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Questar Corp. (NYSE:STR)

Q3 2010 Earnings Call

October 27, 2010 9:30 am ET

Executives

Martin Craven - VP and CFO

Ron Jibson - President and CEO

Jim Livsey, EVP and GM of Wexpro Company

Allan Bradley - EVP and President & CEO of Questar Pipeline Company

Craig Wagstaff - VP and GM of Questar Gas Company

Analysts

Carl Kirst - BMO Capital Markets

Lasan Johong - RBC Capital Markets

Steve Maresca - Morgan Stanley

Mahesh Joshi - Spin-Off Advisors

Kevin Smith - Raymond James

Holly Stewart - Howard Weil

Michael Bates - D.A. Davidson & Company

James Bellessa - D.A. Davidson & Company

Tim Schneider - Citigroup

Ron Barone - UBS

Operator

At this time, I would like to welcome everyone to the Third Quarter 2010 Earnings Release Conference Call. All lines have been place on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

At this time I would like to turn the call over to the Vice President and CEO of Questar Corporation, Mr. Martin Craven. Sir, you may begin your conference.

Martin Craven

Thank you. I am actually the Chief Financial Officer and I want to welcome everyone who joined us to. This is Questar's third-quarter 2010 earnings conference call. With me today are Ron Jibson, Questar's President and CEO, Jim Livsey, Executive Vice President, and General Manager of Wexpro Company, Allan Bradley, Executive Vice President, and President & CEO of Questar Pipeline Company, and Craig Wagstaff, Vice President and General Manager of Questar Gas Company.

Before we begin, let me remind you that we will be making forward-looking statements during our call today and actual results could differ from our estimates for a variety of reasons that we describe in our quarterly and annual SEC filings. Also this call may reference non-GAAP financial measures. And our earnings release put out yesterday provides reconciliations to these measures.

Yesterday we reported third-quarter earnings results and increased by $0.02 cents our 2010 earnings per share guidance for continuing operations before separation costs. We also initiated 2011 earnings guidance in the range of $1.07 to $1.10 per average diluted share, and released a 2011 capital forecast totaling $342 million.

Questar’s third-quarter earnings from continuing operations totaled $27.7 million, including an additional after-tax charge of $1.7 million or $0.01 cent per diluted share for expenses associated with the June 30, 2010 spin-off of QEP Resources.

This additional expense came about as a result of a reduction in our estimate of the portion of separation costs that will be ultimately deductible for income tax purposes.

Pre-separation cost earnings per share were $0.16 in the quarter, unchanged from the 2009 quarter, reflecting an increase in shares outstanding, primarily associated with share-based compensation.

Consolidated income from continuing operations before separation costs grew 10% in the third quarter compared to last year. Wexpro’s net income rose 8% to $22.2 million in the quarter. This was supported by a year-over-year 6% increase in Wexpro’s investment base.

Questar Pipeline, our interstate natural gas pipeline and storage business, grew net income 16% to $16.3 million in the quarter. Pipeline benefitted from higher transportation contract demand related to completion of an Overthrust compression expansion late last year and from continued strong natural gas liquids volumes and prices in the quarter.

Our retail gas distribution utility, Questar Gas, reported a seasonal loss of $9.1 million in the quarter, $1.0 million or a 12% higher loss than a year ago. For the 12 months-ended September 30, Questar Gas’s net income was down about 1%. This decline in quarterly and 12 month results is primarily a result of increased employee-related costs.

Questar Gas typically generates all of its net income in the first and fourth quarters and reports a net loss in the second and third quarters due to seasonal gas usage.

On the expense front, Questar’s operating and maintenance plus general and administrative expenses totaled $64.0 million in the quarter, compared to $55.4 million in the third quarter of 2009, an almost 16% increase. Higher third-quarter 2010 expense was the result of higher demand side management costs incurred at Questar Gas, which are recovered in rates; higher employee costs and increased operating and maintenance expense.

Questar Pipeline incurred some higher than usual compressor maintenance costs in the quarter and Questar Gas saw a return to more normal levels of labor cost and bad debt expense compared to lower than usual costs recorded in the third-quarter of 2009. Excluding Demand Side Management costs, O&M plus G&A costs rose 13% quarter over prior-year quarter. For the nine months and 12 months-ended September, these costs rose 4% and 3% respectively.

