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, 2000.
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, 2000
Common Stock, without par value 80,523,141 shares
1
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
2000 1999 2000 1999 2000 1999
(In Thousands, Except Per Share Amounts)
REVENUES $ 245,117 $ 183,070 $ 814,361 $ 638,742 $1,099,838 $ 915,476
OPERATING EXPENSES
Natural gas and other product purchases 84,902 55,015 304,403 226,050 420,482 347,840
Cost of goods sold 6,712 3,737 18,011 5,518 22,918 6,569
Operating and maintenance 59,925 53,665 175,510 155,366 241,423 211,291
Depreciation and amortization 35,016 34,824 106,858 102,026 142,576 136,911
Write-down of full-cost oil and gas properties 34,000
Other taxes 13,218 8,433 37,046 24,475 45,295 31,090
TOTAL OPERATING EXPENSES 199,773 155,674 641,828 513,435 872,694 767,701
OPERATING INCOME 45,344 27,396 172,533 125,307 227,144 147,775
INTEREST AND OTHER INCOME 11,398 8,565 34,441 37,061 72,080 39,035
OPERATIONS OF UNCONSOLIDATED
AFFILIATES
Income (loss) 1,151 (1,819) 2,852 (1,945) 441 (400)
Write-down of investment in partnership (49,700)
1,151 (1,819) 2,852 (1,945) (49,259) (400)
DEBT EXPENSE (16,013) (13,349) (47,855) (38,748) (63,051) (52,045)
INCOME BEFORE INCOME TAXES 41,880 20,793 161,971 121,675 186,914 134,365
INCOME TAXES 14,617 5,691 58,273 40,139 65,922 41,243
NET INCOME $ 27,263 $ 15,102 $ 103,698 $ 81,536 $ 120,992 $ 93,122
EARNINGS PER COMMON SHARE
Basic $ 0.34 $ 0.19 $ 1.29 $ 0.99 $ 1.50 $ 1.13
Diluted $ 0.34 $ 0.18 $ 1.29 $ 0.98 $ 1.50 $ 1.12
Average common shares outstanding
Basic 80,223 82,622 80,344 82,648 80,587 82,655
Diluted 80,862 82,827 80,649 82,820 80,815 82,871
Dividends per common share $ 0.17 $ 0.17 $ 0.51 $ 0.50 $ 0.68 $ 0.665
See notes to consolidated financial statements
2
QUESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999 1999
(Unaudited)
ASSETS (In Thousands)
Current assets
Cash and cash equivalents $ 25,386 $ 8,291
Accounts receivable 155,554 $ 117,671 181,274
Inventories, at lower of average cost
or market -
Gas and oil storage 26,695 25,177 26,913
Materials and supplies 10,075 11,197 10,701
Purchased-gas adjustments 11,159 13,374 432
Prepaid expenses and other 8,880 11,263 11,249
Total current assets 237,749 178,682 238,860
Property, plant and equipment 3,461,958 3,227,751 3,258,773
Less allowances for depreciation and
amortization 1,568,810 1,456,652 1,471,859
Net property, plant and equipment 1,893,148 1,771,099 1,786,914
Securities available for sale 67,396 103,672 94,945
Investment in unconsolidated affiliates 35,237 68,019 25,269
Goodwill 21,453 1,465 7,750
Cash held in escrow 36,727
Other assets 49,653 45,336 47,532
$2,304,636 $2,168,273 $2,237,997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Checks outstanding in excess
of cash balances $ 5,020
Short-term loans $ 152,458 130,700 $ 144,115
Accounts payable and accrued expenses 188,465 139,717 179,680
Total current liabilities 340,923 275,437 323,795
Long-term debt 724,052 692,070 735,043
Other liabilities 32,412 25,667 29,944
Deferred income taxes and investment
tax credits 228,070 231,335 216,760
Minority interest 17,447 6,610
Common shareholders' equity
Common stock 261,432 295,467 278,437
Retained earnings 671,215 605,208 608,498
Other comprehensive income 29,085 43,089 38,910
Total common shareholders' equity 961,732 943,764 925,845
$2,304,636 $2,168,273 $2,237,997
See notes to consolidated financial statements
3
QUESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
9 Months Ended
September 30,
2000 1999
(In Thousands)
OPERATING ACTIVITIES
Net income $ 103,698 $ 81,536
Depreciation and amortization 111,219 106,652
Deferred income taxes and
investment tax credits 11,406 12,382
(Income) loss from unconsolidated affiliates,
net of cash distributions (1,316) 4,195
Gain from sales of securities (23,361) (26,115)
201,646 178,650
Changes in operating assets and liabilities 23,765 (15,484)
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 225,411 163,166
INVESTING ACTIVITIES
Capital expenditures
Property, plant and equipment (216,865) (132,478)
Other investments (9,324) (29,571)
Total capital expenditures (226,189) (162,049)
Proceeds from the disposition of
