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, 2008
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
QUESTAR PIPELINE COMPANY
(Exact name of registrant as specified in its charter)
STATE OF UTAH | 000-14147 | 87-0307414 |
(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) 324-2400
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 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, 2008, 6,550,843 shares of the registrant’s common stock, $1.00 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 Pipeline Company
Form 10-Q for the Quarter Ended June 30, 2008
TABLE OF CONTENTS
Page
PART I.
FINANCIAL INFORMATION
FINANCIAL STATEMENTS (Unaudited)
3
Consolidated Statements of Income for the three and six months ended
3
Condensed Consolidated Balance Sheets as of June 30, 2008
and December 31, 2007
4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2008 and 2007
5
Notes Accompanying the Consolidated Financial Statements
6
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
7
ITEM 4T.
9
PART II.
OTHER INFORMATION
ITEM 6.
10
10
Questar Pipeline 2008 Form 10-Q
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
See notes accompanying the consolidated financial statements
Questar Pipeline 2008 Form 10-Q
3
See notes accompanying the consolidated financial statements
Questar Pipeline 2008 Form 10-Q
4
See notes accompanying the consolidated financial statements
Questar Pipeline 2008 Form 10-Q
5
QUESTAR PIPELINE COMPANY
NOTES ACCOMPANYING THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of Business
Questar Pipeline Company (Questar Pipeline or Company) is a wholly-owned subsidiary of Questar Corporation (Questar). The Company is an interstate pipeline company that provides natural gas transportation and underground-storage services in the Rocky Mountain states of Utah, Wyoming and Colorado. As a “natural gas company” under the Natural Gas Act of 1938, Questar Pipeline and certain subsidiary pipeline companies are regulated by the Federal Energy Regulatory Commission (FERC) as to rates and charges for storage and transportation of natural gas in interstate commerce, construction of new facilities, and extensions or abandonments of service and facilities, accounting and other activities. Questar Transportation Service, a wholly-owned subsidiary of Questar Pipeline, provides processing and treatment services.
Note 2 – Basis of Presentation of Interim Consolidated Financial Statements
The interim consolidated financial statements contain the accounts of Questar Pipeline and its majority-owned or controlled subsidiaries. The consolidated 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. All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated 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 consolidated financial statements do not include all of the information and notes required by GAAP for audited annual consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Certain reclassifications were made to prior-period financial statements to conform with the current presentation.
Questar Pipeline uses the equity method to account for investment in unconsolidated affiliates where it does not have control, but has significant influence. Generally, the investment in unconsolidated affiliates on the Company’s consolidated balance sheets equals the Company’s proportionate share of equity reported by the unconsolidated affiliates. Investment is assessed for possible impairment when events indicate that the fair value of the investment may be below the Company’s carrying value. When such a condition is deemed to be other than temporary, the carrying value of the investment is written down to its fair value, and the amount of the write-down would be included in the determination of net income.
White River Hub, LLC, a limited liability corporation and FERC-regulated transporter of natural gas, is Questar Pipeline’s principal unconsolidated affiliate. Questar Pipeline owns 50% of White River Hub, LLC, and is the operator.
The preparation of the consolidated financial statements and notes in conformity with GAAP requires that management make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from estimates. The results of operations for the six months ended June 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.
Note 3 – Financing
In November 2007, Questar Pipeline filed a shelf registration with the Securities and Exchange Commission to sell up to $200 million of debt securities with intent to use the net proceeds from the sale of the securities to repay intercompany demand notes as well as for general corporate purposes, including working capital and capital expenditures. In January 2008, Questar Pipeline sold $200 million of 10-year notes with a 5.83% interest rate.
Note 4 – Sale of Processing Plant and Gathering Lines
Questar Transportation Services, a subsidiary of Questar Pipeline, sold a carbon dioxide processing plant and some associated gathering facilities in the second quarter of 2008. The net investment in these facilities was $20.0 million. The transaction closed in April 2008 and resulted in a pre-tax gain of $3.9 million.
Note 5 – Salt cavern storage project impairment
Questar Pipeline impaired the entire $10.6 million investment in a potential salt cavern storage project located in southwestern Wyoming in the second quarter of 2008 based on a technical and economic evaluation of the project.
Questar Pipeline 2008 Form 10-Q
6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion updates information as to Questar Pipeline’s financial condition provided in its previous Form 10-K filing, and analyzes the changes in the results of operations between the three and six-month periods ended June 30, 2008 and 2007. 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 2007 Form 10-K.
