UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2009
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
QUESTAR GAS COMPANY
(Exact name of registrant as specified in its charter)
STATE OF UTAH | 333-69210 | 87-0155877 |
(State or other jurisdiction of incorporation or organization) | (Commission File No.) | (I.R.S. Employer Identification No.) |
180 East 100 South Street, P.O. Box 45360 Salt Lake City, Utah 84145-0360
(Address of principal executive offices)
Registrant’s telephone number, including area code(801) 324-5555
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [X] (Do not check if a smaller reporting company) | Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
On July 31, 2009, 9,189,626 shares of the registrant’s common stock, $2.50 par value, were outstanding. All shares are owned by Questar Corporation.
Registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is filing this form with the reduced disclosure format.
Questar Gas Company
Form 10-Q for the Quarter Ended June 30, 2009
TABLE OF CONTENTS
Page
PART I.
FINANCIAL STATEMENTS (Unaudited)
3
Statements of Income for the three, six and twelve months ended
June 30, 2009 and 2008
3
Condensed Balance Sheets as of June 30, 2009, June 30, 2008
and December 31, 2008
4
Condensed Statements of Cash Flows for the six months ended
June 30, 2009 and 2008
5
Notes Accompanying the Condensed Financial Statements
6
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
7
10
PART II.
10
10
Questar Gas 2009 Form 10-Q
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
See notes accompanying the condensed financial statements
Questar Gas 2009 Form 10-Q
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See notes accompanying the condensed financial statements
Questar Gas 2009 Form 10-Q
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See notes accompanying the condensed financial statements
Questar Gas 2009 Form 10-Q
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QUESTAR GAS COMPANY
NOTES ACCOMPANYING THE CONDENSED FINANCIAL STATEMENTS
Note 1 – Nature of Business
Questar Gas Company (Questar Gas or Company) is a wholly owned subsidiary of Questar Corporation (Questar). The Company provides retail natural gas distribution in Utah, southwestern Wyoming and a small portion of southeastern Idaho. Questar Gas is regulated by the Public Service Commission of Utah (PSCU) and the Public Service Commission of Wyoming (PSCW). The Public Utility Commission of Idaho has contracted with the PSCU for rate oversight of Questar Gas’s Idaho operations.
Note 2 – Basis of Presentation of Interim Financial Statements
The interim condensed financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP) and with the instructions for quarterly reports on Form 10-Q and Regulations S-X and S-K. The interim condensed financial statements reflect all normal, recurring adjustments and accruals that are, in the opinion of management, necessary for a fair presentation of financial position and results of operations for the interim periods presented. Interim financial statements do not include all of the information and notes required by GAAP for audited annual financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Certain reclassifications were made to prior-period financial statements to conform with the current presentation.
The preparation of the condensed financial statements and notes in conformity with GAAP requires that management make estimates and assumptions that affect the amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from estimates. The results of operations for the three, six and twelve months ended June 30, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.
All dollar amounts in this quarterly report on Form 10-Q are in millions, except where otherwise noted.
The condensed financial statements reflect management's consideration of known subsequent events as of August 7, 2009, the date that the condensed financial statements were issued.
Note 3 – Fair-Value Measure
In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) and Accounting Principles Board 28-1 "Interim Disclosures about Fair Value of Financial Instruments," which requires disclosures about fair value of financial instruments for interim periods as well as in annual financial statements. The FSP is effective for interim reporting periods ending after June 15, 2009. The Company adopted FSP FAS 107-1 in the second quarter of 2009. The following table discloses the fair value and related carrying amount of certain financial instruments not disclosed in other notes to the condensed financial statements in this quarterly report on Form 10-Q:
| Carrying | Estimated | Carrying | Estimated |
| Amount | Fair Value | Amount | Fair Value |
| June 30, 2009 | December 31, 2008 | ||
| (in millions) | |||
Financial assets |
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|
|
|
Cash and cash equivalents |
|
| $ 1.2 | $ 1.2 |
Notes receivable from affiliates | $ 1.2 | $ 1.2 |
|
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Financial liabilities |
|
|
|
|
Checks outstanding in excess of cash balances | 4.5 | 4.5 |
|
|
Notes payable to affiliates |
|
| 88.3 | 88.3 |
Long-term debt | 370.0 | 370.9 | 370.0 | 356.7 |
Cash and cash equivalents, notes receivable from affiliates checks outstanding in excess of cash balances and notes payable to affiliates – the carrying amount approximates fair value.
Questar Gas 2009 Form 10-Q
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Long-term debt – the fair value of fixed-rate debt is based on the discounted present value of cash flows using the Company's current borrowing rates.
