SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission File No. 1-8796 QUESTAR CORPORATION (Exact name of registrant as specified in its charter) STATE OF UTAH 87-0407509 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 45433, 180 East 100 South, Salt Lake City, Utah 84145-0433 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(801) 324-5000 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of October 31, 1999 Common Stock, without par value 82,441,432 shares PART I FINANCIAL INFORMATION Item 1. Financial Statements QUESTAR GAS COMPANY STATEMENTS OF INCOME (Unaudited) 3 Months Ended 9 Months Ended 12 Months Ended September 30, September 30, September 30, 1999 1998 1999 1998 1999 1998 (In Thousands) REVENUES $ 54,823 $ 48,619 $ 297,299 $ 314,795 $ 459,327 $476,903 OPERATING EXPENSES Natural gas purchases 26,839 22,615 162,302 182,678 260,628 283,015 Operating and maintenance 23,679 24,214 73,691 73,226 97,388 98,636 Depreciation 8,909 8,288 26,194 23,816 35,639 32,485 Other taxes 2,107 2,138 6,486 7,041 7,630 7,841 TOTAL OPERATING EXPENSES 61,534 57,255 268,673 286,761 401,285 421,977 OPERATING INCOME (LOSS) (6,711) (8,636) 28,626 28,034 58,042 54,926 INTEREST AND OTHER INCOME 553 846 2,524 2,874 3,216 3,621 DEBT EXPENSE (4,509) (4,762) (14,357) (14,458) (19,691) (19,884) INCOME (LOSS) BEFORE INCOME TAXES (10,667) (12,552) 16,793 16,450 41,567 38,663 INCOME TAXES (CREDITS) (4,800) (5,457) 5,238 5,212 13,842 12,343 NET INCOME (LOSS) $ (5,867) $ (7,095) $ 11,555 $ 11,238 $ 27,725 $ 26,320 See notes to financial statements QUESTAR GAS COMPANY CONDENSED BALANCE SHEETS September 30, December 31, 1999 1998 1998 (Unaudited) (In Thousands) ASSETS Current assets Cash and short-term investments $ 3,326 Accounts receivable $ 15,669 $ 12,753 80,512 Inventories 23,693 24,854 22,296 Purchased-gas adjustments 11,263 25,257 2,067 Other current assets 2,754 3,309 2,838 Total current assets 53,379 66,173 111,039 Property, plant and equipment 981,176 914,799 948,280 Less allowances for depreciation 410,897 373,250 382,657 Net property, plant and equipment 570,279 541,549 565,623 Other assets 21,600 24,222 23,853 $645,258 $631,944 $ 700,515 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balances $ 1,716 $ 3,288 Notes payable to Questar Corporation 25,100 56,600 $ 96,700 Accounts payable and accrued expenses 43,694 40,797 71,288 Total current liabilities 70,510 100,685 167,988 Long-term debt 225,000 225,000 225,000 Other liabilities 1,529 5,488 330 Deferred income taxes and investment tax credits 86,740 84,142 80,023 Common shareholder's equity Common stock 22,974 22,974 22,974 Additional paid-in capital 81,875 41,875 41,875 Retained earnings 156,630 151,780 162,325 Total common shareholder's equity 261,479 216,629 227,174 $645,258 $631,944 $ 700,515 See notes to financial statements QUESTAR GAS COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) 9 Months Ended September 30, 1999 1998 (In Thousands) OPERATING ACTIVITIES Net income $ 11,555 $ 11,238 Depreciation 28,200 25,639 Deferred income taxes and investment tax credits 6,717 (2,967) 46,472 33,910 Change in operating assets and liabilities 30,192 55,343 NET CASH PROVIDED FROM OPERATING ACTIVITIES 76,664 89,253 INVESTING ACTIVITIES Capital expenditures (35,602) (42,233) Proceeds from disposition of property, plant and equipment 2,746 3,220 NET CASH USED IN INVESTING ACTIVITIES (32,856) (39,013) FINANCING ACTIVITIES Checks outstanding in excess of cash balances 1,716 3,288 Decrease in notes payable to Questar Corporation (71,600) (43,400) Capital contribution 40,000 Payment of dividends (17,250) (16,875) NET CASH USED IN FINANCING ACTIVITIES (47,134) (56,987) DECREASE IN CASH AND SHORT-TERM INVESTMENTS $ (3,326) $ (6,747) See notes to financial statements QUESTAR GAS COMPANY NOTES TO FINANCIAL STATEMENTS September 30, 1999 (Unaudited) Note 1 - Basis of Presentation The interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Due to the seasonal nature of the business, the results of operations for the three- and nine-month periods ended September 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. Note 2 - Receipt of Contribution of Capital On June 30, 1999, Questar Gas received a $40 million contribution of capital from its parent company that was used to repay short-term debt owed to Questar Corporation. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations QUESTAR GAS COMPANY September 30, 1999 (Unaudited) Operating Results Following is a summary of financial and operating information for the Company: 3 Months Ended 9 Months Ended 12 Months Ended September 30, September 30, September 30, 1999 1998 1999 1998 1999 1998 FINANCIAL RESULTS - (dollars in thousands) Revenues From unaffiliated customers $ 53,957 $ 47,941 $ 296,002 $ 313,998 $ 457,758 $475,801 From affiliates 866 678 1,297 797 1,569 1,102 Total revenues 54,823 48,619 297,299 314,795 459,327 476,903 Natural gas purchases 26,839 22,615 162,302 182,678 260,628 283,015 Revenues less natural gas purchases (non-gas cost margin) $ 27,984 $ 26,004 $ 134,997 $ 132,117 $ 198,699 $193,888 Operating income (loss) $ (6,711) $ (8,636) $ 28,626 $ 28,034 $ 58,042 $ 54,926 Net income (loss) (5,867) (7,095) 11,555 11,238 27,725 26,320 OPERATING STATISTICS Natural gas volumes (in thousands of decatherms) Residential and commercial sales 8,252 6,312 54,822 53,804 84,249 84,190 Industrial sales 1,827 1,806 7,049 6,903 9,827 9,677 Transportation for industrial customers 12,258 13,935 37,409 41,882 50,988 56,228 Total deliveries 22,337 22,053 99,280 102,589 145,064 150,095 Natural gas revenue (per decatherm) Residential and commercial $ 5.18 $ 5.91 $ 4.73 $ 5.16 $ 4.83 $ 5.06 Industrial sales 2.85 3.05 2.91 3.02 2.97 2.99 Transportation for industrial customers 0.13 0.11 0.13 0.11 0.14 0.11 Heating degree days Actual 113 0 3,355 3,291 5,526 5,541 Normal 110 110 3,594 3,594 5,801 5,801 Colder (warmer) than normal 3% (7%) (8%) (5%) (4%) Number of customers at September 30, Residential and commercial 670,652 647,078 Industrial 1,361 1,311 Total 672,013 648,389 The non-gas cost margin increased 8% in the third quarter and 2% in the first nine months of 1999 compared with the same periods of 1998 resulting primarily from gas volumes delivered to new customers and adjustments to deliveries for residential and commercial customers from prior periods. Temperature adjusted usage per customer was approximately 1.8 decatherms or 2% lower in the first nine months of 1999 compared with 1998. Temperatures were 7% warmer than normal in 1999 and 8% warmer than normal in 1998. However, the effect of warmer than normal temperatures on earnings has been mitigated by a weather-normalization adjustment. The number of customers served by Questar Gas grew by 23,624 or 3.6% from a year ago to 672,013. The number of customer additions for the year ending December 31, 1999 is expected to be between 20,000 to 22,000. Volumes delivered to industrial customers decreased in the 3-and 9-month periods of 1999 when compared with the same period of 1998 because a major steel-producing customer reduced operations. The margin earned from gas delivered to industrial customers is substantially lower than from gas delivered to residential and commercial customers. Questar Gas' natural gas purchase costs declined 11% in the first nine months of 1999 when compared with the 1998 period due to lower commodity costs. Commodity costs dropped from $2.17 per decatherm in the third quarter of 1998 to $1.88 per decatherm in the third quarter of 1999 because of amortizing the purchase-gas cost account. However, natural gas purchase costs rose 19% in the third quarter of 1999 over the third quarter of 1998 due to a 31% increase in gas volumes delivered to residential and commercial customers. The Company files for adjustment of purchased-gas costs with the Utah and Wyoming Public Service Commissions on a semiannual basis. Gas costs included charges from an affiliated company for removing carbon dioxide from gas in its southern system. Operating and maintenance expenses increased $465,000 or 1% in the first nine months of 1999 compared with 1998 due primarily to higher information-technology costs. These increases were partially offset by early retirement labor-cost savings of $3 million in the 1999 period. Information-technology costs have been rising due to various projects, such as, enhanced communications, improvements in accounting and customer information systems, testing for Year 2000 issues. Depreciation expense increased in the 1999 periods