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Questar (NYSE:STR)

Q3 2011 Earnings Call

October 26, 2011 9:30 am ET

Executives

Kevin W. Hadlock - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

James R. Livsey - Executive Vice President and General Manager of Wexpro Company

R. Allan Bradley - Executive Vice President, Chief Executive Officer of Questar Pipeline Company and President of Questar Pipeline Company

Ronald W. Jibson - Chief Executive Officer, President, Director, Chief Executive Officer of Questar Gas Company and President of Questar Gas Company

Analysts

Stephen J. Maresca - Morgan Stanley, Research Division

Holly Stewart - Howard Weil Incorporated, Research Division

Christopher P. Sighinolfi - UBS Investment Bank, Research Division

Timm Schneider - Citigroup Inc, Research Division

Carl L. Kirst - BMO Capital Markets U.S.

James Yannello

James Bellessa - D.A. Davidson & Co., Research Division

Operator

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2011 earnings release conference call. [Operator Instructions] Mr. Hadlock, you may begin your conference.

Kevin W. Hadlock

Thank you, Chris. Good morning, everyone, and thank you for joining us for Questar's Third Quarter 2011 Earnings Conference Call. I am Kevin Hadlock, Questar's Chief Financial Officer. With me today are Ron Jibson, President and CEO of Questar Corporation; Jim Livsey, Executive Vice President of Wexpro; Allan Bradley, CEO of Questar Pipeline; and Craig Wagstaff, Senior Vice President of Questar Gas.

During this call, we will be referring to our third quarter earnings presentation that can be found on our website at www.questar.com.

Moving to Slide 2. 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 described in our SEC filings. Also, this call may reference non-GAAP financial measures. Our slides in the appendix provide reconciliations to these measures.

Let's begin on Slide 4. Yesterday, we reported third quarter net income of $36.1 million or $0.20 per diluted share. This compares to income from continuing operations of $29.4 million or $0.16 per diluted share in the third quarter of 2010. As we have emphasized in our prior calls, we are focused on reducing our cost structure. These efforts proved successful in the third quarter as our combined operating and maintenance and general and administrative expenses were down nearly 7% compared to the third quarter of 2010. Operating cash flow has been strong in the first 9 months of 2011, totaling $364 million, up 18% versus the same period last year. With the success we have had year-to-date, we have raised our 2011 earnings guidance range to between $1.11 and $1.14 per diluted share.

Turning to Slide 5. All 3 business units showed earnings improvement in the third quarter versus the prior year. Corporate was slightly lower due to higher interest expense from the $250 million of debt issued in December of 2010. Overall, net income in the third quarter of 2011 increased by $6.7 million or $0.04 per diluted share over income from continuing operations in the same period last year.

Moving to Slide 6. Wexpro, our cost of service natural gas development company, grew EBITDA to $56 million, up $6.8 million or 14% versus the same period last year. Net income was up $3.4 million to $25.6 million, an increase of 15% from the third quarter of 2010. These results were driven largely by a higher average investment base, which saw year-over-year increase of $16.1 million or 3.7%. Wexpro's capital investment of $43.3 million in the third quarter was substantially higher than last year as we saw a larger number of well completions and a higher ownership interest in wells drilled. Overall, Wexpro delivered strong results in the third quarter and earned an attractive return on equity, which was 20.7% for the 12 months ended September 30.

Turning to Slide 7. Questar Pipeline, our interstate natural gas pipeline and storage business, had a strong third quarter. Revenue was up $1 million, driven primarily by additional transportation revenues from the recently completed Overthrust Loop Expansion. These results were partially offset by lower revenues from natural gas liquid sales. Net income was $18.8 million, an increase of $2.5 million or 15% compared to last year's third quarter due in part to lower O&M, G&A and interest expense. Capital investment in the third quarter of 2011 was higher due to the investment in our Main Line 104 expansion project. Overall, Questar Pipeline earned an 11.8% return on average equity for the 12 months ended September 30.

Moving to Slide 8. Questar Gas, our retail gas distribution utility, saw an increase in gross margin of $800,000 due to continued customer growth and recovery of feeder-line replacement costs. On a net income basis, Questar Gas normally shows a loss in the third quarter. For the third quarter of 2011, Questar trimmed the loss by $1.2 million versus the prior year. This was due in part to a reduction in O&M and G&A cost versus the third quarter of 2010. On a financial basis, for the 12 months ended September 30, Questar Gas earned an 11.7% return on average equity, driven by a seasonally low level of equity on solid earnings results.