Production and other taxes rose 18% in the quarter. This increase was driven primarily by an increase in the field price of natural gas used to calculate taxes on Wexpro production. These taxes are recovered in Wexpro’s cost of service under the Wexpro Agreement.

Depreciation expense rose 6% in the quarter on net property plant and equipment that also grew 6%.

Cash capital expenditures totaled $71 million in the current quarter and $210 million for the first nine months of 2010. Of the quarterly amount spent, Wexpro accounted for $22 million Questar Pipeline $20 million, and Questar Gas $29 million.

With regard to cash flows; for the first nine months, cash flow from operations before working capital changes totaled $308 million, unchanged from the 2009 result. After working capital changes, investing activities, and dividend requirements, Questar’s cash flow for the first nine months was a negative $193 million. This reflected a $250 million cash contribution made to QEP Resources prior to the spin-off.

At September 30, we had $395 million of commercial paper outstanding, supported by $600 million of committed bank credit lines.

To summarize, in the quarter we realized continued strong earnings growth and solid overall results. All three Questar businesses are on track to meet our increased 2010 and just announced 2011 earnings goals.

With that, I’ll turn it over to our President and CEO, Ron Jibson.

Ron Jibson

Good morning everyone and thank you Martin for that summary. We appreciate all of you taking the time today to be with us. And I’ll comment briefly on our third-quarter results and our just-announced outlook for 2011.

We’ve come through our first post-spin quarter in good shape and have enjoyed visiting with many of you about the new Questar and our unique mix of businesses. We will be on the road often during the next year answering your questions about what we believe is the most compelling investment opportunity in our space.

We’re on track to meet our earnings goals this year. Our three businesses; Wexpro, Questar Pipeline and Questar Gas, should generate $181 million to 190 million dollars of income from continuing operations before separation costs. We anticipate strong cash flows of between $490 million and 500 million dollars of EBITDA and should earn an approximate 18% return on our average common equity.

Let’s start with Wexpro, perhaps our most distinctive competitive advantage. Wexpro earned a 20.1% after-tax unlevered return on its investment base for the 12 months ended September 30th. We’ve allocated $100 million of capital to Wexpro in 2010, and have spent about $62 million on gross new investment through the first nine months. Wexpro’s investment base is now forecast to grow about 6% to $457 million by year end.

For 2011, we’ve allocated another $100 million to Wexpro’s capital spending, which is forecast to grow Wexpro’s investment base another 6% to$ 484 million.

As a reminder to those new to Questar, Wexpro is unique in the industry. The company develops natural gas and oil on a defined set of producing properties in the Rockies and typically earns an approximate 20% after-tax unlevered return on its net investment base. The natural gas produced from these properties is delivered to our utility, Questar Gas, at a cost-of-service that includes that return.

So while Wexpro’s operations are similar to those of an E&P company, its economic model is more like a regulated utility. Over the past 12 months, Wexpro produced 49.5 billion cubic feet of natural gas. That’s about half of what Questar Gas’s annual supply requirement is.

We’ve just completed an extensive review and update of Wexpro’s investment opportunities in connection with our fall planning process. This assessment reaffirms our expectation of investing between $500 million and $700 million over the next five years in Wexpro’s low-cost and low-risk development-drilling program. This outlook is based on Wexpro’s expected cost competitiveness versus today’s natural gas forward pricing curve.

Turning to our natural gas transportation and storage business, Questar Pipeline earned an 11.4% return on equity for the 12 months ended September 30th. In late 2009, our Overthrust Pipeline compression project drove a $3.7 million addition to revenues in the third quarter and $12.1 million year-to-date.

Questar Pipeline’s processing activities continue to benefit from strong Natural Gas Liquids or NGL pricing in the first nine months of this year. We’ve added $3.2 million of incremental NGL revenues in the quarter and $9.8 million year-to-date.