RESULTS OF OPERATIONS
Questar Pipeline, which provides interstate natural gas-transportation and storage services, reported second quarter 2008 net income of $12.7 million compared with $10.0 million in 2007. For the first half of 2008, net income was $28.6 million, compared with $21.2 million in 2007. Operating income increased $2.2 million, or 10%, in the second quarter 2008 compared to the year-earlier quarter. For the first half of 2008, operating income was 24% higher compared to the year-earlier period, due primarily to transportation-system expansions that were placed in service in late 2007. Following is a summary of Questar Pipeline financial and operating results:
| 3 Months Ended June 30, | 6 Months Ended June 30, | ||||
| 2008 | 2007 | Change | 2008 | 2007 | Change |
| (in millions) | |||||
Operating Income |
|
|
|
|
|
|
REVENUES |
|
|
|
|
|
|
Transportation | $43.2 | $31.3 | $11.9 | $87.4 | $62.2 | $25.2 |
Storage | 9.3 | 9.4 | (0.1) | 18.9 | 19.0 | (0.1) |
Gas processing | 1.0 | 2.1 | (1.1) | 2.7 | 4.1 | (1.4) |
NGL sales | 3.4 | 1.6 | 1.8 | 7.4 | 4.1 | 3.3 |
Energy services | 4.3 | 3.6 | 0.7 | 7.8 | 8.3 | (0.5) |
Other | 0.8 | 1.7 | (0.9) | 2.0 | 4.3 | (2.3) |
Total Revenues | 62.0 | 49.7 | 12.3 | 126.2 | 102.0 | 24.2 |
OPERATING EXPENSES |
|
|
|
|
|
|
Operating and maintenance | 9.9 | 9.5 | 0.4 | 20.9 | 18.8 | 2.1 |
General and administrative | 8.6 | 7.8 | 0.8 | 16.2 | 14.9 | 1.3 |
Depreciation and amortization | 10.5 | 8.6 | 1.9 | 21.3 | 17.2 | 4.1 |
Asset impairment | 10.6 |
| 10.6 | 10.6 |
| 10.6 |
Other taxes | 2.1 | 1.9 | 0.2 | 4.3 | 4.1 | 0.2 |
Cost of goods sold | 0.6 | 0.7 | (0.1) | 0.8 | 2.3 | (1.5) |
Operating Expenses | 42.3 | 28.5 | 13.8 | 74.1 | 57.3 | 16.8 |
Net gain from asset sales | 3.9 | 0.2 | 3.7 | 4.0 | 0.5 | 3.5 |
Operating Income | $23.6 | $21.4 | $2.2 | $56.1 | $45.2 | $10.9 |
Operating Statistics |
|
|
|
|
|
|
Natural gas-transportation volumes (MMdth) |
|
|
|
|
|
|
For unaffiliated customers | 157.7 | 84.0 | 73.7 | 287.5 | 160.9 | 126.6 |
For Questar Gas | 30.1 | 25.4 | 4.7 | 73.3 | 67.5 | 5.8 |
For other affiliated customers | 1.5 | 3.9 | (2.4) | 2.4 | 8.6 | (6.2) |
Total Transportation | 189.3 | 113.3 | 76.0 | 363.2 | 237.0 | 126.2 |
Transportation revenue (per dth) | $0.23 | $0.28 | ($0.05) | $0.24 | $0.26 | ($0.02) |
Firm daily transportation demand at June 30 (Mdth) | 3,124 | 2,240 | 884 |
|
|
|
Natural gas processing |
|
|
|
|
|
|
NGL sales (MMgal) | 1.5 | 1.4 | 0.1 | 4.0 | 3.9 | 0.1 |
NGL sales price (per gal) | $2.24 | $1.20 | $1.04 | $1.85 | $1.05 | $0.80 |
Questar Pipeline 2008 Form 10-Q
7
Revenues
Following is a summary of major changes in Questar Pipeline revenues for the second quarter and first half of 2008 compared with the same periods in 2007:
| Change in Revenues | |
| 3 Months Ended June 30, 2008 | 6 Months Ended June 30, 2008 |
| (in millions) | |
Transportation |
|
|
New capacity lease | $ 7.3 | $ 14.6 |
New transportation contracts | 5.3 | 11.1 |
Expired transportation contracts | (1.0) | (2.2) |
Other | 0.3 | 1.7 |
Gas processing | (1.1) | (1.4) |
NGL sales | 1.8 | 3.3 |
Energy services | 0.7 | (0.5) |
Other | (1.0) | (2.4) |
Increase | $12.3 | $24.2 |
As of June 30, 2008, Questar Pipeline had firm-transportation contracts of 3,124 Mdth per day compared with 2,240 Mdth per day as of June 30, 2007. Questar Pipeline has expanded its transportation system in response to growing regional natural gas production and transportation demand. In November 2007, Questar Pipeline placed an expansion of its southern system in service. The southern system expansion increased Questar Pipeline first-half 2008 firm-transport demand by 175 Mdth per day and first-half 2008 revenues by $8.3 million compared to the year-earlier period. In December 2007, Questar Overthrust Pipeline placed the Wamsutter expansion project into service. The Wamsutter expansion increased Questar Overthrust Pipeline first-half 2008 firm-transport demand by 750 Mdth per day and first-half 2008 revenues by $15.8 million compared to the year-earlier period.