presented when compared with the 1998 periods primarily as a result of continuing investment in property, plant and equipment, including data processing systems. Other taxes, which include payroll taxes, were lower in 1999 as a result of the early retirement program. The effective income tax rate was 31.2% in 1999 and 31.7% in 1998. The Company realized $1,381,000 of tight-sands gas-production credits in the 1999 period and $1,638,000 in the 1998 period. Liquidity and Capital Resources Operating Activities Net cash provided from operating activities in the first nine months of 1999 was $12,589,000 less than was generated in the first nine months of 1998. The decrease in cash flow resulted primarily from timing differences in the collection of purchased gas costs and payment on account to vendors. Investing Activities Capital expenditures were $35,602,000 in 1999 compared with $42,233,000 in 1998. Capital expenditures for calendar year 1999 are estimated at $62.5 million. Financing Activities On June 30, 1999, Questar Gas received a $40 million contribution of capital from its parent company. The proceeds of the capital contribution plus cash generated from operations allowed the Company to repay $71.6 million of short-term debt borrowed from Questar Corporation. Loan balances owed to Questar as of September 30, amounted to $25.1 million in 1999 and $56.6 million in 1998. Capital expenditures for the remainder of 1999 are expected to be financed with net cash flow provided from operating activities and borrowings from Questar. Regulatory and Other Matters Questar Gas filed an application on November 25, 1998 with the Public Service Commission of Utah (PSCU) to recover the costs associated with a contract for the removal of a portion of the carbon dioxide from pipeline gas. The contract covers the costs of a new plant constructed and operated by an affiliate of Questar Gas. The Division of Public Utilities and the Committee of Consumer Services have filed testimony questioning the Company's decision to enter into the contract and opposing pass-through rate coverage for the costs under the contract. The Committee objected to any cost recovery in rates for the plant processing costs. The case has been heard by the PSCU but no decision has been entered at this time. The contract's annual cost of service ranges between $7.5 and $8.5 million. Declining usage of gas per customer and the increasing investment resulting from significant growth in number of customers will likely cause Questar Gas to file a general rate case in the last quarter of 1999 or early in 2000. The last general rate case filed by the Company was in 1995. Year 2000 Issues Questar Corporation established a team to address the issue of computer programs and embedded computer chips being unable to distinguish between the year 1900 and the year 2000 (Y2K). The team identified 55 projects among Questar and its affiliated companies that were classified into application software, infrastructure, non-information technology equipment or critical third-party associations. As of September 30, 1999 those 55 projects have been assessed, remediated, tested and determined to be completed. In the process, Questar employees contacted more than 8,000 vendors and suppliers to assess their readiness to meet obligations to the Company. The estimated cost of the Y2K project is $5.1 million. Questar Gas' portion of Y2K costs is estimated to be $2.3 million. The Company has no cause to believe that Y2K will disrupt operations, but has developed contingency plans to ensure service is not disrupted due to Y2K problems. Operators, engineers, information-technology, communications and other employees will be available during the last half of December 1999 and into January 2000, to be prepared to respond to unforeseen contingencies that may arise. Failure to correct a material Y2K problem could result in an interruption, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. The complete text of Questar Gas' Y2K disclosure can be viewed in Form 10-K for December 31, 1998, filed with the Securities and Exchange Commission or on Questar's website at www.questar.com. Forward-Looking Statements This 10-Q contains forward-looking statements about future operations, capital