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Questar Corporation (NYSE:STR)

New York Analyst Day & Webcast Conference Transcript

November 7, 2012 12:15 PM ET

Executives

Kevin Hadlock - Executive Vice President and CFO

Jim Livsey - Executive vice president and COO, Wexpro

Jim Harmon - Director

Analysts

Kevin Hadlock

We're going to go ahead and get started, I know we do have some folks with me and to the webcast, so we would like to welcome you all to our Fall Analyst Day here in New York City.

As I mentioned I'm Kevin Hadlock, Executive Vice President and CFO, Ron Jibson, our CEO, our Chairman, President and CEO, sends his regrets as I mentioned he returned to Salt Lake this morning to avoid some of this inclement weather that we're just now starting to see roll into the New York City area. I certainly do appreciate all of you for making the trip here today to join us in person and certainly welcome those on the phone.

You do have the presentation books in front of you. I'll try to refer to the page numbers for those on the webcast and I am not Ron Jibson, as featured in the case, but I will try do my best impression of Ron here in this early part of the presentation.

So logistically I'll present in behalf of Ron and Craig Wagstaff for Questar Gas and then I'll turn the presentation over to Jim Livsey, who is joining me here up on the stage. Jim is our Executive Vice President and Chief Operating Officer of Wexpro, and he'll walk through the Wexpro portion of the presentation and I'll come back and talk about Questar Pipeline on behalf of Allan Bradley and then finish up with some financial information. And we'll open up to take your questions and hopefully we can get all that wrapped up here in about an hour and 15 minutes.

As we've often talked about Questar is quite a unique company in the natural gas space. We are an integrated natural gas company from well head to burner tip. We provide a very good return on the investments that we make, incurred with Wexpro. On a consolidated basis we have earned almost a 20% return on equity over the last 12 months. Within the regulated businesses we have a history of earning our allowed returns, it's great to have a allowed returns north of 10% in utilities, and something entirely different to actually to be able to earn that allowed return.

Jim, will have the opportunity to talk a little bit more in detail about Wexpro, but it's a very unique asset that really anchors and is really the roof of our Company, that dates back to the 1930s.

We continue to see solid growth within the businesses, Questar Gas is expected to grow between 7% and 9% over the five-year term. Wexpro continues to forecast a 4% to 8% growth rate and what Questar pipeline lacks for growth it is providing very strong cash flow to help fund the growth in the other businesses.

We're now approaching our target of 60% dividend payout. We're now at about 58% and as we move forward we expect to be at or slightly above that 60% payout and then allowing the dividend to grow along with earnings growth. And all of this is supported by a very strong balance sheet with ample liquidity to support the growth and the dividend.

Our operations are primarily based in the Rockies. This chart simply shows that set of operations you'll see in the callout chart much of our production is located in the Green River basin, with most of our transmission pipeline situated in the heart of the Rockies and the gas distribution utility primarily in Utah with a small part of Wyoming and as even smaller part of Idaho.

As I mentioned, we -- following the restructuring in 2010 we returned to a much more balanced portfolio with Wexpro contributing about 46% of our net income in 2011, Questar Pipeline providing about a third of our net income and Questar Gas making up the balance.

So let's jump right into the Questar Gas story, Questar Gas serves about 277 cities in Utah. We are the primary franchise for natural gas distribution in Utah with the exception of few municipalities. We do have that opportunity to provide gas service to all of those customers. One of the things that makes Questar Gas very unique in the United States is that we are the lowest - provide the lowest residential rates for our customers. The average in the country is about $12.44, we are providing an all in cost to our customers of $8.82, which does have a [shrink] rate there at the bottom.

If you look over time we've consistently been below the national average and saw that gap out and lot of this is to do with Wexpro and this cost of service model that we have that provides a great long-term hedge against volatility in the natural gas market. We described Questar Gas as the top performing utility.

Our return on equity we've been able to earn at or above that ROE for the last seven consecutive years and as we look forward we do have an aggressive investment program, for both pipeline replacement and other infrastructure replacements as well as customer growth.

We do expect to be back in for a rate case next year as required by the Public Service Commission. Following the 2010 settlement they wanted us to come back in within three years, so we will be back in the first half of next year. We are cognizant of the pressure that lot of companies has seen on ROEs and certainly expect that to be part of the conversation with the Commission.

We have shown our ability to keep our O&M per customer very low. In fact when you compare us against the AGA companies we're among the lowest 5% in O&M per customer, which makes us one of the most efficient utilities in providing that service, as I mentioned our customer rates are the lowest in the country.

And customer growth we're starting to see an uptick here, where some areas of the country saw a reduction in customers. We have consistently shown customer growth, I think the lowest amount of customer growth we've seen over the last several years is about 0.9%. So we have certainly outpaced the national average and we're starting to see an uptick in that.

We reported last quarter that through the end of the third quarter we had seen about a 1.4% increase in customers and as we go forward we're looking and forecasting at about 1.5% to over 2% growth in the utility. That is slightly behind where some of the economists are forecasting growth in Utah. But an effort to be conservative we have sort of tailored back some of that expectation.

For market penetration this is for those that have natural gas available to them, what percentage of those customer use natural gas for safety and water heating in Utah that number is greater than 95%. That compares to a national average that's closer to 60% in some of the areas here in the northeast. I know fuel oil, some electric really make up a good portion of the heating, but out of Utah with the low gas rates that we have, virtually every customer that has access to natural gas uses it.

And one of the great thing about the Company, greater than 90% view us, or our customers view us as favorable or very favorable on a seven point scale. We're cracking right now at about 6.4, requires a lot of sevens to get up to that number and for many of our customers the only thing they see from us is a bill every month. So to be able to rate that high is quite a credit to Craig Wagstaff and his team and their ability to meet customer needs.