Questar Pipeline remains on track with another expansion of Overthrust, this is a 43-mile, 36-inch-diameter pipeline loop west of Rock Springs, Wyoming. This $88 million project is underwritten by long-term contracts to move gas west for delivery initially to Kern River Pipeline and ultimately to Ruby Pipeline, which is currently under construction. We expect to put this project in service by year-end at well under our initial budget.

For 2011, we’ve approved a capital budget of $106 million for Questar Pipeline. So we expect the company will generate positive cash flows before dividends next year, and should generate cash flows in excess of capital requirements for the next several years.

Finally, turning to our gas utility, Questar Gas earned a 10.6% percent return on average equity for the 12 months ended September 30th. We continue to benefit from above-THE average customer growth in our service area and added about 14,000 customers over the past year. That’s a 1.6% percent increase. This growth added $400,000 of incremental margin in the quarter and $2.6 million year-to-date.

Effective August 1st, Questar Gas’s allowed return on equity in Utah increased from 10% to 10.35% in a rate case settlement that extended our decoupling tariff. Also approved by the Utah Public Service Commission was an infrastructure-cost tracker that lets us earn on our multi-year high-pressure natural gas feeder-line replacement program as we place facilities in to service.

This cost tracker is extremely important for Questar Gas, its customers and our shareholders. Everyone benefits. Necessary improvements are made to the distribution system without costly and unnecessary rate proceedings. Combined with a continued strong customer growth outlook, this should drive strong annual growth in Questar Gas rate base through 2015.

We’ve approved a $132 million capital budget for Questar Gas next year that includes $45 million for the feeder-line replacement program.

To summarize, we’re pleased to increase 2010 EPS guidance by $0.02 cents per share to $1.02 to a $1.07 per diluted share, and initiate 2011 earnings per diluted share guidance to a range of $1.07 to $1.10 per share.

The good news coming out of our fall planning process is that we continue to have high visibility on profitable investment opportunities next year and beyond that are achievable under the current natural gas pricing outlook.

Wexpro is on track to grow investment base 4% to 8% annually through our 5-year planning period.

Questar Gas is expected to grow rate base 8% to 9% annually and its feeder-line tracker will allow cost and return recovery without regulatory lag.

Questar Pipeline looks to generate strong cash flows in excess of capital requirements that will help fund our 5% to 10% annual dividend growth targets.

Questar is unique. Not only do we understand that it’s all about execution, but we have the balance sheet, the assets and experienced people to deliver. Our businesses provide what investors value most; high returns and strong cash flow to support growth in our dividend and our investment opportunities.

With that operator, we’d like to open the line for questions.

Question-and-Answer Session

Thank you. (Operator Instructions) Your first question comes from the line of Carl Kirst BMO Capital Markets.

Carl Kirst - BMO Capital Markets

Good morning everybody. Nice quarterly results. First off, just a quick question on 2011 guidance. I am not sure how much detail you can share on a segment basis, but by giving color on Wexpro and given where the returns normally are, we kind of have that pretty much contained as for as expectations are for next year. Staying kind of within this $1.07 to $1.11 guidance, is there any color that you can share on sort of what either EBIT or EBITDA expectations may be at those pipelines and gas utility?

Martin Craven

No, Carl I don’t have those numbers in front of me I will be glad to look those up and get back to you with those.

Carl Kirst - BMO Capital Markets

Okay, no problem we can follow up after the call. Let me may be ask one more question if I could to its Ron or Jim and really just around Wexpro with the flexibility of the spend. I assume Wexpro is still kind of delivering gas roughly in that 450 range so little bit but open to the scrip as far as how aggressively we can be spending clearly healthy opportunity asset there. If we are whatever reason blessed with returning back to a $5 scrip for instance, whatever time frame that maybe, is the flexibility of the Wexpro spend such that it can be ramped up relatively quickly, I don’t mean ramping up 100 going to 200 I just simply meaning of that, additional spending can happen or is this pretty much something that gets addressed only once every six months, and wont be till next fall for instance, I assume this kind of I guess addressed every quarterly board meeting?

Ron Jibson

Yes Carl, its, certainly we do have some flexibility there and I would like that Jim maybe give you some more color on that.

