Questar Corporation - Shareholder/Analyst Call

| About: Questar Corporation (STR)

Questar Corporation (NYSE:STR)

November 03, 2011 12:15 pm ET


Unknown Speaker -

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

Anthony Ivins - Treasurer

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

Craig C. Wagstaff - Senior Vice President

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

Anthony Ivins

Good afternoon, ladies and gentlemen. We welcome you to Questar's East Coast roadshow. My name is Tony Ivins, I am Treasurer and Manager of Investor Relations. We welcome you to our luncheon. I will shortly introduce Ron Jibson, our CEO, but just a couple of notes. As we go through the presentation, it will be slightly different than your book. Your book is kind of our general presentation. This one's a little bit more around the individual business units and each head of the business unit will talk about it. So the slides won't match your book exactly, but most of those slides that you will see are in the books.

Also, you'll note on the dividend page, when we printed these books, we had not announced our dividend increase and I didn't dare put the increase in there until the board approved it. So -- but the -- on our website, this presentation will be there and you will be able to see it with the dividend increase. So with those caveats, let me introduce Ron Jibson, Questar Corporation's President and CEO, he will introduce the rest of the management team.

Ronald W. Jibson

Thank you, Tony. And I'll start out by inviting our management team up. Hopefully, they've got their lunch finished and you're going to see a lot of them today. So we'll get started right off with our management team, if they'll come up and take their seats. But good afternoon, and welcome and thank you. We know you have choices on a day like today and it's a beautiful day in New York and we always enjoy being here. But we certainly appreciate you taking the time to come visit with us. We love being out, we get to New York quite often, and I know we've had an opportunity to be with many of you in one-on-ones, but we look forward to this lunch every year. And it gives us an opportunity, especially coming up, our third quarter results and some of the things that are going on at Questar, like I say, very dynamic. As Tony indicated, our books aren't even up-to-date and we just printed them a few days ago. So it's a dynamic time for us and exciting time for Questar.

I'd like to start by introducing our management team, and we've got many major of our management team with us today. You met Tony Ivins. Tony has been with our company over 30 years, Tony has served as our Assistant Treasurer, Corporate Treasurer for many, many years. And then at the time of the spinoff of our E&P business back about 1.5 years ago, Tony came in as our Corporate Treasurer. Next to Tony is Kevin Hadlock. Kevin is the newest member of our management team. And Allan Bradley likes that because now somebody else is the newest member of our management team. Martin Craven, who is here with us last year, retired. We feel very fortunate in being able to bring Kevin on board. Kevin was with Baltimore Gas and Electric and Constellation Energy prior to that, with General Motors and also Morgan Stanley. So Kevin brings a wealth of knowledge and experience and it's great to have him onboard with Questar.

Over to my left, starting on the other end, Jim Livsey. Jim has been with our company over 24 years, has been with Wexpro over 21 years and has actually managed Wexpro as the head of the Wexpro business unit for the last 14 years. So when we talk about fourfold growth in Wexpro over the last 10 years, in that income, Jim has been the leader of that, and him and his team have done an excellent job in developing that growth within Wexpro and you'll hear more from him in just a minute. Allan Bradley, next to Jim. Allan is our President and CEO of Questar Pipeline. Allan has been with us 6 years, has well as over 30 years in the industry. Our goal with Questar is to find somewhere in the world that Allen hasn't been and worked. And obviously, I say that to reflect the fact that Allan's experience in the energy industry and the natural gas industry is something that is a huge asset and value to us at Questar.

Next to Allen is Craig Wagstaff. Craig also has been with Questar for 25 years, 26 years, and Craig took over the utility Questar Gas 1.5 years ago and I can tell you that I'm excited for Craig to get in front of you today because Craig's going to talk about some results and some successes we've had in our utility that we certainly believe are industry-leading and under Craig's leadership has done an excellent job. Let me just take a couple of minutes here to talk about the -- just give you a brief summary of where we're at currently, and then I'm going to ask each of our business unit leads and Kevin to come up and give you a deeper dive on each of these businesses.

First of all, what makes Questar unique? We think we are unique in many aspects. We certainly, from a strategy standpoint, are able to take advantage of our integrated approach. We have a balanced portfolio of companies and we like to talk about the fact that we cover everything from the well head to the burner tip and you'll see that today in the presentations. We have been able to provide superior returns and we like to say we can take advantage of our growth opportunities within our business units and that's shy of speculation or requiring M&A activity. We think we've got a good growth story, doesn't alleviate that opportunity for us, but certainly is a good strategic story in and of itself. We have a history in our company as far as our performance, of providing the returns that hopefully our investors are looking for. We've been able to earn our allowed return in our business units, you'll hear more on that in a few minutes. We have a strong regulatory relationship in Utah and Wyoming, that's key to our utility and to our Pipeline business as far as our relationship with FERC. And we certainly have been able to maintain very high customer satisfaction levels. One of the things helping us in that regard is the fact that we continue to be the lowest rates in the nation in our Utah and Wyoming market.

As far as growth in the business, we're seeing some industry-leading growth with our Utility business, looking at 7% to 9% growth. Wexpro 4% to 8% growth and certainly, again, very strong growth within all of our business units. If we look at Questar Pipeline, and Allan will talk about this, more moderate growth but very strong cash flow generation, providing that benefit to Questar. So we have a strong balance sheet, good cash flows and we'll talk about our dividend policy going forward.

Questar is located in the heart of the Rockies, again, we're anchored by 3 key business units. Wexpro, our production development, production company, develops and produces natural gas for our utility Questar Gas on a cost of service basis. And we'll talk again more about that. Questar Pipeline transports natural gas to our utility, Questar Gas, but also for other third-party shippers. And Questar Gas delivers natural gas over 900,000 of our distribution customers. So again, Wexpro Pipeline and Gas making up that integrated structure of companies. Now we offer a balanced portfolio. This is something that if you followed our company 12 years ago or so, you would've seen a very similar pie chart as far as our 3 business units. Over the last 10 years, we were driving the growth in our E&P business, that culminated in the spinoff of QEP Resources about 1.5 years ago. And so since then, we've rebalanced and you can see it from the net income basis, the balance of those 3 businesses.

Our third quarter results, as far as our return on equity, you can see driving very good returns, Wexpro over 20% return on equity for the third quarter; Questar Pipeline, 11.8%; Questar Gas, 11.7%; and Consolidated at 20.3%. Our current and 5-year outlook as far as the updates that we gave the other day in our earnings release. We continue to expect stock commodity prices. Now it's impossible to project what's going to happen with commodity, but if you look at the current situation, we have an abundance of natural gas in the United States. We've got demand, not quite meeting that same increase in supply and so, as you would expect, we're seeing very soft prices in the commodity market. We anticipate and we build into our 5-year plan a very conservative approach as far as natural gas prices going forward.