One of the things that allows us to be so effective in delivering great service to our customers and providing and earning our allowed return is the regulatory construct in which we operate. Three years ago when we had a rate case settlement, there were a number of aspects that were very important to us in reaching a settlement.

The first was we were able to increase our return on equity from 10% to 10.35%. We hard pressed to find another utility that has been able to see an increase in ROE over the last several years. We do expect as we go in for the rate case, so this will be an area of focus, but certainly given the metrics that we have provided and the service that we provided to our customers we certainly feel like that we should get a very competitive ROE in that process.

Revenue decoupling was also very important to us. When we had our settlement, we were in a pilot program up to that point and as part of that settlement decoupling was approved indefinitely and then helped to stabilize our revenues and really mitigate the effects of the conservation programs that may decrease usage per customer.

The other element that was really important is we know that we have been spending a lot of money and had spent a lot of money on our feeder line replacements and we were able to perceive a tracking mechanism that allows us to put that investment into rate base just as it's put into service. So that allows us to avoid some of the regulatory lags for this very important investment that we're making in our feeder line replacement program.

If you look at the rest of these regulatory attributes and this array of regulation that we have in Utah, we feel like it's very supportive and important to be able to provide great customer service to our customers. As I mentioned the pipeline integrity program and the feeder line replacement program that we're doing now really has it's base and legacy of focus on this area. In the 1980s we went through our system and replaced all of our cast iron pipes. We no longer have any cast iron in our system.

In the 90's we turned our focus to bear steel pipe and replaced all of that in the system and now we're focused on what is called reconditioned pipes, this is pipe that was put in the ground many decades ago, pulled out of the ground reconditioned and put back into service. We continue to do integrity management to ensure that this pipe is fit for service, but as it is getting very old we embarked on a program several years ago to begin replacing all of this feeder line, high pressure feeder line pipes.

We still have six or more years of feeder line replacement that we expect to be able to accomplish at about $55 million up to $60 million a year. And again as I mentioned this is subject to the tracking mechanism. So we do avoid the regulatory lag associated with that.

So if we look at the feeder line placement coupled with strong customer growth in Utah, we are forecasting a compound annual growth rate in the utility of 7% to 9%. That equates to roughly a $1 billion over five years that we will need to invest within Questar Gas. So, great opportunity to invest and to continue to grow the rate base within the regulated utility.

Let me just briefly mention some of the efforts around natural gas vehicles. Utah is recognized around the country as a leader in natural gas vehicles. We made a commitment as a company decades ago to natural gas vehicles at one point had the majority of our own fleet running on natural gas.

As technology in the vehicles changed many companies abandoned their natural gas vehicle program, but we did not, we stayed committed to it. Several years ago the Governor of the State of Utah approached the Company and jointly together we have grown this natural gas vehicle refueling infrastructure.

So as we look at the current state of our natural gas vehicle infrastructure we're going to talk about essentially two approaches to this market. The first is on the regulated basis. We currently have 30 Questar owned stations in the State of Utah. These are owned by Questar Gas and included in rate base. So we are able to earn our Questar Gas allowed return on this investment.

Over the last several years we've been able to invest on a gross basis about $25 million on these Questar owned stations and again, have that included in rate base. We will see this regulated NGV infrastructure grow as the customer requirements grow in the state. Each year we add generally one or two additional stations to meet the customer demand in the areas that are seeing the growth and we continue to work with the states of Wyoming and with Utah to identify additional areas that might be good candidates to see this regulated NGV infrastructure grow.

We're able to provide natural gas refueling at a gallon equivalent price of $1.49. So when you see the gasoline and diesel prices there is a substantial benefit and advantage of natural gas in this market for those customers. What we have seen over the last year is a lot of the trucking companies who have also identified this arbitrage between natural gas prices and diesel have come to us saying we've been pirating and using some of our infrastructure to refuel our trucks along this I-15 corridor, but we'd like to expand our fleet and your infrastructure won't meet our needs. Can you help us develop and design infrastructure that might be more fitting for their requirements.

So earlier this year we launched an unregulated venture that we have called Questar Fueling, established this in March of this year and they would be approach is really to help meet many of these fleet operators requirements in providing refueling infrastructure. Could be in the State of Utah could be outside of the State of Utah but dedicated under contract to help as they build their fleets. These applications that we're seeing are primarily around sort of in out and back terminal approach where trucks will return to base each day and have the opportunity to refuel.

We are in discussions with many of these fleet operators and as this market is growing, we're going to see we're seeing some additional opportunity to invest and to grow this business. I do want to emphasize that the approach for this is really based on contract demand. This is not something where we are looking to take commodity exposure. We do want to base it on a volumetric or a contract basis that protects us against some of those exposures that some of the other competitors in this space are experiencing.

One of the challenges is this market growth is really the availability of technology in engines. The 8.9 liter engine has been available for a number of years, but it is not of sufficient power to really drive some of these larger trucks. We do expect to see the 12 liter engine, 11.9 liter engine available next year. This is a good application for some of the, the trucking companies, but it's still underpowered relative to some of the long-haul requirements that the trucking companies have.

Really the boom should occur as we get into 2015 when the 15 liter engine becomes available. This dedicated CNG engine will really allow all of the trucking companies with whatever their requirements are to have an engine that is powered sufficiently to be able to pull the large loads that many of the strong trucking companies would like to do. But as we see this market grow we are primarily positioned to take advantage of that market and to provide this refueling infrastructure for those companies.

And with that let me turn it over to Jim to talk about Wexpro.