Jim Livsey

Yes Carl, we have the ability in the areas that we operate pretty flexible and we strongly seen changes in the price tags, so we could ramp up the investment frequently, we get that inventory necessary. So not a big delay with that if we wanted to.

Carl Kirst - BMO Capital Markets

Great and then maybe one finale question if I could now, I will jump back in queue but to the extent that we do have low gas prices kind of maybe want us little bit keeping the Wexpro spend, roughly equivalent to 2010 relative to certainly some better years in the past. As we think about the cash flow that may come from less aggressive Wexpro spend at least for 2011, should we think about the possibility for dividend growth perhaps maybe above the long-term CAGR in 2011 or was that something where really we don’t want to perhaps move from 5% or 6 % dividend CAGR and keep some drive fire power, if indeed gas prices were to impact to rally.

Martin Craven

Hello, this is Martin Craven, we’ve got fairly light financing requirements through our planning period so we do have a lot of flexibility on the dividend, it will grow, I think within 5% to 10% annual band up to the next five years or so and I don’t think that allowing gas pipes would necessary causes to slow down on that plan, near term. I do have an answer for you on the EBITDA outlook for 2010, roughly our earnings guidance will translate. In about $520 million to $530 million of expected EBITDA next year associated with our earnings guidance.

Carl Kirst - BMO Capital Markets

Martin, I am sorry is that’s for 2011?

Martin Craven

Yes.

Carl Kirst - BMO Capital Markets

Okay, thank you.

Unidentified Company Speaker

And then Carl with that again we’ve been pretty open with our projections on dividend growth and certainly the cash flows generated from our business units specifically Wexpro and Questar Pipeline will allow us to be very positive with that growth outlook.

Operator

Your next question comes from line of Lasan Johong with RBC Capital Markets

Lasan Johong - RBC Capital Markets

Good morning. Nice results. I am a little curious mind, because I just ran thorough a very quick calculations maybe on still lacking some caffeine in the morning here but it sounds like just Wexpro alone should generate about $0.04 in earning’s growth next year. So on the mid point of your guidance, we already had 109 from 10 to 11 and then you’ve got growth on the gas side as well and you’re generating additional cash from the pipeline, so I am getting a sense that this is about as conservative as a guidance that you can get. Can you kind of throw some color around your guidance numbers in that light.

Martin Craven

Well I was thinking of dampening your enthusiasm, I got a couple of things we do have some interest expense next year that we haven’t incurred in 2010 associated with the spin off that will put a little bit of a damp on earnings. Wexpro pipeline is literally has a bit of slowdown next year in its construction program, so their earnings growth is going to be tempered a little bit but I would say…

Lasan Johong - RBC Capital Markets

And its still growing right.

Martin Craven

It is still growing.

Lasan Johong - RBC Capital Markets

Okay.

Martin Craven

In just, in a lot of sense, we are lot newer to the scheme, we prefer not to err on the high side, I do come for a accounting background, I’d rather just get into the year and let a few uncertainties firm up before getting more aggressive on our outlook.

Lasan Johong - RBC Capital Markets

Okay, and I did it to make sure that you are indeed being conservative and there’s something not missing in the guidance that we are not seeing going forward. On the underlying gas price assumptions for Wexpro, are you assuming kind of the forward curve in your projections right now?

Ron Jibson

Yes, we are that’s all based on forward curve.

Lasan Johong - RBC Capital Markets

So it’s the forward curve proves to be less than accurate, which tends to be the case, how much do you think you could ramp up or ramp down in particular how much do you think to ramp up. I know you said you could do quickly but can you give us a range of how far you can go up? Reasonable range?

Ron Jibson

I think we’re probably comfortable with that range look so on that price 700 million range of we had identified over the five year period.

Lasan Johong - RBC Capital Markets

So roughly $40 million a year is delta that you could generate?

Jim Livsey

Yes, I think unless, we’ve really saw a strong increase in the gas prices that’s probably a pretty fair expectation given.

Lasan Johong - RBC Capital Markets

Okay. And then lastly, your CapEx budget on pipeline, I know its low but there are some interesting things going on out side of the Rocky basin that is being driven by liquids, how should I say this, motivating movement of liquids. Do you see any opportunities for doing something similar in your area of operation?

