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 September 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 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 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 October 31, 2009, 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 September 30, 2009
TABLE OF CONTENTS
Page
PART I.
FINANCIAL INFORMATION
FINANCIAL STATEMENTS (Unaudited)
3
Consolidated Statements of Income for the three and nine months ended
3
Condensed Consolidated Balance Sheets as of September 30, 2009
and December 31, 2008
4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2009 and 2008
5
Notes Accompanying the Condensed Consolidated Financial Statements
6
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
7
ITEM 4.
9
PART II.
ITEM 1.
10
ITEM 6.
10
11
Questar Pipeline 2009 Form 10-Q
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
See notes accompanying the condensed consolidated financial statements
Questar Pipeline 2009 Form 10-Q
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See notes accompanying the condensed consolidated financial statements
Questar Pipeline 2009 Form 10-Q
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See notes accompanying the condensed consolidated financial statements
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QUESTAR PIPELINE COMPANY
NOTES ACCOMPANYING THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of Business
Questar Pipeline Company (Questar Pipeline or the 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 transportation and storage 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 gathering, processing and treatment services.
Note 2 – Basis of Presentation of Interim Consolidated Financial Statements
In July 2009 the Financial Accounting Standards Board (FASB) completed a revision of non-governmental U.S. GAAP into a single authoritative source and issued a codification of accounting rules and references. Authoritative standards included in the codification are designated by their Accounting Standards Codification (ASC) topical reference, and new standards will be designated as Accounting Standards Updates (ASU), with a year and assigned sequence number. The codification effort, while not creating or changing accounting rules, changed how users would cite accounting regulations. Citations in financial statements must identify the sections within the new codification. The codification is effective for interim and annual periods ending after September 15, 2009. The Company is complying with the new codification standards.
The interim condensed 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, 2008. Certain reclassifications were made to prior-period financial statements to conform with the current presentation.
Questar Pipeline uses the equity method to account for its investment in unconsolidated affiliates where it does not have control, but has significant influence. Generally, the investment in unconsolidated affiliate on the Company’s consolidated balance sheets equals the Company’s proportionate share of equity reported by the unconsolidated affiliate. 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 is 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 only 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 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 and nine months ended September 30, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.
The condensed consolidated financial statements reflect management's consideration of known subsequent events as of November 9, 2009, the date that the consolidated financial statements were issued.
All dollar amounts in this quarterly report on Form 10-Q are in millions, except where otherwise noted.
Note 3 – Financings
In September 2009, Questar Pipeline issued $50.0 million of notes due February 2018 with a 5.40% effective interest rate and used the net proceeds to repay $42.0 million of long-term notes that matured in October 2009.
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Note 4 – Fair-Value Measures
In April 2009, the FASB issued guidance requiring disclosures about fair value of financial instruments for interim periods as well as in annual financial statements. The new disclosure rules are effective for interim reporting periods ending after June 15, 2009. The following table discloses the fair value and related carrying amount of certain financial instruments not disclosed in other notes to the condensed consolidated financial statements in this quarterly report on Form 10-Q:
| Carrying | Estimated | Carrying | Estimated |
| Amount | Fair Value | Amount | Fair Value |
| Sept. 30, 2009 | Dec. 31, 2008 | ||
| (in millions) | |||
Financial assets |
|
|
|
|
Cash and cash equivalents | $ 0.3 | $ 0.3 | $ 1.8 | $ 1.8 |
Notes receivable from affiliates | 103.0 | 103.0 | 40.6 | 40.6 |
Financial liabilities |
|
|
|
|
Notes payable to affiliates | 0.2 | 0.2 | 0.2 | 0.2 |
Long-term debt | 502.2 | 544.0 | 452.2 | 457.2 |
Cash and cash equivalents, notes receivable from affiliates and notes payable to affiliates – the carrying amount approximates fair value.
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.