We live and we work in an area that's very robust from a standpoint of economic development. Utah continues to be in the limelight of states where economic development is growing. Forbes magazine recently mentioned Utah as the top state in the nation to do business. FORTUNE Magazine followed that up with listing Utah as one of the 15 locations in the world that they recommend for doing business. And so, a lot of accolades from that standpoint. I think the key there is that right now, we have a lot of business activity, a lot of companies looking at relocating to Utah. We've had very good success with companies such as Procter & Gamble relocating major manufacturing plants, and that's driving the growth that we're seeing. I never thought I'd get excited about 1% to 1.2% growth. But when you look about the -- and that's customer growth. But when you look at the current environment, especially in the United States, we certainly feel good about the fact that we're in a positive growth situation and we've, in our 5-year plan, have also been quite conservative on our growth profiles, even with all of the activity I mentioned. We're looking at a 1% to 2% customer growth over the next 5 years.

As far as our third quarter performance and all 3 of our business units, you'll hear more about that, but we're very excited about our third quarter results. That's allowed us to look at our 2011 guidance. And we've updated that to be, to go from $1.07 to $1.11, we're now guiding at a $1.11 to $1.14 per diluted share, and as far as our Wexpro capital, we've raised that to about $125 million from our original $100 million budget this year, and we raised that to $108 million in the first quarter and we're now raising that to $125 million for year-end. And also our consolidated ROE projections for the year are between 18% and 19% on a consolidated basis within our business units.

We also, as traditionally we've done for the end of third quarter, we gave preliminary guidance for 2012. We put that guidance out at a $1.15 to $1.19 per diluted share and we established our initial 2012 capital budget of about $355 million. We are looking for the opportunities and the right timing to execute on $100 million buyback that we announced in the prior quarter. That is something that was approved by the board through the end of 2012, primarily driven to handle the dilution of our shares that we saw at the time of the spinoff. And we'll continue to execute on that, and Kevin will give more color on that in just a few minutes.

So based on our revised 2011 outlook, we see our long-term earnings growth of 4% to 6% over the planning horizon, and we've also are excited today to announce another increase this year in our dividend. We've had a 5% to 10% dividend strategy since the spinoff and restructuring of Questar, we grew the dividend last year by 8% in August. This year so far in February, we increased that by 9% and now, just this week, announced another 6.6% increase in that dividend. I know that adds up to more than the 10% that we talked about, but based on the current conditions, our cash flow situation, we felt like it was a good time to increase the dividend as we continue to drive towards that 60% level of payout.

And with that, I'd like to introduce Craig Wagstaff again. Craig is our Senior Vice President and runs our utility Questar Gas, and Craig will give you more detail on our Utility business.

Craig C. Wagstaff

Thank you, Ron, and good afternoon, everyone, and again, we thank you for being here and taking your time to spend a bit of your lunch hour learning a bit more about Questar and having some discussion with us.

So as we do look at the utility, at Questar Gas, as Ron indicated, serving Utah, southwestern Wyoming and southeastern Idaho. We are in the heart of some great economic developments. We do hear feedback from the folks involved with economic development in our state. It is a busy time for them. And certainly our customer growth, as Ron stated, at 1% to 2% is a conservative approach as we look at the 5-year plan. If you look at the forecasted data for Utah for the next 5 years, it would be much higher than the 1% to 2%, but we've chosen to take a conservative approach on that. So certainly one of the things that drives economic development is our low rates. Lowest rates in the nation right now, we tend to either be at or near lowest rates in the nation and currently lower 48 states, we have the lowest rates.

What is making Questar a top-performing utility? A few of those attributes as we look at here, for the past 6 years, Questar Gas has earned the allowed ROE and likely, as we wrap up this 2011 year, that will be 7 years that we've earned our allowed return on equity. Also, our efficiencies are among the 5% best in the nation. This is based on national research. So our operating and maintenance cost per customer is very favorable and it's some of the lowest in the nation. Customer rates, as we talked about; growth, we've talked about. And certainly market penetration, we have very high market penetration. This indicates how many users of your product or of natural gas within your existing service territory actually use natural gas for space and water heating. You can see Questar Gas is at 95%. National average would be about 60%. So certainly lowest rates in the nation and a respectable customer satisfaction, which is an excellent -- certainly tied to having a high market penetration for our utility.

As we talk about the regulatory environment within our service area, many investors want to know what type of relationship we do have with our regulators. We would say that our regulatory environment is certainly constructive. We received great feedback from our regulators and receive great support as we come through our most recent rate case in April of 2010, some of those attributes that demonstrate this positive regulatory environment would be, first up, we went from a 10% ROE to a 10.35% ROE which, I don't know if you can find that over the past 18 months for any utility that's actually been able to increase their return on equity.

We have been in a 3-year pilot on revenue decoupling and as a settlement in the most recent rate case. We came out of that with revenue decoupling moving forward, so certainly a great thing for the utility, great thing for our consumers, and certainly ties into the next item up there which is our conservation program. The other key component that we have existing within Questar Gas is the infrastructure upgrade. Safety is first and foremost at Questar Gas. And it shows by the history of activities that we've kind of moved forward with over the past couple of decades. In the '80s, we replaced all the cast iron within our system. In the '90s, we replaced all our lower bare steel. And we came to a point within 2000s, mid-2000s, that we determined it was time to replace our high-pressure feeder line.

Now this feeder line was pipe that was actually put into service back in the '20s and '30s. It was taken out of service in the '50s, or out of the ground in the '50s. It was reconditioned and placed back into service. This has been respectable and good pipe for us, but we just felt the timing was right for us to move forward and start replacing some of this infrastructure.

So as we began meeting with our regulators 4 or 5 years ago to come up with a plan for this, we came forth out of the last rate case with what we determine is a feeder line tracker. What this tracker allows us to do is to, once we have replaced this feeder line and placed it back into service, we can start earning on that investment immediately as opposed to waiting for the next rate case. Many investors often miss the fact that we do not need to wait until the next rate case for us to start earning on this investment. So likely, what you'll see over the next 5 years is a $50 million to $55 million investment each year on our feeder line replacement. And today, as we close up 2011, the nice thing also to report is our initial areas of focus was our high-consequence areas. And by the end of this year, we'll certainly be well over 90% of our high-consequence areas where we'll have replaced this pipe that we're referring to. So as we talk about it, certainly the feeder line replacement program and our customer growth is going to be a driver for Questar Gas, and then a couple of other aspects, just I mention to make you aware that it have been transpiring.

