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Questar Gas Co. – a subsidiary of Questar Corp. (STR - Analyst Report) – has agreed to buy natural gas system of the Eagle Mountain City municipality. The approximately $12 million purchase, subject to city council approval, is likely to conclude by the end of the year.  

The 44 square miles northern Utah County city – the state’s third-largest geographically – has 24,000 residents in 6,000 homes with ample room to grow. Therefore, Questar Gas sees the transaction, which came after almost one year of discussions, as one with operational advantages and a good return on investment.

The to-be-bought system is about 15 years old and includes six miles of steel high-pressure pipeline plus 120 miles of intermediate high-pressure main lines and service lines.

Salt Lake City, Utah-based Questar Corp. is a natural gas-focused utility with three principal subsidiaries – Wexpro Co., Questar Pipeline, and Questar Gas Co.

We believe Questar will be able to generate meaningful earnings and dividend growth in the coming years through strong operational performances by its business units. Other positives in the Questar story include its sole emphasis on the natural gas markets, its focus on long-term contracts and the efficient management team. An above-average credit quality adds to the bullish sentiment.

However, we remain worried about the current volatile natural gas price environment that is likely to restrict near-term growth prospects at Questar Pipeline. We also believe that upside potential will remain limited until the company has fully reaped the benefits of the QEP Resources Inc. (QEP - Analyst Report) spin-off.

As a result, Questar currently retains a Zacks Rank #3 (Hold), implying that it is expected perform in line with the broader U.S. equity market over the next one to three months.

However, some better-ranked gas distributor utility stocks include New Jersey Resources Corp. (NJR - Snapshot Report) and AGL Resources Inc. (GAS - Analyst Report). While New Jersey Resources holds a Zacks Rank #1 (Strong Buy), AGL Resources carries a Zacks Rank #2 (Buy).

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