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 nine-month periods ended September 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 Pipeline, which provides interstate natural gas-transportation and storage services, reported third quarter 2009 net income of $14.1 million compared with $15.4 million in 2008, an 8% decrease. Net income for the first nine months of 2009 was $43.8 million compared with $44.0 for the first nine months of 2008. The second quarter of 2008 included one-time items that reduced net income by $2.1 million. Following is a summary of Questar Pipeline financial and operating results:
| 3 Months Ended Sept. 30, | 9 Months Ended Sept. 30, | ||||
| 2009 | 2008 | Change | 2009 | 2008 | Change |
| (in millions) | |||||
Operating Income |
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
Transportation | $43.4 | $42.0 | $1.4 | $129.4 | $129.4 |
|
Storage | 9.3 | 9.3 |
| 28.2 | 28.2 |
|
NGL sales | 3.4 | 5.3 | (1.9) | 7.4 | 12.7 | ($5.3) |
Energy services | 3.1 | 3.9 | (0.8) | 10.3 | 11.7 | (1.4) |
Gas processing | 0.5 | 0.9 | (0.4) | 2.3 | 3.6 | (1.3) |
Other | 1.2 | 0.6 | 0.6 | 4.4 | 2.6 | 1.8 |
Total Revenues | 60.9 | 62.0 | (1.1) | 182.0 | 188.2 | (6.2) |
Operating expenses |
|
|
|
|
|
|
Operating and maintenance | 10.1 | 9.8 | 0.3 | 27.8 | 27.4 | 0.4 |
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General and administrative | 9.3 | 7.6 | 1.7 | 26.6 | 27.1 | (0.5) |
Depreciation and amortization | 10.9 | 10.6 | 0.3 | 32.6 | 31.9 | 0.7 |
Impairment |
|
|
|
| 10.6 | (10.6) |
Other taxes | 2.2 | 2.0 | 0.2 | 6.6 | 6.3 | 0.3 |
Cost of goods sold | 0.3 | 0.7 | (0.4) | 1.4 | 1.5 | (0.1) |
Total Operating Expenses | 32.8 | 30.7 | 2.1 | 95.0 | 104.8 | (9.8) |
Net gain from asset sales | 0.1 | 0.3 | (0.2) | 0.4 | 4.3 | (3.9) |
Operating Income | $28.2 | $31.6 | ($3.4) | $87.4 | $87.7 | ($0.3) |
Operating Statistics |
|
|
|
|
|
|
Natural gas-transportation volumes (MMdth) |
|
|
|
|
|
|
For unaffiliated customers | 160.4 | 167.4 | (7.0) | 476.1 | 454.9 | 21.2 |
For Questar Gas | 14.0 | 15.1 | (1.1) | 85.1 | 88.4 | (3.3) |
For other affiliated customers | 2.7 | 2.8 | (0.1) | 5.3 | 5.2 | 0.1 |
Total Transportation | 177.1 | 185.3 | (8.2) | 566.5 | 548.5 | 18.0 |
Transportation revenue (per dth) | $0.24 | $0.23 | $0.01 | $0.23 | $0.24 | ($0.01) |
Firm daily transportation demand at Sept. 30, (including White River Hub of 1,005 in 2009 in Mdth) | 4,208 | 3,150 | 1,058 |
|
|
|
Natural gas processing |
|
|
|
|
|
|
NGL sales (MMgal) | 3.2 | 2.4 | 0.8 | 8.9 | 6.4 | 2.5 |
NGL sales price (per gal) | $1.05 | $2.21 | ($1.16) | $0.83 | $1.98 | ($1.15) |
Revenues
As of September 30, 2009, Questar Pipeline had firm-transportation contracts of 4,208 Mdth per day, including 1,005 Mdth per day from Questar Pipeline's 50% ownership of White River Hub, compared with 3,150 Mdth per day as of September 30, 2008. The White River Hub was placed in service in December 2008. Questar Pipeline has expanded its transportation system in response to growing regional natural gas production and transportation demand.
Questar Gas is one of Questar Pipeline's largest transportation customers with contracts for 901 Mdth per day. The majority of the Questar Gas transportation contracts extend through mid 2017.
Transportation revenues increased $1.4 million in the third quarter of 2009 compared to the third quarter of 2008 due to new transportation contracts. Transportation revenues were flat in the first nine months of 2009 compared to the same period of 2008 because the increased revenue in 2009 from new contracts was offset by an adjustment to an accrual for sharing of interruptible transportation revenues that was recorded in the first quarter of 2008.