Moving to Slide 9. With regard to costs, Questar's consolidated operating and maintenance costs were down $1.4 million due to lower labor and maintenance expense. Our general and administrative expense in the third quarter totaled $24.1 million, down $3.1 million from the same period last year due to lower labor and share-based compensation costs. Improvements in both O&M and G&A costs demonstrate that our cost-reduction initiatives are proving effective. Production and other taxes were slightly higher due to property taxes on higher plant investment. Depreciation was up $1.9 million due to the acceleration of capital investment over the past year. Consolidated interest expense was $800,000 lower due to the redemption of Questar Pipeline's long-term notes using short-term debt, partially offset by corporate debt issued in December of 2010.

Turning to Slide 10. The company continues to generate strong cash flow. For the first 9 months of 2011, cash flow from continuing operations before working capital changes totaled about $364 million, an increase of 18% over the first 9 months of 2010. This strong cash flow will allow us to continue raising the dividend and will provide an opportunity to manage the share count back to pre-spin levels through the $100 million share buyback program that we announced last quarter. During the third quarter, we took advantage of favorable market conditions and increased the size of our credit facility to $500 million and extended the maturity of this facility to 2016. At the end of the third quarter, Questar had net available liquidity of $222 million. At September 30, Questar had $278 million commercial paper outstanding, which was used in part to retire $180 million of Questar Pipeline debt that matured in the second and third quarters of this year. We expect to refinance this before the end of the year.

With that, let me turn the time over to Questar's President and CEO, Ron Jibson, to discuss operations and Questar's outlook.

Ronald W. Jibson

Good morning, everyone, and thanks, Kevin, for that summary. We certainly do appreciate all of you joining us today. And I'll comment briefly on our third quarter results, update our outlook for the remainder of 2011 and discuss our outlook for 2012 and beyond.

Let's start on Slide 12. We had a successful third quarter, with all 3 business units performing very well. Wexpro continues to be a key differentiator for Questar because of its unique cost recovery model and industry-leading returns. The company develops natural gas and oil on a defined set of producing properties in the Rockies and 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 the 20% return.

So while Wexpro's operations are similar to those of a natural gas exploration and production company, its economic model is much like that of a regulated utility, noted for its stable and predictable earnings and cash flow but without commodity price exposure or the need for periodic rate cases.

Wexpro's development program continues to deliver low-cost production, largely due to increasing drilling efficiencies in the Vermillion Basin. Drilling performance in this location continues to exceed our expectations, with drilling times as short as 5 to 6 days and reserve estimates of 2.5 to 3.5 Bcfe per well. This has resulted in average finding costs of less than $1 per Mcfe for recently completed wells that Wexpro operates in this area. Together with Wexpro nonoperated wells in Pinedale, our average year-to-date finding costs were $1.10 per Mcfe, which makes cost of service gas from new wells very competitive with the forward price curve.

Questar Pipeline, our natural gas transportation and storage business, experienced increased revenues primarily due to the Overthrust Loop Expansion project completed earlier this year. This increase was partially offset by lower revenues from natural gas liquid sales. We also made significant progress on 2 key projects during the third quarter. We are on track to complete the Main Line 104 extension and the Skull Creek Processing expansion in the fourth quarter of 2011. Also in the third quarter, we received authorization to increase Clay Basin storage capacity by 2.7 billion cubic feet.

Questar Gas turned in another strong quarter, benefiting from customer growth in our service area. Over the past 12 months, Questar Gas added about 11,000 customers, an increase of about 1.2%, which is certainly outpacing the national average. Questar Gas' revenues also increased from feeder-line replacement cost recovery. As Kevin mentioned in his comments, we benefited from lower consolidated O&M and G&A expenses, which is a testament to our employees' focus on our cost-containment initiatives.

Turning to Slide 13. Questar's return on equity continues to be industry-leading. For the trailing 12-month period ending September 30, 2011, we saw a consolidated ROE of 20.3%. This superior return is supported by Wexpro, which provided a return on equity of 20.7%. Questar Pipeline delivered an ROE of 11.8%, which is near its authorized return. On a financial basis, Questar Gas' return on equity was 11.7%, driven by a seasonally low level of equity on solid earnings results.