property, plant and equipment 1,965 4,860
Proceeds from the sales of securities 36,388 34,619
NET CASH USED IN INVESTING
ACTIVITIES (187,836) (122,570)
FINANCING ACTIVITIES
Issuance of common stock 7,561 6,006
Common stock repurchased (24,566) (9,427)
Issuance of long-term debt 39,791 210,000
Repayment of long-term debt (48,423) (142,000)
Change in short-term loans 7,900 (90,400)
Cash released from escrow account 36,727
Checks outstanding in excess of cash balances 5,020
Payment of dividends (40,981) (41,324)
Other 1,873 3,993
NET CASH USED IN FINANCING
ACTIVITIES (20,118) (58,132)
Foreign currency translation
adjustment (362) 47
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 17,095 $ (17,489)
See notes to consolidated financial statements
4
QUESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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, 2000, are
not necessarily indicative of the results that may be expected
for the year ending December 31, 2000. For further information
refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
Note 2 - Purchase of Companies
On January 26, 2000, a subsidiary of Questar Market Resources
(QMR) acquired 100% of the outstanding shares of Canor Energy Ltd
from NI Canada ULC, a subsidiary of Northwest Natural Gas Co for
cash of $US 61 million plus the assumption of $US 5.4 million of
short-term debt. The transaction was accounted for as a
purchase. Canor owns and/or operates more than 800 wells
located in Alberta, British Columbia and Saskatchewan provinces
of Canada. Canor's proven gas and oil reserves are estimated at
61.1 billion cubic feet equivalent.
On June 1, 2000, Questar MetroNet, a subsidiary of Questar
InfoComm, purchased 100% of the outstanding shares of Consonus of
Portland, in exchange for shares of Questar MetroNet, cash and an
assumption of debt. On the same day, Consonus was merged with
Questar MetroNet and the Consonus name was retained. Consonus is
a provider of e-business consulting, applications development and
managed hosting services. The transaction was accounted for as a
purchase.
Note 3 - Comprehensive Income
Comprehensive income is defined as any nonowner change in common
equity. Generally, comprehensive income includes earnings
reported on the income statement plus changes in common equity
formerly reported on the balance sheet only. Questar's other
comprehensive income, which are noncash transactions, includes
changes in the market value of the investments in securities
available for sale and foreign currency translation adjustments.
3 Months Ended 9 Months Ended
September 30, September 30,
2000 1999 2000 1999
(In thousands)
Comprehensive Income:
Net income $ 27,263 $ 15,102 $103,698 $ 81,536
Other comprehensive income (loss)
Unrealized gain (loss) on securities
available for sale (17,491) 11,266 (14,915) 41,052
Foreign currency translation adjustment (763) (42) (2,323) (533)
Other comprehensive income (loss) before
income taxes (18,254) 11,224 (17,238) 40,519
Income taxes on other comprehensive
income (loss) (7,049) 4,293 (7,413) 15,497
Net other comprehensive income (loss) (11,205) 6,931 (9,825) 25,022
Total comprehensive income $ 16,058 $ 22,033 $ 93,873 $ 106,558
5
Note 4 - Operations by Line of Business
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
2000 1999 2000 1999 2000 1999
(In Thousands)
REVENUES FROM UNAFFILIATED CUSTOMERS
Questar Market Resources $166,163 $111,943 $429,723 $302,434 $545,892 $402,204
Questar Regulated Services
Natural gas distribution 58,287 53,957 324,771 296,002 476,375 457,758
Natural gas transmission 10,454 8,863 30,355 27,638 39,639 37,063
Other 492 499 2,441 1,611 3,090 2,320
Total Regulated Services 69,233 63,319 357,567 325,251 519,104 497,141
Corporate and other operations 9,721 7,808 27,071 11,057 34,842 16,131
Total $245,117 $183,070 $814,361 $638,742 $1,099,838 $915,476
REVENUES FROM AFFILIATES
Questar Market Resources $ 21,240 $ 17,057 $ 64,642 $ 56,634 $ 87,716 $ 77,744
Questar Regulated Services
Natural gas distribution 1,265 866 3,475 1,297 4,509 1,569
Natural gas transmission 17,733 19,481 57,097 54,908 77,427 72,959
Other 71 56 207 136 267 164
Corporate and other operations 8,818 6,643 25,865 29,558 35,158 37,728