Jim Livsey

Thank you, Kevin. I'm also pleased to be with you today and I'll tell you about the Wexpro story before I get into to it too much, I do want to acknowledge the presence of Jim Harmon, who is with us today. Jim is a long time former director of Questar, probably 25 plus years and served on our Board up until our separation with our former affiliate QEP Resources, where he went to serve on their Board. But Jim has real intimate knowledge of the Wexpro story and was a key player in negotiating the Wexpro Agreement and we're pleased to have him with us as we talk about Wexpro.

Let me take you to Slide 20, for those that are listening on the webcast when we – just to refresh our memories and talk about the Wexpro arrangement that we operate under in the Wexpro part of the business. This is a very unique contract that allows us to produce cost of service base gas for our utility and really to understand the Wexpro story it's worthwhile to note that we have always had since the inception of this company going back to the 1935 and E&P component of the Company that start to develop a gas supply for the utilities.

So we've always had an E&P arm in this company dating all the way back to our origin and in 1981 the manner that gas and oil would be developed was reset under a comprehensive agreement called the Wexpro Agreement that has endured now for 31 years both in high and low gas environment and has really worked out to be a model that we are now talking about expanding and we'll update you a bit on Wexpro II.

With respect to continuing to develop properties that benefit the customer under a cost to service arrangement are that the things that are noteworthy relative to the Wexpro arrangement are that the model is similar to the utility that is to say we earn a return on investment for capital that we employ to drill wells. We don't sell the gas to the market, rather we deliver that gas to cost to service with that return.

We're not subject to rate cases it's a self governing document as we incur costs we get reimbursement in the subsequent month and it has an oversight mechanism with and independent engineer and accounting monitor that come in quarterly and annually and provide reports on prudence. There is an arbitration mechanism, never employed, but in place and to that extent its self governing and it really doesn't require rate case reset or process.

It extends to the life of the properties so there's no out provision and obviously it provides an after tax un-levered return on successful drilling for gas properties of 20%. All of the gas is dedicated to Questar Gas, currently approximately 60% of the gas supply for the utility is sourced from the Wexpro Gas and strong cash flow as you can see from the slides the upper right-hand corner. Cash flow is adequate to fund the capital program as well as contribute significantly to corporate dividend.

On Page 21, you can see an example of how this model works. Again it's a rate base concept to extend. We grow investment base with successful development. In drilling wells we are at risk for dry holes and non-commercial wells and with this year's program at approximately $130 million to the extent that those wells past the commerciality test reviewed by the monitor. They are eligible for to be added or incremented to the investment base.

We depreciate the properties via units of production depreciation. So as the gas produced the investment base is drawn down, currently about $80 million a year is in the form of depreciation. So that's the level of spending we need to incur just to keep investment base level. And then finally deferred taxes are a reduction to rate base or investment base. So bonus depreciation is the significant item as we think about tax policy.

So to the extent that we're able to add to that investment base, we are in lower risk development areas. So typically 95% plus of the capital we employ is deemed to be commercial and our dryhole history is fairly small compared to the annual capital each year. We'll add to that investment base and you can see that linear relationship with net income growing commensurate with investment base each year.

These properties have been amazingly resilient and the giving if you will, a gift that keeps on giving. As you look back at the level of reserves and Jim would probably tell you those that negotiated this arrangement probably never anticipated both from the regulatory standpoint as well as the Company standpoint just how long and productive these properties would be. And in fact, as you can see on the diagram on Page 22.

We in fact had more reserves as represented by the blue bars at the end of last year than we did when we started out producing the properties 31 years ago. And we produced over a Tcf of gas during that time and in fact we are producing more gas than we ever have as depicted by the red bar for the customers. So the properties are very competitive, they compete with the shale plays in terms of finding cost and they prove to be a tremendous benefit for the customer over time.

The one of the real keys that has allowed us to be competitive and continuing with the drilling program in a lower price environment has been continues drilling operations. And that is to say to the extent that we can stay in an area and turn our drilling endeavors into a manufacturing process, keep the same rigs, keep the same frac crews, we can keep costs down and drive the cost of service lower if you will so that we can compete in this lower gas price environment.

And you can see on slide 23, where our capital is currently being employed. So two thirds of our capital is being developed in the Vermillion basin that primarily is two fields Canyon Creek and Trail, southwest of Rock Springs, Wyoming. And then the other third is in Pinedale, and in both these areas with continuous operations over the last few years, you can see that we've been able to drive the days per well down and really reap the benefits efficiencies with lower finding costs.

Finding costs on the next slide is the single most important metric, as it relates to cost of service, and because of the efficiencies I mentioned earlier, we've been able to bring that finding costs down to the dollar level, where it was prior to the run up a gas prices in 2004 once again by virtue of those continues operations.

Where we stand is with respect to our cost structure as you look at industry peers on the next slide there are 12 - and primarily gas producers that we benchmark ourselves against, and you can see that our cost structure at $2.61 per Mcfe compares very favorably against industry peers those that sit just to left and right of this on this diagram are in fact shale players. And once again that's really a benefit of having these assets in the company now for decades, we don't have high acquisition costs, and we're able to continue to develop those properties in a cost effective fashion to this you have the return gross that protects us and we get in to the $4 level that our customers' [piece].

As we look at the impact on the Wexpro gas to the customer side over the last 31 years you can see on this diagram that purchase gas represented by the blue has obviously gone through periods of volatility, most notably through the last decade. But having the cost-of-service gas is really created a benefit to provide a hedge against price volatility. And on the right side of the diagram, you could see the customer has benefited approximately $1.3 billion by virtue of having that cost of service gas available to them over this time period.