Questar Gas has been a leader in the natural gas for transportation initiatives that have been taking place. We've been involved with this for over 20 years. We have a very good environment as far as the legislature. The governor's behind it, our regulators are behind the natural gas for transportation. So it's something that we've really aggressively moved forward with and we'll continue to do so. You could see by this graph, the blue area indicates increase in usage in each of the -- at our public filling stations. 400% increase in 2008 and substantially, we just come out of the last month, our most recent data indicates one of the highest usage that we've had at our public station. So green line indicates a price of the pump as we talk about natural gas for vehicles.

So as we develop out our infrastructure, a couple of years ago, Ron and Governor Huntsman created an I-15 Corridor initiative to establish this infrastructure that would allow you to drive anywhere north and south within the state of Utah and have the ability to use natural gas for your vehicles. We have 60-plus public, private facilities set up for natural gas, 29 are Questar-owned, and again $1.25 at the pump is what we're seeing for natural gas compared to $3.50-plus per gasoline. The market that also has begun to shift substantially within the past year is the heavier duty over-the-road trucks. Certainly trash trucks, as you see on the left there, those vehicles are available. We have many cities that have purchased them, many private trash companies that are using them. So this market has really taken off and is evolving.

But you'll also see is the vehicle in the right, in 2012, Cummins will come out with a dedicated natural gas engine, it's 11.9 liter engine that will be used for over the road trucking. And what we've had is the opportunity to work with the largest trucking company in the nation recently. They certainly like our I-15 corridor. We actually made the strategic decision to set up filling, fueling facilities at truck stops as we built out infrastructure. So there's been 5 trucks that have been tested over the past year, very extensively and the results of those tests has been very, very positive. And you can see if this continues to move forward as we think it will, the impact it has at the bottom of the slide there indicates if you equate the number of homes to gallons or number of trucks, to the usage, it's very substantial.

So, with that, we'll turn the time over to Jim Livsey, our Executive Vice President of Wexpro.

James R. Livsey

Thanks, Craig. It's my pleasure to do a quick review of the Wexpro business. Part of this arrangement, which is unique and most of you are aware of it to a certain extent by now, is really understanding the history of Questar and how we came to have a Wexpro agreement.

Questar is unique among utilities in that we've always had an EMP-directed portion of the company or division of the company that sought gas supply for the utility and actually the utility was incorporated 1935 as a result of gas that was discovered in southwestern Wyoming. Gas needed a market, the pipeline we call the pipeline of 1929 that still is part of Allan's portfolio, brought that gas 150 miles to the Salt Lake market. And from that point on, Questar always had a gas-directed E&P arm of the company and that operated well for decades. In 1981, or pardon me, in 1972, the company discovered the Brady oilfield, a 100 million barrel field near Rock Springs, Wyoming. And that, along with rising oil prices in the '70s, ushered in a decade of dispute and settlement and resulted in 1981 in the Wexpro agreement.

Primary dispute was centered around who would own those liquid proceeds? Should they inure to the customers or to the shareholder? And ultimately the dispute was resolved with the compromise of 54% of the liquid proceeds went to reduced gas cost, 46% went to the shareholder. And that's what we call the Wexpro agreement. We've operated pursuant to that now for 30 years, celebrated our anniversary of that last month. So 30 years ago, that document was executed, subsequently approved by Utah and Wyoming regulators, and upheld by the Utah Supreme Court. So the agreement extends for the life of the properties and gas production goes to, entirely to Questar Gas and is dedicated to the customer.

The major provisions of the agreement, just on a high-level recap, would be all capital expenditures earn a rate of return. And to the extent we drill successful wells, these go into investment base and earn a return, increased by drilling results each year. If a well is a dry hole or doesn't produce commercial gas, then we're at risk for that. We have no reimbursement. So it's a risk element to the arrangement from the standpoint of our drilling program. As a practical matter, we've had 5% or less of our capital program typically doesn't have reimbursement due to those 2 elements of noncommercial wells or dry holes. And then we produced the investment out via units of production, depreciation and deferred taxes. So a reduction also to the investment base. So dry holes are excluded from investment base. From an operating cost standpoint, operating maintenance expense royalties, production taxes, G&As, those are all reimbursed 100%, via the normal pass-through process, there's no profit component to that.

The other element of the arrangement is, it doesn't require a rate case process, it's real-time, if you will. As we incur these costs, we get reimbursement in the subsequent monthly bill. The investment base and net income have doubled since 2006, you can see the relationship as we grow and drill successful wells and depreciate or deplete those with units of production depreciation, also deferred tax as I mentioned or reduction further to investment base, we're able to earn a return that is approximately 20.4% on that investment base. So pretty linear, as you can see, that investment base growing over the last few years and a commensurate increase in our net income. So pretty direct, straightforward, rate base-type arrangement and we continue to share the oil that went with the proceeds as mentioned before.

So the biggest component to our cost structure and the most important driver and the one that we're incentivized particularly towards within Wexpro is finding cost. And so finding cost is the direct result of drilling a well and the amount of reserves that come from that well. So we'll drill about 70 wells this year. Typically those wells will have a cost of $2 million, we'll have ownership with other partners in those. For example, 50% in a given well and to an extent, a given well that costs $2 million results in 2 Bcf of reserves, that will be a $1 finding cost. So that's how finding cost comes into the equation. You can see with this roll up of our cost structure, finding cost results in depreciation on the units of production basis. We get recovery of the cost structure, and then it also is the basis to which we earn a return, grossed up for taxes. So we have an unlevered return with full tax reimbursement. And that's 70% of our cost structure, remainder being G&A lease operating expenses or O&M royalties and depreciation. So you can see how important effective and low finding cost is in our drilling program in terms of being able to deliver cost of service that works for our customer.

So as we look at our finding cost history, again, with this important variable, you can see that we had cost escalation in our operation, just like every other E&P company, particularly as gas prices increased significantly 2006 through 2009, and the cost to drill wells was doubled essentially during that period. But we've been able, the good news is, to redirect our drilling programs towards a low-cost basin, and retrofit our rigs for walking rigs or skid, being able to skid on a location, put top drives in place. And then the biggest area that's really helped us is having continuous operations. So we've been able to offset this cost pressure with those measures and have our finding cost reduced to the levels that we saw in 2003, 2005, and that's really allowed us to continue drilling program that delivers cost to service that works for our customer.

This is a look back over what's happened over the last 3 decades with respect to our reserve base and, with the blue bar, as you see, that we started 30 years ago with reserves of 550 Bcf in Wexpro, we produced, as depicted with the red line, over a Tcf of gas over that period, and now we have 760 Bcf-plus reserves over this period of time with this set of properties. So a pretty amazing story, microcosm if you will, of what's gone on in the E&P industry, particularly with gas production with new technology downspacing increased density. So these have been an amazing set of properties that have proved to be far more resilient than anyone considered when we entered into this arrangement. I think the founders of this agreement probably thought we had 10 years of development ahead of us, we're producing more gas now than we ever have.

So what does the future look like? We see, we have identified an inventory that we feel comfortable communicating to you, the 900 wells still to drill, $1.4 billion of future investments. So we spent about $1.1 billion in the last 30 years. We see that level out ahead of us and it's primarily centered in 5 main producing areas. Pinedale, most of you have heard about, is one of the lowest-cost gas production areas in the Rockies. We have 200 locations still ahead of us in our areas of ownership. Vermillion and Powder Wash is where we've been drilling currently, 240, 175 locations, and in total that represents along with the other fields that we have ownership in, $1.4 billion and 900 wells yet to drill. And that will allow us to grow investment base over the next 5 years between 4% and 8% depending on where we're at with that $550 million to $700 million in capital that we'll see. And I think gas prices, what our partners want to do will be the main drivers, relative to pace of development in these areas.

2012, we're drilling in Pinedale and Vermillion. It's a similar program to what we are experiencing this year, about $125 million. About 1/3 of our drilling is in Pinedale, we're experiencing finding cost of $1.40. The operator, our former sister-company QEP Resources have done a great job driving those costs down. And we have 3 areas of ownership. You can see on the map we've got 3 participating areas. We're currently in the PAB area, and so remember in this area, the owners have agreed to develop the field in a concentrated fashion that moves from south to north to minimize impact to the wildlife and the habitat. So once you drill out an area, you move to the north. You're done, never to return. So we have to do that in a coordinated fashion. So our investment here will be a little lumpy as we move from south to north and depends on which area of ownership we're in. The good news is, as we go north, we'll see better well results, better reserves for each well that we drill for our account out there. In Vermillion, that's been a great success for us the last couple of years, we're seeing finding cost in the sub-dollar range in our 2 particular fields there, Trail and Canyon Creek. And we'll continue with 2 operated rigs in 2012, drilling about 2/3 of our capital program there.

So a look back would be, what's been the impact of this arrangement on the customer, and you can see a chart that takes us from 1981 to the present. And in total, the cost to service gas compared to market, cost to service gas being the blue line, market being the red line, has saved the customer approximately $1.3 billion by having that gas supply in the portfolio versus having to buy the entire portfolio purchase gas. And we got a couple of periods where cost to service has been higher than market. You can see we're in that mode now, and part of that is a bit of the higher finding costs we've had over the last 5 years, but you can see we're also in that mode in the '90s. And a regulator has a pretty good appreciation that, that will occur occasionally. We don't always promise to be the lowest-cost provider, but I think they recognize this really is a long-term hedge against future price volatility. The dotted line represents the forward curve as we see it now, as we think about our current drilling program.

So finally, one of the things that we've discussed with our regulator as these properties are finite and specified and limited to the properties that produced in 1981, might there be a situation where we could add as appropriate to the Wexpro set of our properties to allow continued production as the properties get produced down. So we've had some preliminary discussions, will call that Wexpro 2 for discussion purposes here. And I think they are receptive to that. We're in the early stage, but there may be opportunities in the areas that we operate, even in the same fields potentially, to buy some interest that will allow an extension of the production life under the Wexpro arrangement. So our discussions are preliminary but as we looked at it, we thought, could this work? And the initial discussions have been patterned or centered around an arrangement that doesn't open up the previous arrangement but mirrors the terms. So those are -- we'll keep you posted, that's an exciting thing that we're working through at this time.

So with that, let me have Allan Bradley come up and talk about the Pipeline.

R. Allan Bradley

Thank you, Jim, and thank you, Ron, for your introduction. It's great to join you this afternoon. You know our pipeline system, we haven't changed our focus at all. We are the pipeline of 1929 and yes, we started moving gas from those east fields in the Rockies to our utility Questar Gas. For 50 years, we've grown as that utility has grown. It was a nice business model, we've been integrated for a long time. Flash forward 50 years, Overthrust came to be in early '80s Overthrust took advantage of growing production and the Overthrust trend, these were traditional gas reservoirs. We were the head system of trailblazers back in those days. Flash-forward again 15 years, those fields had depleted but was just coming about where major advances in technology, that technology unlocked the code for unconventional gas in the Rockies.

This was the first top shale play in early part of the last decade and we had a decision to make. Will we continue to serve our utility, grow as customers grew? Because at the time we're seeing usage per customer decline. It was offset by the customer additions, so it was a pretty flat market. And we made the decision to really step it up and grow in our footprint, and our mantra at the time was really to protect net to the well prices for Rockies producers, as shale gas and pipe sands gas started to grow. We were experiencing this volatility and price capacity was slow to materialize. People would bid for that capacity to drive prices down. You have these huge basis differentials with Henry Hub.

So our goal, about 6, 7 years ago, was really to stay ahead of that production growth and in the process, we were really able to expand the use of Overthrust. The good news is we had, over time, bought out our partners in Overthrust, many pipeline names you know today. So we owned it 100%, that gave us full control of it. Our first big expansion was really to Opal. The Opal hub that already existed. It was the largest supply hub in the West, and Questar Pipeline didn't have a connection to it. So we built the eastern loop segment of Overthrust to the Opal hub. When Rockies Express got going, we anchored an expansion of our Overthrust system to the one sort of hub. That's a hub because it also takes advantage of northbound flows out of the Piceance basin to basically hit that Rockies Express pipeline. That was a major expansion for us.

And then finally this year, in March, tied to the targeted in-service date of Ruby pipeline, we completed the middle section of that Overthrust expansion. Now we operate a high-pressure 36-inch system, bi-directional flows, the eastbound flows roughly equal to westbound flows. The benefit of that is it keeps our fuel rates very low. We only run compressors when we're not getting supplies at one end or the other of those 2 hubs. So very, very nice system that's been a growth driver for us in this past decade. I'll talk about that in a moment. Also this year, we're finishing up another important expansion for us and that's on our southern system, which really builds between the Goshen hub, which connects to Kern River, and the White River hub, which basically connects to all of those east and southbound pipelines there noted. A small project, but it was a very challenging one. It was about 24 miles, we had to cross the Green River, tremendous rocky terrain. We finally got our 24-inch high-pressure line connected to fiddler. I want to talk more about the importance of fiddler. But what that let us do is to basically compete for gas supplies out of a growing processing hub, that then we move go back to Goshen on westbound or we could move east over to the White River hub.