Note 4 – Recent Accounting Developments
In April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," which provides additional guidance for estimating fair value when the level of activity for the asset or liability has significantly decreased. This FSP clarifies and includes additional factors to consider in determining whether there has been a significant decrease in market activity for an asset or liability and estimating fair value when the market activity for an asset or liability has declined significantly. The scope of this FSP does not include assets and liabilities measured under Level 1 inputs. FSP FAS 157-4 is to be applied prospectively to all fair value measurements where appropriate and its provisions are in effect for interim and annual periods ending after June 15, 2009. The adoption of FSP FAS 157-4 did not have a material impact on financial posi tion or results of operations.
In May 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) 165, "Subsequent Events" to establish a general standard of accounting for and disclosure of events that occur after the close of the period but before financial statements are issued or are available to be issued. The provisions of this statement are in effect for interim and annual periods ending after June 15, 2009. The adoption of SFAS 165 did not have a material impact on financial position or results of operations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion updates information as to Questar Gas’s financial condition provided in its previous Form 10-K filing, and analyzes the changes in the results of operations between the three-, six- and twelve-month periods ended June 30, 2009 and 2008. For definitions of commonly used terms found in this Form 10-Q, please refer to the “Glossary of Commonly Used Terms” provided in the Company’s 2008 Form 10-K.
RESULTS OF OPERATIONS
Questar Gas, which provides retail natural gas distribution services in Utah, Wyoming and Idaho, reported a net loss of $2.0 million in the second quarter of 2009, the same as the second quarter of 2008. Net income was $29.8 million in the first half of 2009, up 4% from the $28.6 million in the first half of 2008. Net income for the 12 months ended June 30, 2009, was $41.4 million compared with $38.0 million in the 12 months ended June 30, 2008. Following is a summary of Questar Gas financial and operating results:
| 3 Months Ended June 30, | 6 Months Ended June 30, | 12 Months Ended June 30, | ||||||
| 2009 | 2008 | Change | 2009 | 2008 | Change | 2009 | 2008 | Change |
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Operating Income |
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REVENUES |
|
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Residential and commercial sales | $129.7 | $142.0 | ($12.3) | $521.7 | $518.0 | $3.7 | $930.4 | $874.2 | $56.2 |
Industrial sales | 1.8 | 3.1 | (1.3) | 4.1 | 6.0 | (1.9) | 10.1 | 10.8 | (0.7) |
Transportation for industrial customers | 2.6 | 2.1 | 0.5 | 5.1 | 4.4 | 0.7 | 10.6 | 9.7 | 0.9 |
Service | 1.5 | 1.6 | (0.1) | 3.2 | 3.2 |
| 5.6 | 5.7 | (0.1) |
Other | 3.4 | 13.0 | (9.6) | 10.6 | 22.4 | (11.8) | 34.3 | 34.7 | (0.4) |
Total Revenues | 139.0 | 161.8 | (22.8) | 544.7 | 554.0 | (9.3) | 991.0 | 935.1 | 55.9 |
Cost of natural gas sold | 89.6 | 116.8 | (27.2) | 382.7 | 409.6 | (26.9) | 710.0 | 684.4 | 25.6 |
Margin | 49.4 | 45.0 | 4.4 | 162.0 | 144.4 | 17.6 | 281.0 | 250.7 | 30.3 |
OTHER OPERATING EXPENSES |
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Operating and maintenance | 22.0 | 19.5 | 2.5 | 53.0 | 41.3 | 11.7 | 98.8 | 77.4 | 21.4 |
General and administrative | 11.0 | 10.5 | 0.5 | 20.8 | 21.0 | (0.2) | 38.5 | 43.9 | (5.4) |
Depreciation and amortization | 10.9 | 10.3 | 0.6 | 21.7 | 20.5 | 1.2 | 42.7 | 40.2 | 2.5 |
Questar Gas 2009 Form 10-Q
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Other taxes | 3.9 | 3.6 | 0.3 | 7.7 | 7.1 | 0.6 | 12.5 | 11.4 | 1.1 |
Total Other Operating Expenses | 47.8 | 43.9 | 3.9 | 103.2 | 89.9 | 13.3 | 192.5 | 172.9 | 19.6 |
Operating Income | $1.6 | $ 1.1 | $0.5 | $ 58.8 | $54.5 | $ 4.3 | $88.5 | $77.8 | $10.7 |
Operating Statistics |
