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Natural gas-focused energy company, Questar Corp. (STR - Analyst Report) reported bright third quarter 2011 results, reflecting strong transportation revenues and solid contribution from its expansion venture.

Earnings per share came in at 20 cents, surpassing both the Zacks Consensus Estimate of 17 cents and prior-year result of 16 cents.

Total revenue came in at $146.7 million, up a modest 1.0% from the year-ago level of $145.2 million. The result reflects higher production volumes across most of the business segments.

Segment Analysis

Questar Gas: The segment generated $89.8 million in revenue, flat year over year. The segment registered a loss of $7.9 million, narrower than the loss of $9.1 million in third quarter 2010.

As of September 30, 2011, Questar Gas served 912,698 customers, up 10,415, or 1.2% year over year.

Wexpro: Consolidated sales were up 13.1% year over year at $6.9 million in the quarter. Segmental income from continuing operations increased to $25.6 million from $22.2 million in the prior-year quarter, driven by a higher average investment base.

However, Wexpro reported a 1.6% decline in quarterly production of natural gas (12.6 billion cubic feet (Bcf) from 12.4 Bcf in third quarter 2010).

Questar Pipeline: Consolidated revenues of $50.0 million were up 1.4% from the year-ago quarter and income from continuing operations came in at $18.8 million, reflecting an increase of 15.3%. The income improvement was attributed to additional revenues from the Overthrust Loop Expansion Project along with reduced operating, maintenance, and interest expense.

Total natural gas transportation volumes in the quarter were 188.5 million decatherms, up marginally from the prior-year level of 187.9 decatherms.

Financials

As of September 30, 2011, Questar had long-term debt (including current portion) of $906.4 million, with a debt-to-capitalization ratio of 45.3%.

2011 Guidance

Management increased its 2011 earnings guidance to $1.11 to $1.14 per average diluted share, from the prior forecast of $1.07 to $1.11. The company initiated 2012 earnings guidance at $1.15 to $1.19 per diluted share.

Questar expects to register strong growth in the coming months with a high investment base at Wexpro, multi-year pipeline-replacement program and robust transportation revenues.

Questar plans to expend $355 million in capital investments, with $125 million targeted toward the Wexpro business segment in 2011. For 2012, the total spending is also expected to be around $355 million.

Our Recommendation

We believe that Utah-based Questar will be able to generate steady earnings and dividend growth, going forward, through strong operational performances by its business units. The company is expected to perform well in the coming quarters given its focused and experienced managerial team, manageable debt maturities and long-term contracts.

However, the expected bearish natural gas fundamentals over the next few quarters and excessive domestic gas supplies keep us cautious. Hence, we maintain our long-term Neutral recommendation on the stock. We also believe that Questar remains exposed to greater competitive risks from Cabot Oil & Gas Corporation (COG - Analyst Report) and Anadarko Petroleum Corporation (APC - Analyst Report) among its other peers.

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