So this decade of incredible expansion, really helped generate growing EBITDA. As Ron mentioned, we tripled net income over that decade. We almost tripled the capacity of our combined pipeline systems, growing at about 19% compound annual growth rate. This is contracted capacity. In your slides, you'll see the actual throughput to illustrate my point. The utilities throughput is flat, you'll see the tremendous growth in throughput to these export hubs. So we think we've done a great job with our old mandate, and that is protecting net to the well prices. But you can't grow 20% a year forever.

You've seen us show these slides before. In 2007, I showed a slide that basically had production, this red dotted line, growing to over 4 Bcf a day. Our E&P head said, "Bradley, that's conservative." Well, things change, that forecast was wrong, 2008, the markets really turned around on us. Two things happened, the economic decline generally and also the wide spread in oil versus gas prices really drove a lot of rigs out of the Rockies to wetter plays. And we had the big Marcellus discovery, so a lot of rigs that were active in the Rockies moved to other, hotter plays near high-valued markets.

So as our forecasters look at rig counts, they basically projected flat production in the Rockies. Now one thing's for sure, this forecast will be wrong too because eventually, rigs are going to come back to the Rockies, there's too much gas here. But it's instructional to help understand our planning process and how we're looking at the pipeline near-term and growth prospects. Pipelines take about 2 years to get contracts and go through the environmental and regulatory permitting process. It takes about a year to construct. So you still had capacity coming on in 2011 that was associated with sort of pre-turndown excitement. Bison came on, Ruby came on, Kern River did an expansion down to Vegas. So what was actually created now is a market that has the capability to move about 12.5 Bcf, production about 9.5, we've got a 3 Bcf overhang capacity versus supply and that is a very different market dynamics than people have seen in the Rockies before. What it means, your no longer going to see big price volatility swings. Basis differentials have collapsed to roughly the fuel price. It's a very different market right now. And it's affected Questar Pipeline's historical growth rates, but it's also changed our strategy a little, and I'd like to share that with you.

We've accomplished our job protecting net to the well prices. What we're focused on now is developing a regional market center where shippers who are on our pipeline, we want to give them value-added service, flexibility to chase the higher-value markets and we want to do it at a low cost. So number one, we want to remain cost-competitive with regional pipelines, that's important. What I mean by cost-competitive, that's low-variable cost, we want low fuel rates, low-variable O&M, and we think we've done that with our bi-directional design. We want to stay focused on re-contracting. Re-contracting risk will be important in this environment. Our marketers have done a great job. We've been able to keep revenues not only flat but in many cases, we've grown revenues around providing value-added services. I'm going to describe a project that did just that.

What we're seeing is terms, they're no 20-, 15-year terms. Producers are taking a shorter view, 3- to 5-year contract renewals that tend to roll forward, but we've done a good job locking those terminating contracts up, in many cases, pushing those rates up to max recourse rates under our put-through tariff [ph]. We're also looking at a rate case strategy going forward. Now don't panic. We have no plans to file rate case in this 5-year plan. But to get new services to the market, you have to do it through a tariff and probably a rate case. So if you think about seasonal services, time-of-day services that may be match better the electric generation market, we're probably going to need a rate case to do that but we're not compelled to. But will be set up when that time comes to put some new services on the table.

We're also focusing on incremental value-added projects. We want to maintain our storage leadership position. Failed to mention, we also own and operate Clay Basin, it's the largest storage field in the Rockies. It's got overall reservoir capacity of about 117 Bcf, about 52 Bcf is working gas. We just recently, in October, received approval to expand our working gas capacity by 2.7 Bcf. Rather than selling it out firm, we chose to keep it as is operational capacity for Questar because our system had expanded so much, we needed that flexibility, that balanced line pack. But more importantly, it'll allow us to sell more park and loan services and interruptible storage. And we just recently went out with an open season on a nonbinding basis to look at expanding Clay Basin even further.

We think that the caprock in this reservoir can hold pressures higher than the original discovered pressure, and that's going to allow us to raise working capacity probably 7 to 8 Bcf. A couple, 3 years out, we're on a technical throes of that study. We're not going to do it lightly because this is such a strategic asset and we don't want to do anything that sort of risks the integrity of Clay Basin, but I do see it as a real opportunity for us in the out years of our fall plan. And then finally, with the spinoff of Questar, market resources now QEP, it sort of frees us up to compete more in the unregulated gathering and processing side of the business. And we are seeing demand in some of the areas where our pipes are located to provide a gathering and processing service for producers who rather free up their cash flow to drill wells rather than build gathering and processing, so stay tuned there. None of that is included in our fall plan or any of the projections that Ron has talked about.

So what's a value-added service? What's unique about Questar Pipeline is we have the flexibility to move dry gas, which is pipeline quality gas, but we also have the flexibility to segment our system and move wet gas. There's a section in the Uinta Basin, up around Altamont, that is actually an oil play, has a lot of liquid-rich gas. That gas goes through a processing plant, but it's not efficient. It's refrigeration unit, leaves the ethane in the stream. Ethane's got a lot of value, so what we've done is propose the system that takes the gas off JO-46 [ph], we added interconnect to some gathering facilities, move it to new Fiddler cryo hub which is our affiliate QEP-built services with iron horse. Anadarko's got the Chupeta [ph] plant. And we're able to contract at max rates to move that gas to processing, so producers can again capture the higher value of that liquid the revenue. And then with our Main Line 104 expansion, we're able to pick that dry gas back on our system and move it to market.

We see this as sort of a multiphase project as production continues to grow in this sector of the Uinta Basin. We think we have the ability in 2013, partial loop. We also have a plan underway for some additional looping. We're not ready to talk too much about it because it's a little far out right now, but the important thing is these are very attractive projects for our shippers. They generate max rates. But they don't really move the needle in investment. $3 million in our Phase 1, the loop project about $10 million. So the days of the $50 million to $200 million expansions that really drive net income are just not with us, but we still have a lot of smaller attractive projects that are important in our market that we're going to continue to pursue and if you look at the investment returns, so they're very, very attractive. And this is an example, the kind of value-added service we will be pursuing.

So we think we're very well-positioned as a pipeline. Looking forward, we know those rigs are eventually going to come back to the Rockies. So as we think about our system, we're no longer the pipeline of 1929, we're not an east to west pipeline anymore. Yes, we deliver to our utility, they're still our largest customer, but now we have bi-directional flows, we've established 4 major hubs that are sort of vital to price transparency. Producers like to ship on our systems because they can pick the higher value markets month-to-month. In the past, I think we did a great job protecting net to the well Rockies prices. Today, we're focused on building that regional market center. You heard Craig talk about the optimism in the business growth that's occurring in Utah. Very true. We're seeing an influx of industrial loads. We're seeing our utility, for the first-time, start to talk about a growing portfolio of gas firepower generation, and we're going to be working to compete for that business. We're already in front of a number of industrial and utility plant expansions, working well with Questar Gas to create some innovative services that will allow these large customers to contract with producers, ship on both Questar Pipeline and Questar Gas to serve these growing loads. That's what the regional pipeline center's all about.

We used to handle liquids just to manage the downstream hydrocarbon due-point requirements of those export pipelines and our utility. Today, we're not only doing that, but we're also expanding that business to provide third-party processing. We have about 575 million cubic feet a day of processing capacity on our pipeline system, very unique in the interstate industry.

Finally we're going from a period of tremendous earnings growth to a moderate growth, flat earnings in a sense, but strong cash flows over the 5-year period. We'll deliver about $350 million of cash flow up to the corporation to fund Wexpro, Questar Gas growth projects and support the dividend.

And then finally, and more importantly today, we were in a pretty high variable cost environment 10 years ago. A lot of interventions in our fuel gas cases, they thought we were using too much fuel, we weren't efficient. Today, we've really driven our variable costs down to all-time lows. When we file a fuel adjustment pass-through case at FERC, we don't get an intervention. And that's says a lot about the hard work that our operating team has done managing our rates. In a growth environment, I might add, where compression grew dramatically on our system.

So just to summarize before I turn it over to Kevin, is that we are well-positioned for growth. That growth will turn around and I'm really delighted at the way our system has developed out over this past decade.

So with that, it's my pleasure to introduce Kevin Hadlock. Kevin?

Kevin W. Hadlock

Thanks, Allan. It's been quite a privilege to join this very experienced and capable management team. I joined Questar at the beginning of the year, and, every day, I count myself to be very fortunate to be associated with this extremely high-quality management team and to be called part of that team. Let me wrap up just with some financial slides that provide some perspective on how all of this strategy that we've talked about falls into the financials.

First, let me spend a minute on the capital structure and the balance sheet strength. From a rating agency perspective, we are rated A3 at Moody's, at the operating companies and at the parent. At S&P, our operating companies are rated A2, the corporate is -- sorry, is A, and the parent company's rated A-. We maintain a very strong and conservative balance sheet that supports the growth in the overall financial success of the company and provides us some of the strategic flexibility.

You'll notice that Wexpro has 100% equity in its capital structure, given the unique nature of that return element in the Wexpro Agreement, we leave that 100% equity-financed. And Pipeline, we have about 59% equity. We will be refinancing a significant portion of the debt that's matured this year, about $180 million, as we enter the fourth quarter. And with that time, taking opportunity to adjust that capital structure to a more closer range relative to its authorized level. Questar Gas at 53% is right on top of its authorized level. And we will continue to manage that equity level as they grow the 7% to 9% that Craig and Ron mentioned earlier. You'll see that at Corporate, we have some negative equity. This was a consequence of the $250 million equity injection we provided to QEP just prior to the spinoff. So when you consolidate that together, our overall equity level is at 48% on a consolidated basis.

One of the things that perhaps several investors missed in the days when we were growing the E&P business from 2005 to 2011 is the tremendous growth that these underlying businesses were creating in the shadow of the E&P business. From 2005 through 2011, it has grown at a 10% CAGR, which, given the regulated nature of each of these businesses, is quite remarkable in the industry. And as we look forward, we continue to see significant growth opportunities in the business.

One of the highlights of Questar is the fact that we're earning, on a consolidated basis, based over the last 12 months, over 20% return on equity. You'll see at Wexpro anchored by the Wexpro Agreement has earned on-average, over the last 3.5 years, about 20% and we continue to see that supported as Jim and his team continue to invest and grow that business. Questar Pipeline is earning right about its authorized return. And given the growth that it's seen without rate cases and its ability to increase revenue and to maintain cost control, they've been able to maintain that level of ROE.

Within Questar Gas, it's one thing to have a competitive ROE, it's something entirely different to be able to earn that level of ROE, and Questar Gas over the last 6 years has been able to earn its allowed ROE, and we're certainly on-track this year to, again, earn that level of ROE. I would point out on this chart that the 11.7% is on a financial basis. The regulatory calculation is different, and as we get through the rest of this year, we'd expect to be very close to that allowed ROE on a regulatory basis. When you consolidate that together, given the negative equity at Corporate, we are seeing a consolidated ROE right at 20%. So industry-leading, from that perspective, in our ability to deploy capital and earn those high levels.

To summarize the 5-year plan, we're talking about 4% to 6% EBITDA and net income growth. You'll notice that this is slightly down from the charts that we had out prior to our raised guidance, that is not a commentary on our view of the future. Rather, it's an increase in the base year that mathematically just reduces that to 46%. That is anchored by Questar Gas growing 7% to 9% from the feeder line replacement program and modest customer growth. We see an opportunity to continue to drive that growth over the 5-year plan. With Wexpro, we're growing at 4% to 8% per year. And really, the lever we have in Wexpro is that level of investment that we're seeing it on a cumulative basis of $550 million to $700 million, focused on that low-cost Vermillion and Pinedale drilling operation.

And then Questar Pipeline, as Allan just finished up. We're seeing moderating growth, but throwing out significant cash flow that could amount to $350 million cumulatively over the 5-year plan. Now that cash flow is important to us in a number of reasons. Our first priority in redeploying that cash flow would be to grow the business. And anything that we can invest in that gets us close to that 20% return is where our priority is. And as we find those opportunities, as Jim mentioned with Wexpro, to grow that business, and as Allan mentioned, as production will eventually return to the Rockies, we'll continue to look for those opportunities to invest in the business.

The second priority, is to grow the dividend and, as Ron mentioned earlier, we've been very aggressive in the last 18 months in moving that dividend higher. We are targeting about 60% payout ratio, that will give us the opportunity over the next several years and the early part of the 5-year plan to grow dividends at a faster pace than net income. And I'll finish up with the third priority and that is, make a mention of the stock repurchase program that was authorized by the board. That is the third priority, use of cash flow. The program was put in place to offset the dilution that we saw over the last several years, to try to return the share count back to approximately 175 million shares. So we have between 3 million and 4 million shares that we would target to purchase out of the market, but to the extent we have further opportunities to invest that capital, I wouldn't disappointed as the CFO to see that capital flow into higher-growth projects that are attributed to net income.

So with that, let me turn it back over to Ron to wrap up.

Ronald W. Jibson

Thank you, Kevin for that great financial overview and thanks to our business unit leads for their deeper dive on the business units. I guess in some rate, our commitment to you, our investors, is that of execution. We will continue to execute these businesses in a sense of providing you with industry-leading returns, very strong growth, obviously our commitment to dividend, and we feel we can do that in a very low-cost, low-risk environment. And we continue to provide for you the value that you've come to know from Questar, and we see nothing but that continuing and improving over the 5-year plan and in the future. So with that, I think we've got some time for questions. We'd love to entertain your questions at this point and again thanks for your attention during the presentation. So questions? Yes, sir?