Questar Gas is Questar Pipeline’s largest transportation customer with contracts for 901 Mdth per day. The majority of the Questar Gas transportation contracts extend through mid-2017.
Questar Pipeline owns and operates the Clay Basin underground storage complex in eastern Utah. This facility is 100% subscribed under long-term contracts. In addition to Clay Basin, Questar Pipeline also owns and operates three smaller aquifer gas storage facilities. Questar Gas has contracted for 26% of firm-storage capacity at Clay Basin for terms extending from one to 12 years and 100% of the firm-storage capacity at the aquifer facilities for terms extending for 11 years.
Questar Pipeline charges FERC-approved transportation and storage rates that are based on straight-fixed-variable rate design. Under this rate design, all fixed costs of providing service including depreciation and return on investment are recovered through the demand charge. About 95% of Questar Pipeline costs are fixed and recovered through these demand charges. Questar Pipeline’s earnings are driven primarily by demand revenues from firm shippers. Since only about 5% of operating costs are recovered through volumetric charges, changes in transportation volumes do not have a significant impact on earnings.
NGL sales more than doubled in the second quarter of 2008 and were 80% higher in the first half of 2008 over the same periods in 2007 due primarily to higher NGL prices.
Expenses
Operating and maintenance expenses increased by 4% in the second quarter of 2008 and 11% in the first half of 2008 compared to the same periods in 2007. The increase was a result of system expansions and higher labor and service costs. General and administrative expenses increased by 10% to $8.6 million in the second quarter and 9% to $16.2 million in the first half of 2008. Operating, maintenance, general and administrative expenses per dth transported declined to $0.10 in the first half of 2008 compared with $0.14 in the first half of 2007 because transportation volumes increased 53%. Operating, maintenance, general and administrative expenses include processing and storage costs.
Depreciation expense increased 22% in the second quarter of 2008 and 24% in the first half of 2008 compared to the 2007 periods due to investment in pipeline expansions.
Questar Pipeline 2008 Form 10-Q
8
Sale of processing plant and gathering lines
Questar Transportation Services, a subsidiary of Questar Pipeline, sold a carbon dioxide processing plant and some associated gathering facilities in the second quarter of 2008. The net investment in these facilities was $20.0 million. The transaction closed in April 2008 and resulted in a pre-tax gain of $3.9 million.
Salt cavern storage project impairment
Questar Pipeline impaired the entire $10.6 million investment in a potential salt cavern storage project located in southwestern Wyoming in the second quarter of 2008 based on a technical and economic evaluation of the project.
Interest and other income
In the second quarter of 2008, Questar Pipeline received the final cash payment on a note receivable resulting from the May 2005 sale of a business. Gain on collection of the note receivable and related interest amounted to $3.7 million.
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, 2007;
·
general economic conditions, including the performance of financial markets and interest rates;
·
changes in industry trends;
·
changes in laws or regulations; and
·
other factors, most of which are beyond the Company’s control.
Questar Pipeline 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 4T. 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, 2008. The effectiveness of the Company’s internal control over financial reporting was assessed using criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control – Integrated Framework. Based on such evaluation, such officers have concluded that, as of June 30, 2008, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company, including its consolidated subsidiaries, 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 contr ols 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 or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure.
This quarterly report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Questar Pipeline 2008 Form 10-Q
9
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, 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS.
The following exhibits are filed as part of this report:
Exhibit No.
Exhibits
31.1.
Certification signed by R. Allan Bradley, Questar Pipeline Company’s President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2.
Certification signed by S. E. Parks, Questar Pipeline Company’s Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.
Certification signed by R. Allan Bradley and S. E. Parks, Questar Pipeline Company’s President and Chief Executive Officer and 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 PIPELINE COMPANY
(Registrant)
August 7, 2008
/s/R. Allan Bradley
R. Allan Bradley
President and Chief Executive Officer
August 7, 2008
/s/S. E. Parks
S. E. Parks
Vice President and Chief Financial Officer
Exhibits List
Exhibit No.
Exhibits
31.1.
Certification signed by R. Allan Bradley, Questar Pipeline Company’s President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2.
Certification signed by S. E. Parks, Questar Pipeline Company’s Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.
Certification signed by R. Allan Bradley and S. E. Parks, Questar Pipeline Company’s President and Chief Executive Officer and Chief Financial Officer, respectively, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Questar Pipeline 2008 Form 10-Q
10