Moving to Slide 14. Looking at the remainder of 2011, we have sufficient visibility into our earnings to raise our guidance to between $1.11 and $1.14 per diluted share. This new earnings guidance is supported by strong year-to-date earnings, continued focus on cost containment and an increase to Wexpro's full year capital investment forecast by $17 million to $125 million. We continue to look for opportunities to execute on a $100 million share repurchase program that was approved by our board last quarter. Year-to-date, we have repurchased $3.8 million under the $100 million authorization, which extends through the end of 2012.

Turning to Slide 15 and some perspective on our 5-year outlook. We continue to expect natural gas prices to remain soft over the next several years. While we have very little direct exposure to commodity price volatility, sustained low natural gas prices have an impact on drilling activity in the Rockies. While the U.S. economy continues to show signs of weakness, economists are forecasting that Utah's recovery should outpace the national average. We continue to see strong signs of economic development in Utah. Recently, Forbes Magazine named Utah as the #1 best state for business, and Fortune Magazine named Salt Lake City as one of the 15 best global cities for business.

We continue to be optimistic about our long-term growth prospects. For 2012, we have established a preliminary earnings guidance of $1.15 to $1.19 per diluted share and estimate our compound annual earnings growth rate to be between 4% and 6% over our 5-year planning horizon. This growth rate is supported by highly visible opportunities to invest in Wexpro development and to grow Questar Gas' investment base through the feeder-line replacement program. This earnings growth and associated cash flow provides the opportunity for us to continue our dividend growth. We are currently targeting a dividend payout ratio of about 60%, which could allow us to increase the dividend faster than earnings growth over the early part of the 5-year plan.

Turning to Slide 16. Wexpro continues to project compound annual growth rate of 4% to 8% through the 5-year planning horizon. We are driving further efficiencies in our drilling operations in the Vermillion Basin and are moving into a more prolific areas of Pinedale in the next few years, which gives us confidence in our ability to keep cost of service gas competitive with the forward curve. We are expecting to invest between $550 million and $700 in million cumulative capital through 2016, with a forecast of $135 million for 2012.

Last quarter, I mentioned that we have opened a dialogue with Utah and Wyoming regulators to expand the Wexpro Agreement. Currently, the agreement does not permit us to add new properties. We believe that Questar Gas customers and company shareholders could benefit by expanding the Wexpro Agreement to include some additional future assets. We would not expect that adding properties to the Wexpro Agreement would materially change our current 5-year drilling plan, but it would accomplish our objective of adding years to the Wexpro Agreement.

Moving to Slide 17. After several years of significant earnings growth at Questar Pipeline, we are entering a period of slower growth and fewer investment opportunities, while still generating strong free cash flow. The spread between oil and natural gas prices has widened, causing some producers to shift development in favor of wet gas and oil producing areas. As a result, Rockies natural gas production is forecast to be relatively flat over the 5-year plan. Additionally, several project completions in 2011, including Ruby Pipeline and the Kern River expansion, have increased export capacity for Rockies gas. Our strategic position, which is centered around the 4 key Rockies hubs, remains very strong. And our long-term, demand-based contracts mitigate the potential negative impact on transportation revenues over the 5-year plan.

Overall, we are expecting earnings to be flat over the 5-year planning horizon. We were likely see some variability in Questar Pipeline's earnings due to continued volatility in natural gas liquid prices. We continue to look for opportunities to provide value-added services to producers. Market dynamics, however, are presenting fewer growth opportunities. For 2012, we are forecasting capital investment of about $55 million. On the positive side, we are projecting cumulative free cash flow of approximately $350 million over the 5-year plan.

Turning to Slide 18. The outlook for Questar Gas continues to be bright. We are projecting compound annual earnings growth of 7% to 9% over the 5-year planning horizon. This growth rate reflects softer customer growth expectations for 2012 of about 1%, rising to 2% over the 5-year plan. Given recent economic forecast for the state of Utah, this customer growth estimate could prove conservative. Questar Gas' growth rate is supported by customer growth and the feeder-line and infrastructure replacement program. The feeder-line tracker allows us to earn on our current multiyear pipeline replacement program as we replace new facilities into service. This cost tracker is extremely important for Questar Gas, our customers and our shareholders. Everyone benefits as necessary improvements are made to the distribution system without the need to file general rate cases to add the investment to rate base. Questar Gas is projecting higher capital investment totaling approximately $155 million in 2012, including about $55 million allocated toward the feeder-line replacement program.