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Natural gas volumes (MMdth) |
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Residential and commercial sales | 17.8 | 19.2 | (1.4) | 62.3 | 69.1 | (6.8) | 105.5 | 114.2 | (8.7) |
Industrial sales | 0.3 | 0.5 | (0.2) | 0.6 | 0.9 | (0.3) | 1.4 | 1.7 | (0.3) |
Transportation for industrial customers | 13.6 | 13.4 | 0.2 | 30.1 | 29.4 | 0.7 | 62.9 | 62.3 | 0.6 |
Total industrial | 13.9 | 13.9 |
| 30.7 | 30.3 | 0.4 | 64.3 | 64.0 | 0.3 |
Total deliveries | 31.7 | 33.1 | (1.4) | 93.0 | 99.4 | (6.4) | 169.8 | 178.2 | (8.4) |
Natural gas revenue (per dth) |
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Residential and commercial sales | $7.27 | $7.41 | ($0.14) | $8.37 | $7.50 | $0.87 | $8.82 | $7.65 | $1.17 |
Industrial sales | 6.29 | 6.92 | (0.63) | 6.97 | 6.75 | 0.22 | 7.14 | 6.38 | 0.76 |
Transportation for industrial customers | $0.19 | $0.16 | $0.03 | $0.17 | $0.15 | $0.02 | $0.17 | $0.16 | $0.01 |
Colder (warmer) than normal temperatures | 4% | 31% | (27%) |
| 16% | (16%) | (2%) | 11% | (13%) |
Temperature-adjusted usage per customer (dth) | 17.1 | 16.4 | 0.7 | 64.5 | 65.6 | (1.1) | 108.8 | 111.0 | (2.2) |
Customers at June 30, (thousands) | 890.2 | 881.5 | 8.7 |
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Margin Analysis
Questar Gas margin (revenues minus gas costs) increased $4.4 million in the second quarter of 2009 compared to the second quarter of 2008, $17.6 million in the first half of 2009 compared to the first half of 2008 and $30.3 million in the 12 months ended June 30, 2009, compared to the 12 months ended June 30, 2008. Following is a summary of major changes in Questar Gas margin:
| Change | ||
| 3 Months Ended June 30, | 6 Months Ended June 30, | 12 Months Ended June 30, |
| 2009 to 2008 | 2009 to 2008 | 2009 to 2008 |
|
| ||
Customer growth | $ 0.4 | $ 1.3 | $ 2.3 |
General rate case | 1.7 | 6.2 | 10.4 |
Conservation-enabling tariff | (1.2) | 1.0 | 1.9 |
Change in usage per customer | 1.2 | (1.8) | (3.7) |
Demand-side management cost recovery | 2.7 | 8.4 | 12.8 |
Recovery of gas-cost portion of bad-debt costs | (1.2) | 0.2 | 2.5 |
Other | 0.8 | 2.3 | 4.1 |
Increase | $ 4.4 | $17.6 | $30.3 |
At June 30, 2009, Questar Gas served 890,249 customers, up from 881,505 at June 30, 2008. Customer growth increased the margin by $0.4 million in the second quarter of 2009, $1.3 million in the first half of 2009 and $2.3 million in the 12 months ended June 30, 2009.
In December 2007, Questar Gas filed a general rate case in Utah requesting an increase in rates of $27.0 million, including an authorized return on equity of 11.25%. The Company subsequently modified its request to $22.2 million to reflect a change in test year ordered by the PSCU and the impact of tax law changes on rate base. In the second quarter of 2008, Questar Gas received an order from the PSCU increasing rates by $12.0 million. The PSCU reduced Questar Gas’s allowed return on equity from 11.2% to 10%. The new rates went into effect in mid-August 2008 and increased the margin by $1.7 million in the second quarter of 2009, $6.2 million in the first half of 2009, and $10.4 million in the 12 months ended June 30, 2009.
Temperature-adjusted usage per customer increased 4% in the second quarter of 2009 compared to the second quarter of 2008 and decreased 2% in the first half and 12-months ended June 30, of 2009 compared to the prior-year periods. The impact on the Company margin from changes in usage per customer has been mitigated by a pilot conservation-enabling tariff (CET)
Questar Gas 2009 Form 10-Q
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that was approved by the PSCU beginning 2006. The CET resulted in a margin decrease of $1.2 million in the second quarter of 2009, offsetting the $1.2 million increase in margin resulting from usage per customer. For the first half of 2009, the CET increased margin $1.0 million partially offsetting the $1.8 million decrease in margin from lower usage per customer. For the 12 months ended June 30, 2009, the CET increased the margin by $1.9 million compared to a $3.7 million decrease in usage per customer.