Question-and-Answer Session

Unknown Speaker

On the natural gas vehicles. Some of your projections, does that -- any of that include tax incentives? Is that going to come in the way? Because that seems like could be explosive growth opportunity. Because Westport, I know, is doing some things in Nevada also to -- I think they have a 50-truck test with UPS. And I don't know where that stands, but you're the next state over. And seems like you could have some large opportunities, especially if there's some incentives.

Ronald W. Jibson

Great question. We see Westport is a big player along with others right now. Westport is self-developed. The technology of the diesel-natural gas blend that's being used by Swift Trucking and others, medium and heavy-duty trucks, without question, are seeing tremendous paybacks. What surprises us right now is that the passenger market, we feel like is right on the verge of also seeing that kind of growth. As far as the tax incentives, I know there are proposals out there. I can tell you that, from a national perspective, our objective is to not depend on tax incentives for this to drive the market, to drive the business. We feel like it is possible to do that without incentives and without tax incentives. So it's something that we're not depending on. And I know things have been somewhat held up in current bills that are in place. But we feel like the natural gas for transportation market is one that is sustainable on it's own and it can be very market-driven. And we feel that will play out in the future. We're very committed to that market. Again, working with Westport and others to develop the larger vehicles. I know, the one large trucking company has made a commitment of 16,000 18-wheeler vehicles over the next 5 years. That's a big commitment and I think that will drive the entire market, not just in Utah, but surrounding states as it is already, and across the nation. Craig, any other insights on the tax plan so far?

Craig C. Wagstaff

No, I think -- you're right on, Ron. The only other thing I'd is next week, down in California, Freightliner will be doing an open house, they've got their thousandth CNG truck that they are kind of rolling out here, so they've done 1,000 trucks thus far. So the market is moving forward like Ron said. And I would like to quote his comment.

Unknown Speaker

In Wexpro 2, [indiscernible].

Ronald W. Jibson

The question was regarding Wexpro 2, and the expansion of Wexpro that we've talked about a little bit in the last couple of quarters. The idea behind that is, again as Jim explained, we're really looking at developing and being able to take advantage of a couple of key components right now. One is the fact that in a low-price environment, we feel like that with, how low prices have been for a sustainable period of time now, that there could be potentially assets come on to the market, as a lot of producers have moved from the Rockies to the oil-rich plays, that we could be able to, we may be able to find some low-cost assets to be able to acquire. The second component is we have a very positive regulatory climate right now, we work very closely with our regulators in Utah and Wyoming. And we've had some very positive dialogue with them about moving those assets into a similar but different bucket. And I appreciate the question, because one of the things I want to be very clear on, the original Wexpro agreement is not at stake here. We're not opening that agreement up, that agreement is very solid, there is no reopener to it. This would be essentially an add-on to the Wexpro agreement, allowing us to add assets that would make it to the point where we would not have to indicate that Wexpro contains a finite set of producing properties. So we'd have the ability to grow those assets over the years. What that would do is to extend the life of Wexpro. It's not going to have a radical change to our development plan, but it would expand the years that we would be able to continue to develop Wexpro properties. And so it's, as far as the exact structure, that's what we're working on right now, but I can tell you that it would have a similar look to what you're used to in the Wexpro returns and rigs. And so it's going to be tailored very, very similar to that.

Unknown Speaker

The second question is whether or not you pursue midstream opportunities, and it gets to be a high-class problem where you need capital. And I think at one time several years ago, you discussed putting a piece of Overthrust into an MLP, whether or not that could be a potential thing we would see years down the line.

Ronald W. Jibson

Allan, you want to address that?

R. Allan Bradley

Yes, you're right. We did study the MLP about 3 or 4 years ago at great depth. What we concluded is 2 things. One, Questar Pipeline itself was not a good asset to put in at a very low tax basis, but Overthrust was in an expansion mode. At that time, we didn't want to share that expansion with unitholders who are a little greedy. We kept it for our shareholders. Today when we look at Overthrust, Overthrust is pretty built up and to get the kind of MLP cost of capital, multiples, you really have to have a drop-down, a real growth strategy. Of course, our pipelines are a little small to pursue that. There's a high cost to setting it up. So it really hasn't fit us and we haven't contemplated, going forward, needing to look at that vehicle. We feel like, given our geographic locations, strong presence in those 3 basins, Greater Green, Piceance and Uinta, but we have sort of a natural logistical advantage. And thus far, as we have pitched proposals, I've been very pleased with the results. It really boils down to do I sole source with a midstream company like Questar, or do I put it out for bid. If it goes out for bid, you're probably going to see transactions more along the line as the EnCana sale of its Piceance gathering system to Summit. Summit was a new entrant. They paid premium prices and IVU [ph] put all of the upside going forward in that purchase price, which means execution is going to be, we think, a bit of a challenge. So our strategy is to really try to offer a good solid service upfront, try to void their real competitive RFP processes and see if we can be a little more tactical on our growth strategy for midstream.

Unknown Speaker

Quick question. Is Wexpro 2 right now, are you leaning towards just adding properties for Questar Gas? Or is this potentially opened to third parties soon?

Ronald W. Jibson

Great question. Our initial interest with the Wexpro 2 would be to acquire assets. And again these would be assets that we're very familiar with. These would be potentially additional interests in wells that we have a joint venture in currently. They could be additional producing properties within the producing fields that we're currently in. The initial interest there would be to find those properties, to put those into this addendum, which would certainly benefit Questar Gas customers. But I really appreciate the question from the standpoint that it shows the flexibility we have to go beyond that in the future. I think that the Wexpro model is a model that could be used elsewhere. We see this as an opportunity for developing gas supplies that could be used for other utilities, and potentially could be used in a similar model with even power generators. To where that long-term hedge concept would work very well. That's one of the problems that power generators have had over the years, is the volatility of commodity prices. We feel like, as Jim showed on the one slide, we can maintain a very stable commodity price there and stable outlook for producers in the future as far as power generators. But also potentially other utility companies could use a similar model. So we're not restricting ourselves with this concept. Now the initial Wexpro 2 that we're talking about would be dedicated to Questar Gas, but we can also look beyond that if we see the right opportunities.

Unknown Speaker

With the refinancing of the pipeline debt, what is the optimal cap structure that we would look for?

Ronald W. Jibson


Kevin W. Hadlock

Yes, with Questar Pipeline, the outright level of equity is 54%. And so we would be targeting somewhere in that low- to mid-50% level as an ongoing equity structure.

Unknown Speaker

Yes, on the CNG business, with a price differential of over $2, what are the limiting factors to faster growth in that area?