Moving to Slide 19. In summary, we continue to show strong performance in all 3 of our business segments. I am very pleased with our third quarter results, which demonstrate our employees' resolve to execute our business plan while reducing costs. Our year-to-date progress gives us confidence to raise our earnings guidance to between $1.11 and $1.14 per diluted share in 2011. Looking out one more year, we have established a preliminary earnings guidance range for 2012 of $1.15 to $1.19 per diluted share and a capital budget of approximately $355 million. Using the higher earnings expectations for 2011 as the base year, our long-term compound earnings growth rate could be in the range of 4% to 6% over the 5-year plan. We remain focused on increasing shareholder value and providing a competitive return. In addition to a strong earnings growth, we expect to continue increasing the dividend, targeting a 60% payout ratio. This could allow us to increase the dividend faster than earnings growth over the early part of the 5-year plan.

Overall, we are very pleased with our progress so far this year and are excited about our prospects looking in the future and going forward. And with that, we'd be happy to take any of your questions. And Chris, we'll turn the time back to you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Steve Maresca with Morgan Stanley.

Stephen J. Maresca - Morgan Stanley, Research Division

A couple of questions. First if I can touch upon Wexpro. And just -- you talked about last quarter and mentioned it again now the possibility of expanding into other areas. I'm wondering if you could just give more color on progress, status of that and then what next steps are for that to happen? And then if it were to happen, how would you go about expanding? Is that something where you would need to go and find more acreage or buy more acreage, or how would this sort of play out?

Ronald W. Jibson

Great. Steve, we appreciate that question. We -- last quarter, we did mention the fact that we have had some dialogue with our regulators and -- in looking at potentially expanding the assets that would be part of the Wexpro Agreement. Just to know, we have many, many years of assets still remaining in Wexpro, but this would be an opportunity to expand that even further. Since the last quarter, we've had continued dialogue with the regulators. In fact, over the last 2 weeks, we've had 2 meetings. Those have been positive and productive. We continue to work with both Wyoming and Utah regulators and the regulatory staffs in this approach. It's something that we feel is a -- could be of great value certainly to our customers and also our shareholders. As far as the next steps, we'll continue that dialogue. We're moving very close to having a draft proposal. We'll work with the regulatory groups in that regard, and we'll be able to you update you each quarter on that. Essentially, what it would provide us the opportunity to do is to look for low-cost assets, obviously, in the areas that we feel very comfortable, in our core areas. And we would look for those assets to be able to purchase those and then provide in the Wexpro model. Maybe, Jim, do you want to give a little more explanation on -- Jim has been -- Jim Livsey, who heads up Wexpro, continues to be in the middle of that dialogue with the regulators and maybe could give us a little more perspective.

James R. Livsey

Thanks, Ron. I think -- just to reiterate what Ron said, we talked about some kind of mechanism that would allow us to keep the Wexpro cost of service in a perpetual mode with adding properties, occasionally when they might make sense, and those would be in our current areas of operation, areas that we know well. And we're familiar with the way that we operate. We think it could be a good opportunity.

Ronald W. Jibson

Thanks, Jim. And Steve, just to put it in perspective, we plan to have something resolved on this within months, not years. This is something that we're working very aggressively on, and we'll update you as we move along in the process.

Stephen J. Maresca - Morgan Stanley, Research Division

One quick follow-up on that. Is there anything that the regulators or a specific issue that they're concerned about or things that you have to overcome, or is it just sort of working through a process?

James R. Livsey

Yes, I think we're working through a process and having dialogue. And the dialogue has been good and constructive, so I think that's where it's at.

Stephen J. Maresca - Morgan Stanley, Research Division

My second and final question is just on your returning of cash to shareholders. You've got, I think, a relatively conservative dividend payout ratio, and it seems to be the ability to raise it more, like you said, even more than earnings possibly in the next couple of years. You also have the share repurchase agreement in place. What are your thoughts between toggling between the 2 in terms of what do you think the impact to STR in terms of dividend increases versus share repurchase? If feels like in the market place, we're starting to see more companies take on the dividend increase strategy. And is that something you would look to do more than share repurchases and, I guess, how you're viewing that?

Ronald W. Jibson

Yes, let me just say, in general, we have stayed committed to growth in our dividends since the spin-off the resources. We've aggressively been raising that dividend. Again, as a reminder, last year, about 8% and then, February of this year, another 9% increase. We continue to drive towards that approximate 60% payout ratio. But maybe I'll ask Kevin, if Kevin could give us a little more color on that.

Kevin W. Hadlock

Thanks, Ron. As it pertains to dividends, we certainly prioritize our free cash flow with the highest priority to find ways to reinvest that capital into the business. As you saw this quarter, we had a very strong consolidated return on equity. And to the extent, we continue to drive those kinds of results. We'll want to plow that money back into the business. We're certainly cognizant of the way that investors are valuing the dividend today and continue to focus on driving the dividend strategy, targeting that 60% payout ratio. To your point, depending on the -- your view of where we're going to be with earnings, that payout ratio is in the mid-50% area. And we certainly now have room to drive that higher and the cash flow to do it. The share repurchase program is the third priority use of that cash, and we do expect to be opportunistic in the market. As you've seen, of the $100 million program that has been authorized, year-to-date, we've only repurchased about $3.8 million, which offsets the continuing dilution that comes from some of the benefit plans and the dividend reinvestment. So we have not been out aggressively buying the stock, and the stock has still performed very, very well.

Operator

Your next question comes from the line of Carl Kirst with BMO.

Carl L. Kirst - BMO Capital Markets U.S.

The first thing that I just want to touch on was the O&M gains, clearly, better than we were expecting. And I just kind of wanted to get a sense, was it -- is this something that is sustainable at the current level? Do you think maybe there is even additional gains to be had in 2012? And I'm just trying to kind of get a sense of since the improvement was better than we were expected if this sort of an ongoing trend? Or if, in effect, we have just captured some of the O&M efficiencies sooner than anticipated. And I'll sort of wrap that into a secondary question, which is the EPS CAGR going forward kind of being shaved 100 bps to 4% to 6%, understandably because the 2011 number is now a little bit higher. But with the end number, if you will, the outer years kind of relatively more unchanged, is it all still coming back to O&M, that basically we just got a little bit sooner kicked than expected? I'm just trying to better understand that.

Ronald W. Jibson

Yes, let's have some discussion on that. Again, I want to just mention the superb job I think all of our business units have done as far as this year being focused on costs. We're very pleased with what we're seeing in our O&M for this 2011 year to-date. And maybe to drill down on that, I'll ask Kevin to give you more on the actual gains that we see, what we see going into 2012 and also our EPS guidance.

Kevin W. Hadlock

Thanks, Ron. In terms of the O&M gains we have seen, primarily in the second and third quarters of this year, I'd characterize it really about half of those are one-time or timing issues. For example, we have the opportunity this year in a number of projects to capitalize the labor costs where, for example, next year, those costs would likely be going to O&M projects. And so -- yes, I'd characterize some of it as timing issues. So I wouldn't expect that full amount to continue in the future. There's also an element of things like delayed hirings and putting off discretionary spend that may actually be more sustainable as we go into the future. I still think we have the opportunity post-spin with the cost structure that we have to be more efficient in our organization and to find ways, especially at the corporate level, to continue to find O&M reductions as we allocate those costs down to the business units and to push some of those costs down in the business units where they can be better managed. In terms of the EPS CAGR, as we go forward, your intuition is very good. The reason for the reduction of 4% to 6% is primarily because 2011 is expected to be such a strong year and the out years have not moved significantly. And one of the areas that we've been very focused on in this planning session is around what's going on in pipeline. We are expecting, as we get into 2012 and through the 5-year plan with natural gas prices where they are, that opportunities in the Rockies are going to be a little bit lower than what we had expected in the past. We are forecasting lower natural gas to liquid revenues that have tempered some of our view as we go forward out the curve in the 5-year plan. So I think it's a combination of some one-time O&M savings, as well as a little bit of a tempered view on Questar Pipeline's future.

Ronald W. Jibson

And certainly, Carl, any kind of a rebound in natural gas prices could have an impact on that. But we're being cautious as far as what we see with those commodity prices.

Carl L. Kirst - BMO Capital Markets U.S.

No, I very much appreciate that color. So does this mean that you guys aren't going to be interested in CIG if it comes on the block? One follow-up, if I could, with Wexpro though. Given that we are seeing F&D now under a $1, is the kind of the new program over the latest 3 months, 4 months, what have you, is that delivering cost of gas at the margin at that sort of targeted $4 level? Have we sort of achieved that benchmark?

James R. Livsey

Yes, Carl, this is Jim. So the drilling program we have currently with the lower finding cost coupled with the benefit that bonus depreciation is giving on cost to service is really allowing us to deliver cost to service below the $4 level over the next 5 years. And then, these wells in total, over the 30- or 40-year life of the well, will have cost to service in the low $4 range. And so we think that's a great benefit for the customers, so we feel very good about what we're doing for the customer with this drilling program.

Carl L. Kirst - BMO Capital Markets U.S.

Great. And then last question, also on Wexpro and understanding this may be cart in front of the horse, but I just to want to make sure I've got sort of the understanding if we can get it. When we talk about potentially adding more opportunity to Wexpro, expanding the ring fence, if you will, but doing it by not necessarily changing the 5-year spend, it's more about sort of adding inventory and adding life. Does this mean that you would only be going after PUDs of resource, you wouldn't be buying flowing production? And I guess, part of that also too is, if dollars were spent upfront, to either acquire land or product for that matter, would that investment fall under the Wexpro Agreement or is it just the development capital in future years that would fall under the Wexpro Agreement?

James R. Livsey

Yes. Carl, Jim, again. I think the way we're looking at this is, as we think about opportunities, they probably would be a combination of existing producing wells, as well as drill out PUD opportunities. And I think the early discussions we're having is -- would be directed towards coming up with a mechanism that would provide cost reimbursement for both parts of that equation but still in a manner that delivers cost to service that works for the customer. So we're early stage on that, but that's where we're looking.

Operator

Your next question comes from the line of Jay Yannello with Skyden Capital.

James Yannello

Following up on Steve and Carl's point, and not to try to pry you too open here, but with regard to Wexpro and expanding it, is it as simple as the regulators want to get more comfortable with the gas price outlook? I mean, clearly, you save customers a ton of money over the years. You would think a deal would be easier to come by. Is it just simply, they want to feel more comfortable with the pricing outlook? And I'm referencing like your Slide 36 from your road show where it showed, it could be kind of breakeven or slightly underwater near term. Is that kind of the main sticking point?

Ronald W. Jibson

It's a -- appreciate the question, Jay. It's really a situation that this is a new concept for the last 30 years. We've talked about Wexpro having a finite set of producing properties. And we really haven't approached the regulators in the past about this kind of a concept to be able to essentially add assets to that asset base. So I don't think that there's really sticking points at this point. I think the dialogue has been very productive. It's been very positive. The regulators, certainly, as you indicated, understand the benefits of Wexpro to our customers. Certainly, over the last 10 years, that's resulted in about $750 million of savings to the customer. So they're very positive about the fact that if we're able to do this, that it would continue to provide that benefit to our customers for many years to come and would expand the life of Wexpro. So I think, right now, it's just the actual process of getting everyone comfortable with how the mechanism would work. Now we're working through a lot of that. This is an interactive dialogue. We're wanting to get input from our regulators on what they would like to see this structured as, and we're having a very good dialogue in an interactive sense that way. So I really don't see headwinds at this point. We just need to get a document that works for both parties and then start to look for those producing properties. It has been certainly a very cooperative and collaborative effort between the regulators and our company.

James Yannello

Okay, fair enough. And quickly going back to the share repurchase. The $3.8 million seems a little light. There's been some days where one would think you could go in and be a little more active. I don't know if you're in quiet periods from the end of the quarter, the road show. And it's easy to play Monday morning quarterback here with the way this market is, but I would have thought a little more on the buyback. Any color on that?

Kevin W. Hadlock

Sure. I think we have been -- over the last several weeks, we do have a natural blackout period that we do enter into where we cannot be opportunistic in the market. But we will watch it closely. We've enjoyed watching the relative performance of the stock here over the last several months, and then we'll continue to be opportunistic to look for ways to reduce the dilution and effectuate that program.

Operator

Your next question comes from the line of Holly Stewart with Howard Weil.

Holly Stewart - Howard Weil Incorporated, Research Division

Most of my questions have actually been answered. But I would like to prod Jim on well count assumptions for 2012 and the new capital spending number. I want to know if he could give us a breakout between Vermillion and Pinedale and how that compares to this past year or for '11?

James R. Livsey

Yes, we're going to see, Holly, about 70 wells again, perhaps about 20 in the Pinedale area next year in our capital program and the balance in the Vermillion area, primarily Trail, Canyon Creek. So comparable to this year, just a bit more in Pinedale area next year.

Operator

Your next question comes from the line of Timm Schneider with Citigroup.

Timm Schneider - Citigroup Inc, Research Division

Most of my questions have already been answered. But just real quick, what is the share buyback assumption for the 2012 guidance? Is there anything in there?

Kevin W. Hadlock

Yes, we assume we effectuate the program through the bulk of 2012. Certainly, if we find additional opportunities to invest that capital, we'll do so. But the assumption baked in is that we would effectuate that program throughout the year.

Timm Schneider - Citigroup Inc, Research Division

Got it. And then just real quick on the pipeline side. I mean, in the past, you've talked about looking at potentially midstream opportunities. Just wondering if there was an update there?

Ronald W. Jibson

Yes, I'll ask Allan Bradley to cover that.

R. Allan Bradley

We're still actively going after opportunities in our 3 basins, particularly around the liquid-rich play. Nothing new to report. We've got a lot of proposals out. And quite frankly, that space is just very active right now. We're encouraged by what we're seeing.

Kevin W. Hadlock

Yes, and one follow-up I wanted to mention on the share repurchase. Because of the way the shares are averaged into that count, you won't see a huge effect of the share repurchase program on 2012 earnings because of the averaging effects there.

Operator

[Operator Instructions] Your next question comes from the line of Jim Bellessa with D.A. Davidson.

James Bellessa - D.A. Davidson & Co., Research Division

You mentioned in your formal remarks the commercial paper that you've taken down. What was the reason for the use of commercial paper?

Kevin W. Hadlock

This is Kevin Hadlock. We use commercial paper to manage our seasonal working capital needs, as well as this year because of the maturities with pipeline. We took the opportunity to essentially redeem those long-term notes as we had 2 separate maturities in order to get a large enough amount to issue effectively to just carry that in the short-term market. We do expect to refinance $180 million of that before year end. So the $278 million, about $180 million of that is to be refinanced to long-term notes and issuance at Questar Pipeline, the remaining $100 million really manages the seasonal working capital as we begin to inject gas for the winter heating season.

James Bellessa - D.A. Davidson & Co., Research Division

Thank you, you went on and elaborated where I wanted to go. And then, on your Slide 13, you showed this return on equity consolidated at 20.3% for the last 12-month period. That's impressive. But when I look at the graph, Wexpro was at 20.7%, and then the 2 other entities were less than 12%. So just on a weighted basis, I would have guessed that the overall consolidated ROE would have been less than 20.3%. What keeps it at such a high level?

Kevin W. Hadlock

Sure, there's a -- Kevin Hadlock again. There are 2 things going on here. One is we have $250 million of debt sitting at corporate that helped that return. We also have negative equity sitting at the parent arising from the spin-off of QEP when we made an equity injection there. That does elevate that consolidated ROE.

James Bellessa - D.A. Davidson & Co., Research Division

And that negative equity at the parent, will that be reversed at some point or are you going to keep it in place?

Kevin W. Hadlock

So as we accrete in earnings and that equity will eventually reverse itself.

Operator

Your next question comes from the line of Chris Sighinolfi with UBS.

Christopher P. Sighinolfi - UBS Investment Bank, Research Division

Yes, most of my questions have also been touched. I appreciate the additional color on Wexpro and also on the share repurchase. Question for you on midstream, I guess, maybe for Allan. As we see other announcements from other producers -- or not producers but midstream operators, I know the bulk of sort of your NGL volume decline has come because of your former sister company having some expansions in the region. How do we think about the opportunities you guys have versus some of maybe the headwinds that might be created farther upstream by ongoing expansions that those companies, third-party companies might announce?

R. Allan Bradley

Thanks, Chris. This is Allan. Clearly, as producers look at the value of that production, they're going to want to capture all of the frac spread themselves. So as you see in pipelines forecast, we're actually showing over the 5-year plan, a decline in volumes. These are liquid volumes that we recover on our systems. But as it grows in the field, we think Questar Pipeline's low cost to capital, our willingness to enter into some unique transactions with producers gives us certainly an edge as we negotiate. And we've seen some traction, but the market moves fast. It's a business model that for the midstream is a little different than a traditional long-term contract on the pipeline. And we continue to try to work through these negotiations in a way that kind of captures the elements of sort of a fixed debased arrangement that gives the bulk of the upside on the liquids to the producer. And we're looking at both acquisition opportunities and just simply expansion opportunities as well, as producers expand in the areas where they don't have existing gathering. And a lot of the production currently flows in our system and is processed downstream, and it's really just a question of trying to position ourselves to compete in the field side of it. So this is a new opportunity for us. It's one that presented itself as a result of the spin-off of QEP, as you note. And it's still early days. But I assure you, we've got a number of aggressive proposals out there and we're working hard to see if we can't sort of close our first opportunity.

Christopher P. Sighinolfi - UBS Investment Bank, Research Division

Okay, great. Another question, we focused on it in the past on some of the excess capacity that remained on Overthrust. Any update about that? I know in the past, Allan, you've given us some sort of feeling for what market was like.

R. Allan Bradley

Let me just remind you, we've built out the Overthrust Loop. It was anchored by long-term contracts, so it's generated a very attractive return. So in the process of building the loop, we actually created additional capacity. You'll recall that we had 50,000 to 100,000 decatherms a day going eastbound out of our Wamsutter hub. And we had another couple of hundred thousand decatherms a day westbound, which really tied to a much higher Ruby expectation in terms of ultimate capacity. What we're seeing right now is that there is adequate takeaway capacity out of the Rockies. Production is fairly flat over the planned period. So there really is an incentive right now for producers to add additional contracts to their portfolios. So I think, right now, in our plan, we've assumed that those capacities are not taken on a firm long-term basis in the next 5 years. But instead, we've continued to bake in some interruptible opportunities because we can use that capacity as markets dictate. And that's the nice thing about Questar Pipeline system is that we do give producers, shippers on our system the opportunity to flex between these hubs depending upon where the markets are the strongest, whether it's a California play one month, a Mid-Continent, Chicago play the next. That extra capacity gives us additional flexibility to provide some pretty good value-added service under our standard firm transportation arrangements. What we're seeing on the export side with the introduction of Ruby is we're actually seeing some of the traditional throughputs decline on existing pipelines. And you would expect that if you have a flat production, and you add upwards to 1 to 1.3 Bcf a day of capacity into the market. So it's still going to be a very competitive environment for export pipelines going forward. And as they look to reposition those export capacities, we're paying close attention to how it affects competition in our core service territories with Wasatch Front and Colorado, Wyoming. So we're very mindful of the potential increase competition that is going to result as contracts roll off primary terms. So we're laser-focused on that.

Christopher P. Sighinolfi - UBS Investment Bank, Research Division

Okay, great. And I guess, one final sort of more strategic question. Obviously, you've mentioned in your 5-year plan, given the dynamics in the Rockies, limited additional pipeline opportunity. The pipeline is going to be generating a lot cash. Obviously, we've talked about dividend and share repurchase as potential usage for that. But when I think about outside the Rockies, tremendous opportunity for increased infrastructure to move gas, how do you guys think about maybe expanding beyond the current footprint geographically and using some of the -- maybe some of the cash flow that's going to be generated by that business to maybe potentially grow into a new area?

Ronald W. Jibson

Yes, Chris, I think we're staying consistent in that regard. We will always look for opportunities. As you mentioned, our balance sheet is strong. We've got good cash flows. We're in a very good position that way. We're not really limiting ourselves to any opportunity. But obviously, we're going to be very careful in that approach and make sure that we have accretive value in that sense. Maybe, Allan, you want to give your perspective outside the Rockies?

R. Allan Bradley

We have, at times, entered into discussions with third parties about expanding into growing shale plays. Typically, there is adequate good infrastructure. So we're really coming on as a facilitator and nonoperating interest holder in a partnership. One of the things we pride ourselves is being a low-cost operator, efficient operator. So when you're going into a new region and you're looking at expansion opportunities, it's really hard to step in and argue you have synergies to really bring to a party. So those are a little bit more difficult to structure around our return levels. I think when you look at acquisitions today, much -- I mean, I just look at some of the recent acquisitions in the MLP space. Again, very hard to step in without some synergies with gathering and midstream to really compete with the more aggressive MLP acquires. So while we continue to look and would be hopeful to see some opportunities and create synergies with our operation, we really don't have anything like that baked into our 5-year plan. Most of it is organic growth, growth in the 3 basins that we know well. And that's honestly where our primary focus is.

Operator

At this time, there are no further questions. I'll now turn the call back over to management for closing remarks.

Ronald W. Jibson

Okay, thank you. Again, we want to express our appreciation to all of you for participating today on the call. As always, please feel free to give us a call if you have any additional questions. Certainly, we're available today for any drill down on anything. And we certainly look forward to seeing you in the future. We'll be out on the road a lot over the next couple of months and hopefully, we'll have the opportunity to see you on our road shows and other opportunities. So thanks again for your participation today.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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