring nature.

The following table reconciles GAAP net income and diluted earnings per common share to non-GAAP adjusted earnings and diluted earnings per common share before the third-quarter 2013 impairment of the eastern segment of Southern Trails Pipeline for the 12 months ended June 30, 2014. The table also reconciles GAAP ROE to non-GAAP adjusted ROE before the impairment charge for the same period.

2. Management defines Adjusted EBITDA as net income (loss) before the following items: interest expense, income taxes, depreciation, depletion and amortization, net gain or loss from asset sales, abandonments and impairments, and other special items. Management believes Adjusted EBITDA is an important measure of the Company's financial performance and a key measure for comparing results to other companies.

The following table reconciles Questar's net income (loss) to Adjusted EBITDA for the three months ended June 30, 2014:

The following table reconciles Questar's net income (loss) to Adjusted EBITDA for the three months ended June 30, 2013:

The following table reconciles Questar's net income (loss) to Adjusted EBITDA for the six months ended June 30, 2014:

The following table reconciles Questar's net income (loss) to Adjusted EBITDA for the six months ended June 30, 2013: