Questar Net Income Grows 35% in 2008

Questar Corp. (NYSE:STR) net income grew 35% in 2008 to $683.8 million, or $3.88 per diluted share, compared to $507.4 million, or $2.88 per diluted share, for the prior year. In the fourth quarter of 2008, Questar net income was $121.2 million, or $0.69 per diluted share, compared to $130.8 million, or $0.74 per diluted share, for the 2007 period, a 7% decrease. Reported 2008 and fourth-quarter net income included net mark-to-market losses on natural gas basis-only swaps of $49.7 million, or $0.28 per diluted share and $54.3 million or $0.31 per diluted share, respectively. Questar net income included $40.6 million of after-tax gains on asset sales during 2008, including $1.4 million in the fourth quarter. Excluding the effect of net mark-to-market losses on natural gas basis-only swaps and after-tax gains on asset sales, Questar’s net income was $692.9 million or $3.93 per diluted share for 2008 and $174.1 million or $0.99 per diluted share in the fourth quarter.

"Questar posted double-digit net income growth for the sixth-straight year – driven by a 22% increase in natural gas and oil-equivalent production in Questar E&P and record net income in all six Questar business units,” said Keith O. Rattie, Questar Chairman, President and CEO. "But 2009 shapes up to be a very tough year for the U.S. economy, the natural gas industry, and thus for our company. We’re well positioned to weather the storm, but we’ve lowered 2009 earnings and production guidance to reflect significantly lower energy prices, and lower capital spending,” Rattie added.

2008 Highlights

• Questar E&P grew natural gas, oil and natural gas liquids (NGL) production 22% to 171.4 billion cubic feet of natural gas equivalent (Bcfe) compared to 140.2 Bcfe in 2007. Natural gas comprised 89% of reported production volumes. Questar E&P replaced 304% of 2008 production and grew proved reserves 19% to 2,218 Bcfe at year-end 2008.
• Average realized natural gas prices at Questar E&P increased $1.11 per thousand cubic feet (Mcf), or 17%, and average realized crude oil and NGL prices increased $18.97 per barrel (bbl), or 35%. Natural gas hedges increased reported revenues by $125.8 million, while oil hedges decreased revenues by $31.9 million.
• Net mark-to-market losses on natural gas basis-only hedges decreased net income $49.7 million in 2008 compared to a gain of $3.6 million a year-earlier.
• Sales of non-core assets at Questar E&P increased net income $37.9 million in 2008 compared to a net loss of $0.4 million in the year-earlier period.
• Wexpro grew its investment base 37% to $410.6 million at December 31, 2008. Wexpro produced 46.1 Bcf of cost-of-service gas for delivery to affiliate Questar Gas, up 32% from 34.9 Bcf in 2007. In 2007 Questar Gas elected to defer some Wexpro production and purchased replacement gas at low regional prices.
• Gas Management net income grew 47%, driven by higher gathering and processing margins. Net processing revenues increased 36% to $88.4 million due to a 59% increase in fee-based processing volumes and higher keep-whole processing margins.
• Questar Pipeline grew net income to $58.0 million in 2008, a 29% increase from 2007, driven by higher transportation revenues from expansion projects completed in the fourth quarter of 2007 and higher NGL sales.
• Questar Gas earned $40.2 million, 7% more than a year ago, driven by customer growth.
• Questar earned a 16.2% return on assets (ROA – defined as earnings before interest and income taxes divided by average total assets) for the trailing 12-month period ended December 31, 2008. Market Resources ROA was 19.4%; Questar Pipeline ROA was 10.8%; and Questar Gas ROA was 7.2%.

Questar Updates 2009 EPS and Production Guidance

Questar now expects full-year 2009 net income to range from $2.50 to $2.70 per diluted share compared to previous guidance of $3.05 to $3.25 per diluted share. The company now estimates that Questar E&P 2009 production will range from 180 to 186 Bcfe, compared to 185 to 193 Bcfe in prior guidance, up about 5 to 9% from 2008. This revised guidance assumes significantly lower natural gas and oil prices than reflected in prior guidance. Revised 2009 guidance also assumes capital expenditures of $1.3 billion, versus $1.6 billion in prior guidance, with most of the reduction at Questar E&P. Questar capital expenditures totaled $2.5 billion in 2008, including about $700 million associated with gas and oil property acquisitions.