Allan Bradley

Lasan this is Allan Bradley. As you know we just completed the Raptor processing plant down in Price.

Lasan Johong - RBC Capital Markets

Yes.

Allan Bradley

And we’re obviously benefiting from the increase liquids we are able to recover; I think given Rocky's production today is relatively flat, the near term prospects for midstream growth are probably limited and so you’re exactly right if we take our small midstream business and want to grow, we’ll have to look for place out side of our very traditional basins, Greater Green, Uinta and Piceance

And we are currently evaluating those opportunities but we are obviously a late entrant and many of those are the plays that which you are thinking about.

Operator:

Your next question comes from the line of Steve Maresca with Morgan Stanley.

Steve Maresca - Morgan Stanley

Couple of questions. First on Wexpro, you talked about 6% investments based growth next year. But I think you mentioned 8% or 9% longer term, what are you assuming in terms of gas prices longer term to get that?

Jim Livsey

We’re looking at the forward curve and I think as Martin identified we see 4% to 8% that is put out.

Martin Craven

Yes. With respect to the forward curve over that period.

Steve Maresca - Morgan Stanley

So 4% to 8% investment based growth at Wexpro.

Ron Jibson

That’s correct.

Steve Maresca - Morgan Stanley

Okay. And on the NGL exposure, what is your exposure on the processing side, either percent-wise or what types of contracts do you have that are giving you to that exposure?

Jim Livsey

Basically. Raptor is a key for us basically. I look at it as a frac plan on the Southern system. So the frac spread got upside down, the relationship might change but we don’t see that happening in today’s environment.

Steve Maresca - Morgan Stanley

Got it. And is there something if you did see it, I mean would you ever look to somehow protect that or hedge that?

Jim Livsey

We typically haven’t done that and its very hard to predict. Obviously, the volume of NGLs were recovered. So typically we haven’t done that.

Steve Maresca - Morgan Stanley

Okay. And then lastly, on the pipeline side, can you remind how much did the pipe is from transportation on a percent bases versus...

Allan Bradley

Virtually all of that is firm.

Steve Maresca - Morgan Stanley

So, there is nothing interruptible or not contracted right now?

Allan Bradley

There is no interruptible. Most of the capacity is taken out on the front long term contracts. And customers have the ability to release that. So it becomes in a sense in a form of interruptible transportation.

Operator

Your next question comes from the line of [Mahesh Joshi with Spin-Off Advisors].

Mahesh Joshi - Spin-Off Advisors

My first question is in regards with the Questar Gas, can you share your expectations for the customer growth in the fourth quarter?

Ron Jibson

Yes. Over the plan we do see some increased customer growth, again we've had about 14,000 additional customers over the last 12 months, 1.6% growth. What we would anticipate going forward is we see an increase in 2011. We expect similar growth a little higher, and then in the outer years, we see 2012 going to about 18,000 customers; 2013, a little over 20,000 customers; 2014 about 23,000; 2015 about 24,000. So we are expecting that to increase growth.

That's based on projections by the state and is also tied very directly to the economic development that we see going on in the state of Utah right now with new businesses and manufacturers coming into the state.

Mahesh Joshi - Spin-Off Advisors

With regards to Questar Pipeline. I know that you have a number of projects that are planned for 2011, just wanted to know is that on track, and if they are, have you factored the incremental earnings from those projects into your earnings guidance for 2011?

Allan Bradley

That project which we referred to on our southern system as an extension of our mainline 104 to Fidlar is definitely on track. We expect to file our FERC certificate here next month, and that will definitely be a 2011 project what's interesting about that is some of the contracts that underlie it were contracts that may have terminated on our systems.

So with the expansion we were able to term up those contracts that were due to terminate and also negotiate a rate increase, most of them were discounted rates. We were able to move those rates up to our maximum recourse. So, yes, those increased revenues will show up in our 2011 forecast.

Operator

Your next question comes from the line of Kevin Smith with Raymond James.