We're excited with the downturn you see with the Wexpro blue line, where we've actually this year have been able to reduce the cost-of-service gas by 10%, once again by virtue of this low cost development occurring in the Permian Basin.

The other question we're often asked is how much development still sits ahead of us. And on the next diagram you can see that as we look at a $4 price deck, that is to say what would be economic at $4, we've identified 800 plus or $1.3 billion of we have to be developed locations ahead of us. And those are primarily in four principle areas that Vermillion Basin, Pinedale, Moxa Arch and the Uinta Basin in Utah. But that level represents the same amount that we spent over the last 31 years, we have that level of ahead of us.

Wexpro II, so over the last year, we have been in discussions and we've spoke of that through our quarterly updates with our regulators in Utah and Wyoming about entering an arrangement that would allow us to add to the property set taking advantage of lower gas prices right now. Our feeling is it's an opportunistic time to try and expand the property set to provide long term development benefits to the customer our regulators have been sympathetic to that.

And on September 17th we signed an agreement with Questar Gas as well as Utah Division of Public Utilities in Wyoming office to consumer advocate that has now been filed and we'll proceed with the approval process with Utah and Wyoming regulators. And we hopefully will be able to report over the next few months that we'll get approval of the contract. But what that does allow us to do is to go out and now and acquire properties, and add them to the property set and have development occur in the same fashion that it currently occurs under the original Wexpro Agreement, it's modeled upon the provisions of the Wexpro Agreement.

Let me just show you finally an example of what - how that would occur and what the mechanism would be for going forward with that with the hypothetical $50 million capital acquisition of a property set. So the design of the arrangement is such that we would earn the utilities return on upfront costs for producing properties, as well as leaseholds and that emulates the treatment for the properties that existed in the 1981. And original Wexpro Agreement those properties that were flowing at the time of execution earned the utilities return.

And as we went on to the develop those properties, we would earn the risk return, as we do in the Wexpro I arrangement, Wexpro II would provide for that same return currently 20.42% for gas property. But just with the $50 million hypothetical example financed by debt, you can see with $1 million of interest costs, there would be $3.2 million net income impact or it'd be accretive to earnings per share of $0.01 to $0.02 yet still be less than 1% impact on the customer side.

So this really demonstrates the what we think is compelling notion for the customer that if we can go out and buy a property and not even develop it in the current timeframe but allows the flexibility to develop as needs to be, as we go down the road we would still have an accretive earnings impact and have the option earn the higher return with modest costs to the customer and until we develop that property.

With that let me turn it over to Kevin, for the balance of the presentation.

Kevin Hadlock

Well, then doing my best Allan Bradley impersonation here. And talk about Questar Pipeline, as you know Questar Pipeline is really centered on a four hub strategy in the heart of the Rockies. We do move a tremendous amount of gas from the producing areas to the long-haul pipelines, going to the east out of [Wyoming] center, we do supply our REX and WIC through White River hub moving tremendous amount of gas down through our TransColorado, Southern Star. And then certainly to the west where we're seeing a lot more of the flows today is on to Ruby and Northwest pipeline, and then through Goshen down where Kern River, takes major deliveries.

Questar Pipeline also provide service to Questar Gas, and as you'll on slide 32, how the average deliveries have changed over the years with the completion of Overthrust and some of the other long-haul pipelines, we have dramatically increased the amount of gas that we were moving to the export pipeline and as a red bar on this chart represents what we are sending to Questar Gas.

EBITDA has grown commensurately, but what we're seeing as we forecast Questar Pipeline going forward with the low gas price environment, we are seeing less producing and less development activity in the Rockies, and as such we are projecting the Questar Pipeline earnings well before the core transportation business to be relatively flat. We are protected on this core region by the long term contracts that we have in place.

What we're also seeing is a number of other challenges within Questar Pipeline, as we talked about in our earnings call. And we are seeing some expenses like pension expense, we are seeing other reductions in revenue related to natural expectation around natural gas liquid volumes and pricing, as well as some of the contract renewal for the Southern Trail pipeline that for 2013 we are seeing and expecting a bit of reduction in our net income in pipeline, but then quickly returning as we get towards the back part of the plan back to 2012 levels.

But as Allan would say and I would certainly second, his team has done a great job of creating these regional market center that has essentially made Questar Pipeline one of the most desirable sets of assets certainly in the Rockies and around the country. We continue to look at ways to reduce our costs structure within Questar Pipeline, re-contracting some of these contracts come up is very important, we still have very long contracts in place the average contract duration for Questar Pipeline is about 10 years, 9 year to 10 years. And so we have quite a protection here against some of these competition, with excess export capacity in the Rockies.

We are for the first looking at a rate case strategy in the five year plan, years 2016, 2017 timeframe as we began to see some of these costs pressures mount and your part of the plan. We continue to be supported by Clay Basin storage which is the largest storage facility in the Rockies and provides a great service to customers like Questar Gas that has a lot of these Wexpro production that during the summer month, we inject in and then take out in the winter month for the heating season.

We have and continue to look at gathering and processing opportunities in the Rockies, this has been an area of focus for us, though we are finding it difficult to compete candidly with some of the low cost of capital MLPs in some of these areas and producers who are making some of these investment themselves.

So for Questar Pipeline the future remains steady as she goes. One thing that we did mention is despite some of these steadiness in earnings, we are finding opportunities to invest. This last year, we begin an expansion in the Uinta Basin to help some of these producers take their high Btu or wet gas are from the producing area in the Uinta Basin field through mining which is small hub for us to the processing in FIDLAR.