Weather, as measured in degree days, was 4% colder than normal in the second quarter of 2009 and normal in the first half of 2009. Weather for the 12 months ended June 30, 2009, was 2% warmer than normal compared to 11% colder than normal for the 12 months ended June 30, 2008. A weather-normalization adjustment on customer bills generally offsets financial impacts of moderate temperature variations.
Expenses
Cost of natural gas sold was down 23% in the second quarter of 2009 compared to the second quarter of 2008 and down 7% in the first half of 2009 compared to the first half of 2008. The decreases were due to lower gas purchase expenses per dth and lower sales volumes. Cost of natural gas sold during the 12 months ended June 30, 2009 was 4% higher than the year-earlier period because of higher gas purchase expenses per dth. Questar Gas accounts for purchased-gas costs in accordance with procedures authorized by the PSCU and the PSCW. Purchased-gas costs that are different from those provided for in present rates are accumulated and recovered or credited through future rate changes. As of June 30, 2009, Questar Gas had a $48.6 million over-collected balance in the purchased-gas adjustment account representing costs recovered from customers in excess of costs incurred. Questar Gas reduced its rates for gas costs by an annualized $165 million effective March 1, 2009. In addition, Questar Gas rebated approximately $50 million of the over-collected balance in the purchased-gas adjustment account to customers in May 2009 business.
Operating and maintenance expenses increased 13% in the second quarter of 2009 compared to the second quarter of 2008 and 28% in the first half of 2009 and the 12 months ended June 30, 2009, compared to the first half of 2008 and the 12 months ended June 30, 2008. The increase was due primarily to higher demand-side management costs. The demand-side management costs increased $2.7 million in the second quarter of 2009 over the second quarter of 2008 and increased $8.4 million in first half of 2009 compared to the first half of 2008 and $12.8 million in the 12 months ended June 30, 2009, over the 12 months ended June 30, 2008. These costs are for the Company’s energy efficiency program and are recovered from customers through periodic pass-through rate changes. General and administrative expenses increased 5% in the 2009 second quarter and decreased 1% in the first half of 2009 and decreased 12% in the 12 months ended June 30, 2009. Operating, maintenance, general and administrative expenses per customer were $83 in the first half of 2009 compared to $71 in the first half of 2008 due to an increase in demand-side management cost of $9 per customer.
Depreciation expense increased 6% in the second quarter of 2009, the first half of 2009 and the 12 months ended June 30, 2009, respectively compared to the 2008 periods, primarily as a result of plant additions from customer growth and system expansion.
Forward-Looking Statements
This quarterly report may contain or incorporate by reference information that includes or is based upon “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, exploration efforts, expenses, the outcome of contin gencies such as legal proceedings, trends in operations and financial results.
Any or all forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining actual future results. These statements are based on current expectations and the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements. Among factors that could cause actual results to differ materially are:
·
the risk factors discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008;
·
general economic conditions, including the performance of financial markets and interest rates;
Questar Gas 2009 Form 10-Q
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·
changes in industry trends;
·
changes in laws or regulations; and
·
other factors, most of which are beyond the Company’s control.
Questar Gas undertakes no obligation to publicly correct or update the forward-looking statements in this quarterly report, in other documents, or on the Web site to reflect future events or circumstances. All such statements are expressly qualified by this cautionary statement.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures.
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2009. Based on such evaluation, such officers have concluded that, as of June 30, 2009, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company, required to be included in the Company’s reports filed or submitted under the Exchange Act. The Company’s Chief Executive Officer and Chief Financial Officer also concluded that the controls and procedures were effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management including its principal executive and financial officers o r persons performing similar functions as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls.
There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended June 30, 2009, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
a.
The following exhibits are filed as part of this report:
Exhibit No.
Exhibits
31.1.
Certification signed by Ronald W. Jibson, Questar Gas Company’s President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2.
Certification signed by Richard J. Doleshek, Questar Gas Company’s Executive Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.
Certification signed by Ronald W. Jibson and Richard J. Doleshek, Questar Gas Company’s President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, respectively, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
QUESTAR GAS COMPANY
(Registrant)
August 7, 2009
/s/Ronald W. Jibson
Ronald W. Jibson
President and Chief Executive Officer
Questar Gas 2009 Form 10-Q
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August 7, 2009
/s/Richard J. Doleshek
Richard J. Doleshek
Executive Vice President and
Chief Financial Officer
Exhibits List
Exhibit No.
Exhibits
31.1.
Certification signed by Ronald W. Jibson, Questar Gas Company’s President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2.
Certification signed by Richard J. Doleshek, Questar Gas Company’s Executive Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.
Certification signed by Ronald W. Jibson and Richard J. Doleshek, Questar Gas Company’s President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, respectively, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Questar Gas 2009 Form 10-Q
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