The company’s guidance assumes hedges in place on the date of this release and excludes mark-to-market gains and losses on basis-only swaps and any net gains and losses on asset sales. These and other assumptions are summarized in the table below:

^(a)For 2009 unhedged volumes

• Questar E&P has hedged about 72% of forecast natural gas and oil-equivalent production for 2009 with fixed-price swaps. Additionally, the company has hedged about 14% of forecast 2009 production with natural gas basis-only swaps (see table at the end of this release).
• The company estimates that a $1.00 per MMBtu change in the average NYMEX price of natural gas for 2009 would result in about an $0.08 change in earnings per diluted share.
• The company also estimates that a $10.00 per barrel change in the average NYMEX price of oil for 2009 would result in about a $0.07 change in earnings per diluted share.

Questar E&P Grows Production 22% in 2008; Net Income Up 43%

Questar E&P – a Market Resources subsidiary that acquires, explores for, develops and produces natural gas and oil – reported production of 171.4 Bcfe in 2008 compared to 140.2 Bcfe in 2007, a 22% increase. Higher realized natural gas, crude oil and NGL prices and growing production more than offset a 17% increase in average production costs. Increased production costs were driven by higher production taxes, interest expense and depreciation, depletion and amortization expense. Net mark-to-market losses on natural gas basis-only swaps decreased net income $49.7 million in 2008 compared to a $3.6 million gain in 2007. Sales of non-core assets increased net income $37.9 million in 2008 compared to a $0.4 million loss in 2007.

In the fourth quarter of 2008, Questar E&P net income decreased 27% to $47.9 million compared to $65.2 million a year earlier. Net mark-to-market losses on natural gas basis-only swaps decreased fourth-quarter 2008 net income $54.3 million, offsetting the benefit of a 28% increase in production volumes and higher realized gas prices. Impairment expense increased $29.9 million in the quarter-to-quarter comparison as a result of higher total production costs combined with lower gas and oil prices.

Questar may enter into derivative transactions on up to 100% of forecast production from proved reserves to lock in acceptable returns on invested capital and to protect cash flow and net income from a decline in commodity prices. The company uses natural gas basis-only swaps to protect cash flows and net income from widening natural gas-price basis differentials that may result from capacity constraints on regional gas pipelines.

Questar E&P production costs (the sum of depreciation, depletion and amortization expense, lease operating expense, general and administrative expense, allocated interest expense, and production taxes) per unit of gas-equivalent production increased 17% compared to 2007, due primarily to increased depreciation, depletion and amortization expense, production taxes and allocated interest expense.

• Production volume-weighted average depreciation, depletion and amortization per Mcfe (the DD&A rate) increased due to higher costs for drilling, completion and related services, increased cost of steel casing, other tubulars and wellhead equipment. The DD&A rate also increased due to the ongoing depletion of older, lower-cost reserves and the increasing component of Questar E&P production derived from recently acquired, higher-cost fields in the Midcontinent.
• Lease operating expense per Mcfe increased due to higher costs of materials and consumables, increased produced-water disposal costs and increased well-workover activity.
• General and administrative expense per Mcfe decreased as the result of increased production.
• Allocated interest expense per unit of production increased primarily due to financing costs related to the first quarter 2008 acquisition of natural gas development properties in northwest Louisiana.
• Production taxes per Mcfe increased in 2008 as the result of higher natural gas and oil sales prices. The company pays production taxes based on a percentage of sales prices, excluding the impact of hedges. Production taxes per Mcfe decreased in the fourth quarter compared to the 2007 quarter due to lower natural gas and oil sales prices.

Wexpro Net Income Up 25% in 2008

Wexpro – a Market Resources subsidiary that develops and produces cost-of-service reserves for affiliate Questar Gas – benefited from a higher average investment base compared to the prior-year period. Wexpro investment base at December 31, 2008, was $410.6 million compared to $300.4 million a year ago, a 37% increase. In the fourth quarter of 2008, Wexpro net income was $18.5 million compared to $15.8 million for the prior year, a 17% increase, primarily due to a higher investment base.