Ronald W. Jibson

I think, probably right now, it would be just changing the mindset, I think is probably the largest limiting factor. If you look at it across the world, the growth of natural gas and transportation is substantially higher than what we see in the United States. We're seeing anywhere 20% to 40% growth across the world in other countries. I think it's a situation where years ago, 15 years ago or so, we had somewhat of a push for natural gas vehicles, the technology was there but the interest wasn't. And the prices, gasoline prices were low enough that we didn't see that move. Manufacturers became disenchanted with it, they weren't selling enough vehicles, they were selling a lot more SUVs and the larger vehicles. I think there's been a mindset change, certainly with sustained gasoline prices close to the $4 range, that's driving a lot of this emphasis, but also the move to alternative fuel vehicles. Natural gas vehicles are 90% cleaner than a gasoline-driven vehicle. So the move to create a cleaner planet is certainly helping us in this regard. The nice thing is that technology is available today. It's being used today and I think we're seeing a different feel across the country as far as acceptance of the natural gas vehicles. We feel like the future is really in home refueling, in a convenience mode, where instead of building more and more infrastructure, other than for the large vehicles that will need that infrastructure, that home refueling is really the answer. And what we're seeing coming out of Detroit is a move to a bi-fuel vehicle, and a lot of the vehicles you'll see announced are a bi-fuel model, which takes advantage of 80% to 85% of our miles being driven in a commuter mode, where individuals can drive that vehicle to work everyday, come home at night, plug into the system that's already into their home. Next morning, have a full tank of natural gas to be able to commute again with that, and then if they decide to go somewhere for the weekend, they have the bi-fuel capability if they're in an area without natural gas. So we feel like that's the future, it's also a lot of opportunity, and we're looking for that opportunity within our company. But I can tell you the momentum with this over the last year, you may not have seen a lot or heard a lot. I mean we're hearing more and more about it, but we're seeing it from within the industry and that move is taking place. So the holdbacks I think right now are just getting our heads around driving something different than what we've been used to. Using a fuel, we always get the questions, where do I get the vehicle, where do I get the fuel. We're answering those questions very quickly here, and I think once we eliminate those 2 issues, that you'll see natural gas for transportation become our way of getting energy independence in the United States. That's something that we're all certainly interested in doing. Obviously the abundance of natural gas is driving that. We're no longer worried about running out of natural gas like we were back in the '70s, and I think that with the abundance of shale gas and other supplies, it's opening up that world of opportunity for natural gas to be used in more platforms.

Unknown Speaker

The 5-year plan that you've outlined for us includes the 4% to 8% Wexpro growth. I assume that is based on the current Wexpro assets.

Ronald W. Jibson

That is. That's a great question. We are -- everything we've shown you today is based on what we have currently. And none of the -- there's no speculation built into the 5-year plan of expanding that agreement.

Unknown Speaker

But can you speculate a little bit? If you get an agreement?

Ronald W. Jibson

You need to remember, this is a political time and so I gave you a political answer on that. But I appreciate the question. We really -- the way to look at the additional assets that we hopefully will be able to fit into Wexpro in the future. Think of it in the sense of taking that end of the agreement, which ends when every molecule of gas has been developed in Wexpro, and expanding that out. It's not going to change much the development plans we have in a 5-year plan, for instance, because we have so many assets already available. So even if we were able to acquire additional assets -- now if they are in a location for instance, say it's an additional interest in a well that we currently are going to be developing say next year, then that will have an impact as far as being able to develop that interest. But most likely it would be adding on to the end, not adding on to the year-by-year development. So it would just expand the years that we would have in Wexpro. Continue that savings for customers over those years and obviously continued that 20% after-tax return for investors.

Unknown Speaker

So effectively, if you're going to buy those very long-life assets and discount back, you're going to have to be looking at assets with a very low cost?

Ronald W. Jibson

We will. But we're also looking at a model that would allow us to recover the investment on a minor basis, but to recover that investment initially and then not see the higher investment return until that is actually developed.

Unknown Speaker

Can you just talk about the free cash flow budget for the next 5 years? We have the CapEx, you've told us about $350, dividends about $110?

Ronald W. Jibson

You bet. Kevin you want to walk-through the cash flow?

Kevin W. Hadlock

Sure. And this is for 2000 and looking forward. If you think about cash flow this way, from the perspective of Questar Gas, they're going to be a significant consumer of cash. They're going to be investing each year somewhere between $125 million and $150 million in depreciating on an increasing basis around $70 million to $80 million. So they're going to be a consumer of cash flow as they grow that 7% to 9%. Within Questar Pipeline, we are looking at $350 million of cumulative cash flow over that period of time. And with Wexpro, they're more than cash flow sustaining, even given their significant investment opportunity. So as you think about cash flow overall, you'll still be able to approach that and be a, pay about a 60% dividend without having to go and access -- certainly no equity, but be able to grow those balance sheets with limited increases to our overall debt balances over that 5-year period.

Unknown Speaker

It would look like they have a surplus though. I mean, we have this 100 million share buyback. I mean...

Kevin W. Hadlock

Yes. So even with that cash flow that we talked about, we wouldn't have to go about and issue any equity or significantly change the leverage profile of the company to execute on all those priorities. So to be able to grow at the pace were growing, to increase the dividend and pay that 60% payout and execute the $100 million share buyback program, that would not change the overall leverage statistics that we have in the company. As the balance sheets grows with retained earnings, the debt level would grow at a measured pace to keep that debt-to-equity at about that 50% level.

Unknown Speaker

Just one quick follow-up question on the Wexpro 2. So I understand how the assets will be dropped into the -- or would be an addendum and the extended life of the asset. And that's for Questar Gas. But assume you're doing a deal with a third-party, like another utility maybe in another state, is that be something that would going into rate base right away or would that still be pulled from that same asset pool?

Ronald W. Jibson

It wouldn't be pulled from that asset pool. That would be dedicated to the utility Questar Gas. So for another utility, or power generator, that would have to be a whole new agreement. It would have to be with that particular customer and would then contain their own defined set of properties also. So it would be, we think, a similar model, but it will be in a separate agreement.

Unknown Speaker

Okay, but that's something that would be going to rate base immediately then?

Ronald W. Jibson

Yes. We'd want to probably want to structure along those lines. So it would -- again it's hard to say, because we haven't built that yet. But we certainly want to make sure that that's contained in a similar model to what we're doing currently, which contains that rate base.

Well again, thank you so much. We appreciate the time you've given us today and being with us in this lunch and, again, we look forward to this each year and we'll see you again next year. But hopefully, as we see many of you throughout the year, we'll give you updates on these issues as we go forward. Again, our goal is execution. We're committed to you and we thank you as our investors and thanks again for being with us today.

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