What we're doing this year is looping our jurisdictional lateral 47 in two phases, this will be an aggregate in investment of almost $20 million that will help these producers take this high BTU gas this wet gas to the processing facilities and capture more value, so we are findings ways to add value to these producers in these areas.

The second major project that we're working on this year, we did win the contract to provide PacifiCorp through Rocky Mountain power gas service about 90 decatherms a day to a new gas-fired generation facility they've call it Lake Side 2. This is a really interesting project because, it's brought together one of the strengths that we have at Questar in the integrated model that brought together Questar Pipeline and Questar Gas who jointly bid to provide this service.

And I really have to compliment Craig and Allan's teams for the work they did and working this contract negotiation. As many of you know our Kern River runs near this area [as willing] as an affiliate of PacifiCorp Rocky Mount power and to be able to win that business, really shows the competitive nature, our competitiveness and to be able to provide this kind of service to their affiliates.

Before we move on from Questar Pipeline, we did announce week and half ago, our intention to look at a strategic review of what we've termed some of these non-core assets within Questar Pipeline. The two sets of assets where we're focused is Southern Trail which is a repurchased in 1998 formally an oil pipeline that we converted the eastern segment and put that into natural gas service.

As the basis between San Joaquin Basin in California for natural gas has essentially collapsed. There is not much of basis differential and so as we had one contract on Southern Trail expire we're able to renew that but at much lower rates. And as we look forward we are evaluating opportunities for this pipeline.

One of the encouraging elements is that when you look at the oil basis differential between Permian, San Juan and some of the Long Beach processing, one of the areas that we will focus on in this review is whether it makes sense to convert to oil or whether it makes sense to potentially convert to water or CO2 for some of the oil drilling and lifting that they need in the California area.

So we focused on this project to see what kind of value we can create from that strategic review at Southern Trails. The other area of focus will be evaluating Overthrust and the opportunities that we might have in this market were valuations for pipelines were high, I've heard analysts refer to Overthrust as on a most valuable per mile pipeline in the Rockies we certainly would agree with that is a very attractive asset.

But we'll be looking to see if there is some potential to accelerate some of these great cash flow that Overthrust is producing in the form potential sale, joint ventures or other approach that might allow us to get some value from the Overthrust pipeline. It still is a very helpful and strategic asset in the Rockies but to the extent that we can get a rich valuation we will evaluate that in our strategic review process.

So let's talk a little bit about the financials on slide 37 this is a slide that we like show because that demonstrates the very strong return that Questar has been able to generate over the year. Our return on equity is consistently been above 20% for Wexpro, and this is one of the great elements of that contract that's in place, that we're able to earn on the debt development drilling about 20% return on equity, Questar Pipeline is consistently been able to earn above 11% or about 11.4% average than 2008 with an allowed return of about 11.75%.

Questar Gas has allowed return of 10.35%, on a financial basis we've averaged 10.6% and certainly have a big capital program coming into Questar gas in the future that's we're looking forward to continuing to earn at or near that allowed return. Because of some of the negative equity that we have at the parent company, you'll see that on a consolidated basis we're earning at almost 20% consolidated return on equity, which is really hard to beat in this industry that we're very proud of.

When you look at the balance sheet, we certainly have very strong balance sheets across each of the businesses because of the 20% plus return that we're earning at Wexpro, we do hold that at 100% equity finance.

Questar Pipeline has an authorized equity level of 54% we're at about 57% today, with the strong cash flow we'd expect to dividend some of that money out of Questar Pipeline, and we'll soon return back senior debt authorized level.

Questar Gas is at a seasonally low level of equity as we are now almost complete with the injection season and turning to the heating seasons, where we'll see some of that working capital come out of Questar gas, we also have a financing at Questar Gas that we have closed will be funded next month for about a $150 million to take out some of the commercial paper that we have from the debt maturities that we experienced this year. You will see a corporate, I mentioned the negative equity that's hit the corporate to get a consolidated equity level of about 43%.

On slide 39, this shows our updated capital forecast, you'll notice a material uptick in capital spending for next year, Wexpro is going to be pretty consistent about $135 million as they focus on that drilling program, Questar Pipeline is seeing about a $50 million uptick this is really related to the two projects that I mentioned the Uinta Basin expansion as well as the Lake Side 2 two project and you will see a noticeable uptick at Questar Gas.

Questar Gas' uptick is really related to both the Lake Side 2 project, their portion at spending as well as southern expansion or reinforcement project that we have for Southern Utah. This is a project that we've continued to push off as we weren't sure exactly how customer growth was going to behave in the Southern part of the state, but as we've seen that growth return it's now time to upgrade some compression and some of that investment that gets us to that uptick.

As we move forward just to give you a bit of prospect of how we see capital expenditures moving to the future. As we look at Wexpro their level of capital is really going to be determined by how we see natural gas prices move in the future. If we stay in an environment of low natural gas prices from an earnings perspective we certainly would expect to see closer to the 4% level of net income and commensurate level of capital would be lower.

If we see a recovery in natural gas prices that will give Jim and his team the opportunity to invest more and drive more growth and we'll require more capital. Good Questar Pipeline getting through these two major projects, I would expect Questar Pipeline to see lower capital requirements in the future, but again if we see an uptick in natural gas prices that brings producers back to the Rockies, we could see an increased requirement for capital also in Questar Pipeline.

With Questar Gas customer growth returning we actually expect to see capital to say pretty consistent about our $190 million to $200 million a year in the five year plan which gets you close to $1 billon of capital requirement for Questar Gas going forward.

Talk about the dividend for a second, as I mentioned we are approaching that 60% target level and would expect to hit that likely next year and then see dividends growth inline with the earnings growth rate going forward.