Kevin Smith - Raymond James

Can you go over one more question on Wexpro as far as your gas sensitivity, obviously with the weakness in gas prices. Is there a point and I guess there has to be some point where Wexpro is no longer competitive on a cost advantage basis, or am I thinking about that incorrectly?

Jim Livsey

Kevin, this is Jim Livsey. We have a pretty good level of inventory that we're currently drilling through in the Vermillion Basin that has a very low finding cost. So we think we're able to continue to operate for a period of time even in this very low gas prices environment we're seeing right now.

So we feel good at least for a period of time we're going to have that lower level of gas development inventory available to us. Over time, the forward curve as we've done our five year modeling, we're able to have a pretty good level of spending beyond that.

Kevin Smith - Raymond James

So in this current kind of 450ish environment let's call it for the next 12 months or so, you're still expecting Wexpro to be competitive and Questar Gas to be sourced roughly half by Wexpro?

Jim Livsey

Yes. We've got our two directed rigs operating in Vermilion area, our lowest finding cost, and we fully anticipate to be able to deliver cost of service that will be competitive even in the slower cost price environment.

Operator

The next question is from the line of Holly Stewart with Howard Weil.

Holly Stewart - Howard Weil

Just two quick follow-ups I guess for Allan. Can you walk us through the pipeline budget for next year, what's maintenance and then what you've got in there for these extension projects?

Allan Bradley

I sure can. This is 2011. I spoke about the Southern System what we call our Main Line 104 expansion over to Fidlar. There has been a lot of processing growth over there by producers in the Uinta Basin, so we need to extend our new 24 inch line over to compete for that volume and that's about $48 million.

so if you look at our maintenance budget and upgrades, it's probably about $58 million. You add the two up, that's our $106 million budget. Some of the maintenance budget in 2011 has rolled over from 2010, so you probably noticed a decline in the Pipeline budget for 2010, a portion of that, obviously Ron spoke about which was just a great job by our team up on the Overthrust Loop Expansion.

We're feeling very good about that project. Weather has been great since we started construction in September. We've got a terrific construction crew. So we've got some savings there in 2010, and then some maintenance on our Southern System we just couldn't get to because of some permitting delays and that will roll over to 2011. So 2011 is little higher normal for us as a maintenance budget.

Holly Stewart - Howard Weil

Then on the NGL sales revenue for the Pipeline business for next year, how are you thinking about that? I know we had some pretty robust margins here on the keep-whole side as of late. So, how are you factoring that into your guidance for next year?

Allan Bradley

It's really hard to predict that, Holly. Over a long-term period, we think that volume is going to decline as more and more producers process upstream of our pipeline, our processing is designed to meet the downstream export pipeline, hydrocarbon dew point specs, and they are tighter than ours.

So, we have both embedded processing that Questar Pipeline has in its existing facilities and then through the Raptor plant have grown processing through an unregulated midstream company, just gets rolled up as part of Questar Pipeline. So, overtime, we expect the volumes to decline.

Quite frankly, we've been very surprised at how successful the Raptor plant has been. We were sort of targeting about 350 barrels a day and we've been averaging for the first nine months closer to 600, and that accounts for that revenue increase, and I think a lot of that had to do with just having a new plant, understanding it, always trying to optimize the processes there.

Again, our operators have just done a great job through this, and it's been just over a year now really optimizing operation of that plant.

Holly Stewart - Howard Weil

So you're thinking about in the '11 guidance something around the same range as 2010 or you are modeling it down?

Allan Bradley

I think it's going to decline a little personally because you're going to see on the southern system some expansions of producer facilities down in that Fidlar area that I spoke about, so we are actually showing a decline in revenues.

Operator

The next question comes from the line of James Bellessa with D.A. Davidson & Company.

Michael Bates - D.A. Davidson & Company

Hi guys this is Michael Bates on the line for Jim. Just a couple of questions. On the separation charge that you recorded in the quarter, was that expected?

Martin Craven

No, our original estimate of the tax deductibility of separation cost changed. There are fewer of those cost that qualify for tax deductions, so we record additional basically tax expense in the third quarter. So the pre-tax separation cost did not change but their treatment for tax purposes did and caused additional expense.