Under a long-standing agreement with the states of Utah and Wyoming, Wexpro recovers its costs and earns an unlevered after-tax return of about 19 to 20% on its investment base – the investment in commercial wells and related facilities, adjusted for working capital and reduced for deferred income taxes and accumulated depreciation.

Gas Management Net Income Up 47% in 2008

Questar Gas Management (Gas Management) – Market Resources’ gas-gathering and processing-services business – grew net income 47% in 2008, driven by increased gathering and processing margins. Gathering margin increased $49.8 million or 74%, and processing margin increased $22.7 million or 41%. Net processing revenues rose 36% to $88.4 million due to increased fee-based processing volumes and a greater frac-spread – the difference between the market value of the NGL extracted from the gas stream and the cost of the Btu-equivalent volume of natural gas required to replace the extracted liquids. Gas Management grew fee-based gas-processing volumes 59% in 2008 to 201.5 million MMBtu. Fee-based gas-processing revenues grew 57% compared to a year ago, while keep-whole processing margin increased 28% or $12.4 million. Approximately 76% of Gas Management net operating revenue (total revenue less processing plant-shrink) was derived from fee-based contracts compared to 74% in 2007. In the fourth quarter of 2008, Gas Management net income increased 14% to $16.8 million compared to $14.7 million in 2007, driven by higher gathering margins.

Questar Pipeline Net Income Up 29% in 2008

Questar Pipeline – which provides interstate natural gas transportation and storage services – grew net income 29% in 2008. Revenues increased $42.7 million or 21%, driven by higher transportation volumes related to system expansion projects placed into service in late 2007, and higher NGL prices. NGL prices increased 43% and sales volumes increased 18% in the year over year comparison. Operating and maintenance expense increased $5.8 million due to additional operating costs for new transportation facilities. Operating, maintenance, general and administrative expenses totaled $0.10 per decatherm transported, down from $0.14 in the year earlier, the net result of a 53% increase in transportation volumes and a 7% increase in these expenses. 2008 net income was reduced by $1.9 million for asset impairments, offset by net gains on the sale of assets and other one-time items.

Questar Pipeline net income rose 19% to $14.0 million in the fourth quarter of 2008 compared to $11.8 million in the year-ago period, primarily due to system expansions placed in service late in 2007.

Questar Gas Net Income Up 7% in 2008

Questar Gas – which provides retail natural gas distribution services in Utah, Wyoming and Idaho – reported higher net income, driven by customer growth and an increase in Utah general rates effective August 2008, partially offset by higher expenses, primarily bad-debt expense, demand-side management costs and interest expense. Operating, maintenance, general and administrative expenses totaled $142 per customer in 2008, compared to $136 per customer in 2007. At December 31, 2008, Questar Gas served 888,602 customers, up 14,995 or 1.7% from December 31, 2007.

Questar Gas net income was $20.4 million in the fourth quarter of 2008, 14% higher than the year-earlier period, primarily as a result of customer growth.

2008 Earnings Teleconference

Questar management will discuss 2008 results and the outlook for 2009 in a conference call with investors Thursday, February 12, beginning at 9:30 a.m. EST. The call can be accessed on the company Internet site at www.questar.com.

About Questar

Questar Corp. (NYSE:STR) is a natural gas-focused energy company with an enterprise value of about $8.5 billion. Questar finds, develops, produces, gathers, processes, transports, stores and distributes natural gas.

Forward-Looking Statements

This release includes forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933, as amended, and Section 21(e) of the Securities Exchange Act of 1934, as amended. Such statements are based on management’s current expectations, estimates and projections, which are subject to a wide range of uncertainties and business risks. Factors that could cause actual results to differ from those anticipated are discussed in the company’s periodic filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2007. Questar undertakes no obligation to publicly correct or update the forward-looking statements in this news release, in other documents, or on the Web site to reflect future events or circumstances. All such statements are expressly qualified by this cautionary statement.

For more information, visit Questar’s Internet site at: www.questar.com.