And then finally on 41, maybe I'll just mention when we think about priority to use of cash flow we certainly are focused on investing in the business and growing the businesses is the first priority to use the cash flow.

Second is to grow the dividend and then third is share repurchases, we're almost complete with our share repurchase program an authorization that extends to the end of this year to get to our target of $175 million shares would expect that we would spend probably close to $90 million up to $100 million authorization and we'd expect to wrap that up this year.

So in summary, to talk about the outlook we are continuing to expect 4% to 6% growth in the business anchored by Questar Gas and it's robust 7% to 9% growth rate that is anchored by the infrastructure replacement spending as well as increasing customer growth.

For Wexpro, as I motioned 4% to 8% growth depending on where we see gas prices going forward that equates to about $500 million to $600 million of capital and with Questar Pipeline for what it lacks in growth it is providing generous cash flow to help support the business.

So as we talk about Questar and why to invest? Certainly Wexpro is a differentiator for us. We provide the industry leading returns at near 20% consolidated as you look at the growth there is not speculation here in fact if Jim is successful in getting through Wexpro II with the regulators and we find attractive properties that capital and earnings are not in our plans going forward, at this point for '13 certainly as we look forward, we are hopeful that what we'll be able to find those opportunities and grow earnings more in Jim's business. It does not include in this plan any spending for Questar Fueling, which we are anxious and hopeful that that will be business we can invest in and modestly grow earnings.

From a risk profile very attractive low risk in the business that are anchored by contracts and regulation. And finally a great track record of creating value for shareholders of both in the form of increasing dividends and stock price appreciation.

So with that why don't we go ahead and open it up for your questions and your best answers. Christine?

Question-and-Answer Session

Unidentified Analyst

Southern Trail, the question on the pipeline that you would potentially want to convert, are there volumes flowing to that portion now, gas volumes? And then can you also talk about any regulatory approval that you would need to convert and timeline?

Kevin Hadlock

Sure, there are contract on Southern Trails and in fact we've tried to time those contracts with what a conversion might look like in terms of timing that conversion at the end of 2014. At this point, we haven't gotten to the point where we haven't really talked about the regulation the regulatory requirements to do that, but as we go through the strategic review, we'll resolve those kinds of issues to ensure that this is something that will work well, both from an economic perspective and regulatory perspective. What's up, Frank?

Unidentified Analyst

The natural gas fueling stations, that you went over, what kind of range of costs are you - would want to experience depending on whether you have one bay or seven bays or whatever?

Kevin Hadlock

Sure, great question so from a natural gas refueling perspective, the stations that we're currently building in rate base, which generally have a couple of base and some compression are in the $600,000 to $800,000 range, those are generally collocated with gasoline, diesel locations could be Flying J, ConocoPhillips some of those kinds of stations.

We're focused on locations in particular where the large truck can get into as well in the 30 that we have in Utah, majority of those can accommodate those large trucks. So pretty economical, when we start looking at inside the fence fleet applications it will really depend on the number of trucks and dispensers, the availability of natural gas to the location, the availability of electricity to the location that could be anywhere from $1 million to $2 million that to $7 million or $8 million depending on the size of the facility needed. So if you're looking at a couple of hundred trucks, you're going to be pushing closer to about $6 million to $8 million range.

Unidentified Analyst

Let me just two questions, one just a follow up on what the other gentlemen said, you're using Flying J and few of other guys out there, could you see this as a partnership with those type of companies for the interstate system out west where, this is really an economical deal, as opposed to in the Northeast here. Could you see yourselves spending $600,000 to 700,000 per station may be doing 50 or 100 as your goal. And therefore having somewhat who can actually fuel the fleet going from Utah however all the way to California in back?

Kevin Hadlock

We have been in conversations with many players in the trucking industry from the operators to the refilling stations. Any approach for us right now is to focus on contract base requirements. So to the extent that one of the operators would ask us to partner with one of those stations, so that along their routes they can have a logical location we certainly would look at that.

But our initial focus is really with the operators and meeting their requirement for behind the fence applications there maybe a small portion of that where they could open to the public as well but. The drill - the main focus is on those return to base applications.

As we move into the future as the number of trucks that the demand increases we certainly could see us at some point, moving more into their kind of partnerships but for now we're really focused on those behind the fence applications underneath with the operators.

Unidentified Analyst

I thought so. The other thing is on Wexpro II what is the reason you couldn't just expand the current Wexpro situation to do that? It's seems like it's a mirror image when you started you did, you bought those properties. Is there some sort of a problem in the agreement that you really couldn't do that or is that some other reason?

Kevin Hadlock

Jim do you want to address that.

Jim Livsey

Well, I think as I understand your question, why couldn't we do that with the original Wexpro Agreement and that agreement is specifically limited to properties that we're producing in 1981. And in essence what we are doing with this Wexpro II is we're copying the terms or emulating the terms of the original agreement and applying it to as you have defined property, so I think we're doing essentially what you're asking us to do. But keeping the two arrangements separate.

Kevin Hadlock

[Paul?]

Unidentified Analyst

I can repeat your question if you want, go ahead.

Unidentified Analyst

Basically, firs of all the rate case strategy at [deployed volumes] what does it imply in terms of

Unidentified Analyst

Well, in terms of ROE, that you'd actually have that pipeline going to and I guess you also mentioned that the equity could be still be taking some equity out that business I'm just wondering what kind of capitalization we should be thinking about and what ROE which has to be sort of earnings in order to be justifying going in for a rate cases, just so if you elaborate a little bit more on that?