spending, regulatory matters and expectations of Questar Gas. According to management, these statements are made in good faith and are reasonable representations of the Company's expected performance at the time. Actual results may vary from management's stated expectations and projections due to a variety of factors. Important assumptions and other significant factors that could cause actual results to differ materially from those discussed in forward-looking statements include changes in: general economic conditions, gas prices and availability of gas supplies, competition, regulatory issues, weather conditions and other factors beyond the control of the Company. These other factors include the rate of inflation, the adverse effects of failure to achieve Y2K compliance and adverse changes in the business or financial condition of the Company. These factors are not necessarily all of the important factors that could cause actual results to differ significantly from those expressed in any forward-looking statements. Other unknown or unpredictable factors could also have a significant adverse effect on future results. The Company does not undertake an obligation to update forward-looking information contained herein or elsewhere to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information. PART II OTHER INFORMATION Item 1. Legal Proceedings. a. The Public Service Commission of Utah (PSCU) has not yet issued a decision on the contested application filed by Questar Gas Company (Questar Gas or the Company) seeking pass-through treatment of the processing costs incurred to remove carbon dioxide from gas volumes. See the Company's Report on Form 10-Q for the quarter ended June 30, 1999, Item 1. Legal Proceedings. The Division of Public Utilities and the Committee of Consumer Services, which are two state agencies, are opposing the Company's application. Questar Gas and both state agencies have filed written briefs on the issues. The Company estimates that it will pay approximately $7.5-$8.5 million per year in processing costs and began paying these costs when the plant opened in June of 1999. b. The Public Service Commission of Wyoming (PSCW) has set a calendar to consider contested issues, primarily return on equity, in the Company's general rate case. Questar Gas will submit testimony on November 19, 1999, followed by public hearings on November 29 and 30, 1999. The Company is seeking authorization for a general rate decrease of $315,872. c. On October 26, 1999, Questar Gas, the Division of Public Utilities, the municipality of Hilldale, and a group of the Company's industrial customers reached a settlement of the issues raised by Hilldale's request that the Company be required to transport gas volumes that would be resold by it to town residents. See the Company's Report on Form 10-Q for the quarter ended June 30, Item 1. Legal Proceedings. The settlement was subsequently approved by the PSCU on October 27, 1999, through a bench order, but the approval had not been reduced to writing as of the date of this report. Under the terms of the settlement, Questar Gas will offer municipal transportation service to cities or towns where it does not provide general service or have a franchise and where such service will not subject it to regulation by the Federal Energy Regulatory Commission (FERC). The settlement also calls for the Company to cooperate with Hilldale in seeking a determination from the FERC about jurisdictional issues associated with Hilldale's desire to extend service to a sister community across the Arizona border. d. The Company filed a semi-annual pass-through application with the PSCW on November 1, 1999, seeking authorization to increase its rates effective December 1, 1999. Questar Gas's application reflects an increase in commodity costs and results in an annualized revenue increase of approximately $850,000. The Company will also request a December 1 effective date for its pass-through application that will be filed with the PSCU in mid-November. 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) November 10, 1999 /s/ D. N. Rose D. N. Rose President and Chief Executive Officer November 10, 1999 /s/ S. E. Parks S. E. Parks Vice President, Treasurer, and Chief Financial Officer