Michael Bates - D.A. Davidson & Company

Great. What do you see as the likelihood that there will be other impacts from the spin-off as far as separation charges or additional tax issues?

Martin Craven

We think we're done at this point. We had a quarter and had time to think about it in lots of detail, firm up our estimates and we don't expect any more surprises.

Michael Bates - D.A. Davidson & Company

One question on the gas utility, obviously the third quarter isn't all that important, but I did see a decline in volumes on the residential and commercial side. Can you give some color as to why usage might have gone down even though your customer count went up?

Ron Jibson

We have been very involved I think as you know, Michael, with demand side management programs. We continue to be investing around $35 million this year in those demand side management programs and so certainly just ongoing usage per customer declined, but a lot of that is driven by the response from our customer base. We've seen about close to 26% of our customer base actually take advantage of some of those programs.

Martin Craven

Michael, we're also looking at our temperature-adjusted usage per customer. We had a pretty warm quarter, about 64% warmer than normal in the quarter, so global warming.

James Bellessa - D.A. Davidson & Company

This is Jim Bellessa with a query. I'd like to inject myself with a question if that's all right?

Ron Jibson

That's fine, Jim.

James Bellessa - D.A. Davidson & Company

Your interest expense line item. Earlier you had said that for conservative purposes, your guidance incorporated a higher forecast of interest expense because of issues related to the spin-off.

When do those hit, those additional interest expense. In the most recent quarter they were about flat with the two previous quarters, and so, is this something that comes in at a later time?

Martin Craven

Jim, this is Martin. It does. We originally anticipated we would go to market and term out the monies that we borrowed on commercial paper for the cash we put into QEP resources as part of the spin. That's still outstanding on commercial paper and I don't want to be tied down as to when we term that out.

But when we go to market and we will at some point before the middle of the next year, we'll see an increase in interest expense associated with term debt.

Operator

Your next question comes from the line of Tim Schneider with Citigroup

Tim Schneider - Citigroup

Hello, guys. Question has been answered. Thank you.

Operator

Your next question comes from the line of Ron Barone with UBS.

Ron Barone - UBS

Good morning, Ron and Martin. My question also has been answered. Thank you, anyway.

Operator

Your next question is a follow up from the line of Carl Kirst with BMO Capital Markets.

Carl Kirst - BMO Capital Markets

Sorry guys. Tim asked me this question. Thank you.

Operator

(Operator Instructions) Your next question is from the line of Lasan Johong with RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Martin or Ron or Allan, there has been a lot of talk about an oversupply of liquids and this pressuring NGL prices going forward. Are you seeing any evidence of this in your service territories?

Allan Bradley

Not yet. You can anticipate that as Marcellus production continues to grow and they decide where to take sort of the liquid side of that play. Our prices are all sort of tied to Mont Belvieu, and we net back fractionation and transportation, and when you look at our nine-month this year versus nine-month last year, it's well over 50%.

Can we sustain that? Maybe near-term I would say yes, longer term I think there will be pressure. That is my personal opinion. Our forecast does have volumes coming down in the Rockies. Obviously, we're not at the moment suffering any capacity constraints on the ability of the two NGL lines to move it to market.

Lasan Johong - RBC Capital Markets

When you say long-term, are you looking at a year out or six months out or two years out or…?

Allan Bradley

I am looking longer, five years out and the time it takes to get infrastructure built.

Lasan Johong - RBC Capital Markets

I see, I understand. Then, Martin, this extra interest expense from the merger that you're terming out, I'm assuming that the numbers will depend on what the terms and condition you get in the capital markets, but generally speaking kind of how much in terms of EPS are you thinking that's going to make a difference?

Martin Craven

Well, we're currently borrowing at about 0.5% and the permanent rate is going to be today somewhere between 3% and 4.5%.

Lasan Johong - RBC Capital Markets

How much are we talking about, $250 million?

Martin Craven

$250 million.

Operator

At this time, there are no further questions.

Ron Jibson

Again, we want to thank all of you for being with us today and we appreciate you interest in Questar.

Operator

This concludes today's conference call. You may now disconnect.

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