Kevin Hadlock

Sure. So in terms of Questar Pipeline rate case strategy as we get out to 2016 - 2017 first I will - let's talk about the equity structure, I don't expect we would divert too far from the current authorized 54% does that we will see that 54%, 55% of that it's a good target for us, if you look at that capitalization just six months ago it would have been would have been 58, 59% so we've already started to see some of that come out as we've increased the internal dividend from Questar Pipeline.

In terms of ROE it's a little bit early to know where interest rates are going to go, it's exactly know what the ROE expectation is that far out, I would jstu except we'd need to see earned ROEs somewhere give or take 9% before really make a hard charge doing that we haven't had a rate case in Questar Pipeline in a very long time. And so when we focused on reducing costs and managing that ROE through whatever cost reductions we can to try to avoid the rate but I would suspect that we did below 10%, approach 9% that that would be come more in focus for us Paul.

Unidentified Analyst

Okay, so you guys have a 11.2% ROE now, should we basically be thinking that the earnings are going to be go down that business between now and initially used to keeping it flat I mean we're talking really maybe going down before you go in rate tax?

Kevin Hadlock

Yeah, and we talked about on our earnings call for 2013 we're expecting earnings and pipeline to be down really driven by the recontracting at Southern Trail pension expense in other reduction or expected reduction natural gas.

Unidentified Analyst

But then also just suggest that would be going back up I am just saying in the rate case which is happening in later years I mean it would suggest that it might be going down even further, right.

Kevin Hadlock

So, with some of the projects like the Lake Side 2, project like Uinta basin expansion, we do have some projects that will support some of that growth here in call it years two and three of the five year plan, I think where we don't have quite a same visibility as when we get out years four and five at what some of those growth projects may look like. And so because of that we're starting to look more seriously at our rate case strategy should we be continuation in soft natural gas prices and production remaining relatively flat in the rookies.

Unidentified Analyst

Okay, the 9 year to 10 year average life of contact are there any contracts that are above market that are expiring and that's an average they're expiring before that range in other word that means are there any other than Southern Trail are there any other contracts that are out of market that are going to be – that we have to be looking out for?

Kevin Hadlock

The next significant expiration we've actually just taken care off with I shouldn't say significant but it was a contract expiration next year with Questar Gas that through some of the additional services that we were able to provide the Questar Gas we were able to renew that contract that was beneficial to both party.

The next significant recontracting that we'll have us in 2017 and again that's with Questar Gas given the value added services that we provide target visibility exactly to what pricing is going to look like at that point in time but we're certainly optimistic with the value added services that Questar Pipeline can provide that recontracting that will be a very attractive thing for us and be able to do that without saying a significant reduction in revenue as a result but other than that there are no significant contract expiration on that core systems here before 17.

Unidentified Analyst

Okay, then just finally on Wexpro the $500 million to $600 million CapEx plan what your CapEx plan that's assuming current gas prices or is there any assumption gas prices what gas prices that on I guess where it is now?

Jim Livsey

That would be looking at the five year forward curve and so the way we account that is to say prices around the low side we'd see ourselves in the lower side of that $500 million to $600 million bracket.

Unidentified Analyst

And then if we go up to [40]

Jim Livsey

Beyond that.

Unidentified Analyst

Okay thank you

Kevin Hadlock

Thanks, Paul.

Unidentified Analyst

Just on natural gas vehicles just had a question the viability of it versus diesel and you made the comparisons are there federal taxes that are going to come on these as more and more trucks coming to the usage of vehicles and cars because I assuming $1.49 does include any taxes from the federal government and we have a tax and spend new leader again so they're going to be looking at this free money and so do you know what the taxes might be?

Kevin Hadlock

No that is one of the uncertainties that sit out there relative to natural gas for transportation, there has not been any significant conversation about taxation certainly president Obama over the last six months has mentioned natural gas with much greater frequency as a clean energy fuel we'll see how that translate into policy as we move forward over the next four years we now have some visibility into the state of US politics but I think that's one of we are known that we face in the market but even with a equivalent natural gas tax similar to what we see on diesel there is still a vast advantage to natural gas for fuel for transportation?

Unidentified Analyst

you mentioned QEP resource in past anyway you introduced the former director and my question is there an ongoing ownership position between Questar and that company and is there an ongoing working relationship between the two companies maybe you could summarize that?

Kevin Hadlock

I'll take the first one and Jim can take the, Jim, unless you want to take all with you.

Jim Livsey

Yeah, QEP resources has ownership in number the fields that we're operating in with respect to Wexpro development and the fact they operate the Pinedale field and we work with in conjunction with them and then we have spend it operating agreements or governed the way those arrangements work and those have – those are gone down the past as they do with other working interest owners.

Kevin Hadlock

But in terms of any equity ownership there is no longer any tie all of the arrangements that we have with QEP resources or third party types of arrangements this is we'd have with any other working partner relative to the Wexpro development.

Unidentified Analyst

Kevin talk a little bit about what's driver your customer growth which is substantially higher than everybody else and you did mention that you serve most of the state but not all of it, are those munis and co-ops maybe you could acquire just a bit more to the customer account or certain wholesale to begin with?

Kevin Hadlock

so I will take the second question first there are a handful of municipalities that doesn't allow to many customers the 20,000 to 30,000 customers as all. So we've been able to overtime purchase some of these areas both in Utah and Wyoming, but it's not a significant number that would do much to volumes or to customer growth, it's a great question about what's driving the customer growth really is economic activity in the State of Utah many publications over the last several years have identified Utah is one of the most attractive states to the business.

One of the reason is that we have very attractive and low energy prices that is driving some of that just in the last 12 months Proctor & Gamble relocated a manufacturing facility from California to the State of Utah, [Adobe] just this week opened up a large building just south in salt lake city we're seeing just a tremendous amount of relocation of some of those companies partially because the highly education workforce a lot of focus that do attend the schools in Utah like today in Utah they love the scheme they love the area and as such we tend to have highly educated workforce cost of living is great, recreation is fantastic.