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 2013 to 2019 and 100% of the firm-storage capacity at the aquifer facilities for terms extending until 2018.
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 were $1.9 million lower in the third quarter of 2009 compared with the third quarter of 2008 and $5.3 million lower in the first nine months of 2009 compared with the first nine months of 2008. NGL volumes were 39% higher in the first nine months of 2009, but NGL prices were 58% lower.
Other revenues were higher in the nine months ended September 30, 2009 due primarily to $1.3 million received from storage customers in the second quarter of 2009. Under a stipulation, these customers were required to pay the difference between the cost-of-service for a gas-processing facility and liquid revenues received from this facility for the 12 months ended May 2009.
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Expenses
Operating and maintenance expenses increased by 3% to $10.1 million in the third quarter of 2009 compared to $9.8 million in the third quarter of 2008. Operating and maintenance expenses increased 1% in the first nine months of 2009 compared with the first nine months of 2008. General and administrative expenses increased by 22% to $9.3 million in the third quarter of 2009 compared with the third quarter of 2008. The lower expense in the comparable 2008 quarter resulted from a significant reduction in deferred compensation expense (non-cash) as a result of a decline in the price of Questar common stock during the 2008 quarter. General and administrative expenses decreased by 2% to $26.6 million in the first nine months of 2009. Operating, maintenance, general and administrative expenses were $0.10 per dth transported in the first nine months of 2009, the same as the year-earlier period. Transportation volumes increased 3% and costs were flat. Operating, maintenance, general and administ rative expenses include processing and storage costs.
Depreciation expense increased 2% in the first nine months of 2009 compared to the first nine months of 2008 due to plant additions.
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 book value of 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 net book value of 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.
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, expenses, the outcome of contingencies 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;
·
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 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 September 30, 2009. Based on such evaluation, such officers have concluded that, as of September 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, 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 controls and
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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.
Changes in Internal Controls.
There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended September 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
Questar Pipeline is involved in various commercial and regulatory claims and litigation and other legal proceedings that arise in the ordinary course of its business. Management does not believe any of them will have a material adverse effect on the Company’s financial position, results of operations or cash flows. A liability is recorded for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the anticipated most likely outcome. Disclosures are provided for contingencies reasonably likely to occur which would have a material adverse effect on the Company’s financial position, results of operations or cash flows. Some of the claims involve highly complex issues relating to liability, damages and other matters subject to substantial uncertainties and, therefore, the probability of liability or an estimate of loss cannot be reasonably determined.
InUnited States ex rel. Grynberg v. Questar Corp., Civil No. 99-MD-1604, consolidated asIn re Natural Gas Royalties Qui Tam Litigation, Consolidated Case MDL No. 1293 (D. Wyo.), Jack Grynberg filed claims against Questar and other natural gas companies under the federal False Claims Act (Act) alleging industry-wide mismeasurement of natural gas quantities on which federal royalty payments are made. The trial court dismissed the case on jurisdictional grounds because Grynberg was not the “original source” of information for the alleged mismeasurement as required by the Act. The 10th Circuit Court of Appeals affirmed the dismissal in March 2009. On October 5, 2009, the U.S. Supreme Court denied Grynberg’s petition forcertiorari which concludes the matter.
The following exhibits are filed as part of this report:
Exhibit No.
Exhibits
12.
Ratio of Earnings to Fixed Charges.
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 Richard J. Doleshek, Questar Pipeline Company’s Executive 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 Richard J. Doleshek, Questar Pipeline 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.
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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)
November 9, 2009
/s/R. Allan Bradley
R. Allan Bradley
President and Chief Executive Officer
November 9, 2009
/s/Richard J. Doleshek
Richard J. Doleshek
Executive Vice President and
Chief Financial Officer
Exhibits List
Exhibit No.
Exhibits
12.
Ratio of Earnings to Fixed Charges.
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 Richard J. Doleshek, Questar Pipeline Company’s Executive 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 Richard J. Doleshek, Questar Pipeline 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.
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