And so we're seeing a lot of companies to finding those advantages in the State of Utah governor results are very supportive to the economic development the Wexpro agreement give some visibility to future natural gas prices in the state so we're seeing just robust economic climate in the state of Utah that is driving a lot of that, so with that economic activity comes in flux of customers that is driving that customer growth. Chris?

Unidentified Analyst

Hey, Kevin I was curious if you could stay on the distribution company for a moment, you mentioned some of that pressures that ROE is an under nationwide, I think we're, all appreciate to that, what about equity component, I think some recent rate outcomes in bordering states that lowered to be equity component on companies.

Kevin Hadlock

Yeah, the state has been very reasonable in their approach to some of these issue as I mentioned before and I think the best evidence is three years ago when we 2.5 years ago when we went in for a rate case and we were able to settle that with an increased ROE. The arguments we used which were accepted by the interveners and by the Commission we're simply we need to be competitive, we need to have regulation that is stable rather than being too over-reactive to market conditions, both up and down.

And I think from the equity side, it's always a risk, every thing is put into a rate case and evaluated but from that perspective the commission has proven to be quite reasonable in their approach to overall regulation.

As Chris, as you know, we're going in for this rate case at the request of the commission from three years ago primarily, because they wanted to look at the infrastructure tracker to ensure that that was working as they had envisioned it would. It's always a concern when you have a tracking mechanism then you over-earn and for the commission as we've gone through this and had more than 3 years of experience it's actually worked just as it was intended to work.

We've been able to invest the capital have been able to earn right at that allowed return so it's not creating to – should get the benefit for investors and on the shoulders of the rate payers and vice versa it's been a very fair mechanism. So they've proven to be quite reasonable on those issues and quite foresight-full and insightful in that process that things like decoupling in the tracker ahead of many other jurisdictions.

Unidentified Analyst

Okay, thanks for that. And I guess they actually increased the level of spend on their tracker, I do you believe - I don't.

Kevin Hadlock

Yeah, that we started it out $45 million and the unfortunate incidents in [Bruno] and some of the other areas they did ask us to increase that and that's been aided by bonus depreciation, for the ability to get those is. To be able to put those in quickly, we are going to be somewhat operationally constrained in our ability to really increase that significantly. But somewhere around that $55 million stretching to maybe $60 million is possible. But we certainly want to ensure that we run a safe of a system as possible.

Unidentified Analyst

Okay. And I guess my second question was on this point. Kevin you had mentioned, this was a big uptick in [customer] spending at the gas utility next year, you guided associated with likes that too and compression upgrades, but then today you're saying that the five year outlook would have that level to expand holding from in the years two through five. Can you just talk about what else if you're thinking about $55 million to $60 million in pipe [deflation] if you think about customer growth, there's something else that's going on within the system that that elevates that growth relative to what we've seen historically.

Kevin Hadlock

Yeah, there's two elements. We are seeing just across all utilities and pipelines increased requirements for safety and integrity that we are going to need to address. The other elements that we're seeing an uptick in customer growth and so the spending required to meet those customer needs is going to keep that, that we were forecasting that that will keep that spending up in that $190 million to $200 million level.

Unidentified Analyst

Great.

Unidentified Analyst

Thanks, Kevin. Does the Wexpro II agreement incorporate the same 100% equity structure.

Jim Livsey

Correct.

Unidentified Analyst

So any that that's needs to be funding the acquisitions of properties would be ways of the holding company.

Jim Livsey

That is the expectation, yes.

Unidentified Analyst

And there's plenty of room in the writings to do that on the short term and I guess Moody's and S&P.

Kevin Hadlock

Yes, so as we look at the metrics that Moody's and S&P look at, we feel comfortable in the rating category for any modest Wexpro II type acquisitions that we will need to make. Certainly as we're focused on somewhere in that $25 million to $50 million range on an acquisition the balance sheet certainly has sufficient strength to support incremental debt to fund that, near term.

Unidentified Analyst

Thanks a lot.

Unidentified Analyst

On Wexpro II, you know of properties that you are considering or looking at?

Kevin Hadlock

Question is on the Wexpro II where is the focus in terms of properties? The natural place would be where we're already at and so we think about other owners in the same field so we have Wexpro I ownership, or adjacent to areas certainly in the Rockies where we have expertise, that's how we're thinking about what would make instance.

We're approaching our 1:30 stop time. If there's one more question we can take that and we'll certainly stick around if anybody wants to hang out and chat further. Starting from the front.

Unidentified Analyst

You mentioned as an example I believe Adobe and P&G had found a home in your state and I think that exited California as I recall. Roughly speaking what kind of rates were they paying for their gas there versus where you are. Just to give us a general idea?

Kevin Hadlock

I don't have the actual comparison on rates, but as you talk with P&G in particular, they are biggest drivers, certainly rates were a helpful thing. But the biggest driver was an educated workforce that they could have in their facility, that the state of Utah provides, and you know the cost of that labor was certainly very attractive for them to come at the state of Utah. One thing that surprises many people one I didn't mention, is the second largest concentration of employees for Goldman Sachs is now in Salt Lake City. So you're saying an influx of both manufacturing jobs, professional jobs, are really increasing in the state.

Thanks for that question and thanks for joining us today here in New York. I appreciate those that have endured on the phone. Certainly if you have additional follow-up questions you can reach out to myself or Tony Ivins, who runs our Investor Relations program and again thanks and try to stay dry here in New York.

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