Total $ 49,127 $ 44,103 $ 151,286 $142,533 $ 205,077 $190,164
OPERATING INCOME (LOSS)
Questar Market Resources $ 39,227 $ 19,214 $ 95,357 $ 50,468 $ 121,667 $ 29,614
Questar Regulated Services
Natural gas distribution (8,883) (6,711) 27,901 28,626 44,588 58,042
Natural gas transmission 13,739 13,428 43,458 40,400 57,453 54,495
Other (150) (59) (66) (276) 154 (469)
Total Regulated Services 4,706 6,658 71,293 68,750 102,195 112,068
Corporate and other operations 1,411 1,524 5,883 6,089 3,282 6,093
Total $ 45,344 $ 27,396 $ 172,533 $125,307 $ 227,144 $147,775
NET INCOME (LOSS)
Questar Market Resources $ 24,008 $ 11,308 $ 56,239 $ 29,993 $ 72,112 $ 16,065
Questar Regulated Services
Natural gas distribution (7,889) (5,867) 9,496 11,555 17,160 27,725
Natural gas transmission 6,566 4,468 20,766 18,462 (6,087) 26,768
Other 8 48 240 38 453 (17)
Total Regulated Services (1,315) (1,351) 30,502 30,055 11,526 54,476
Corporate and other operations 4,570 5,145 16,957 21,488 37,354 22,581
Total $ 27,263 $ 15,102 $ 103,698 $ 81,536 $ 120,992 $ 93,122
6
Note 5 - Financing
On April 12, 2000, Questar Market Resources filed a registration
statement with the Securities and Exchange Commission for a
public debt offering. Following effectiveness of such
registration statement, Questar Market Resources intends to issue
$150 million of notes and use the proceeds to repay a portion of
the outstanding debt of Questar Market Resources.
In the third quarter of 2000, QMR initiated an unrated commercial
paper program with a $100 million capacity. Commercial paper
borrowings are limited to and supported by available capacity on
QMR's existing revolving credit facility. At September 30, 2000,
QMR had a commercial paper balance of $31.5 million.
Note 6 - Reclassifications
Certain reclassifications were made to the 1999 financial
statements to conform with the 2000 presentation.
7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
QUESTAR CORPORATION AND SUBSIDIARIES
September 30, 2000
(Unaudited)
Results of Operations
Questar Market Resources
Questar Exploration and Production, Wexpro, Questar Gas
Management and Questar Energy Trading, collectively,
(Market Resources) conduct the Company's exploration and
production, gas gathering and processing, and energy
marketing operations. Following is a summary of Market
Resources' financial results and operating information.
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
2000 1999 2000 1999 2000 1999
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $166,163 $111,943 $429,723 $302,434 $545,892 $402,204
From affiliates 21,240 17,057 64,642 56,634 87,716 77,744
Total revenues $187,403 $129,000 $494,365 $359,068 $633,608 $479,948
Operating income $ 39,227 $ 19,214 $ 95,357 $ 50,468 $121,667 $ 29,614
Net income 24,008 11,308 56,239 29,993 72,112 16,065
OPERATING STATISTICS
Production volumes
Natural gas (in million
cubic feet) 17,361 15,557 51,985 45,946 68,751 60,356
Oil and natural gas liquids
(in thousands of barrels)
Questar E & P 562 576 1,679 1,770 2,220 2,410
Wexpro 126 151 395 419 531 578
Production revenue
Natural gas (per thousand cubic $ 2.98 $ 2.03 $ 2.55 $ 1.94 $ 2.46 $ 1.94
Oil and natural gas liquids
(per barrel)
Questar E & P $ 20.06 $ 15.40 $ 20.48 $ 13.18 $ 19.47 $ 12.86
Wexpro $ 29.06 $ 17.78 $ 26.63 $ 14.75 $ 25.77 $ 13.60
Wexpro investment base at
Sept. 30, net of deferred income
taxes (in millions) $ 116.1 $ 106.3
Marketing volumes in energy equivalent
decatherms (in thousands of
Decatherms) 26,948 27,512 79,147 87,829 104,300 118,910
Natural gas gathering volumes
(in thousands of Decatherms)
For unaffiliated customers 23,205 22,359 68,244 64,485 88,720 82,476
For Questar Gas 7,500 5,338 26,588 22,257 36,381 30,847
For other affiliated customers 6,476 4,964 18,154 14,083 23,730 18,632
Total gathering 37,181 32,661 112,986 100,825 148,831 131,955
Gathering revenue (per
Decatherm) $ 0.13 $ 0.15 $ 0.13 $ 0.15 $ 0.13 $ 0.15
8
Continued strength in commodity prices and increased gas
production in 2000 resulted in revenues that were
substantially higher than the revenues reported for the
comparable 1999 periods. The average natural gas price
per thousand cubic feet (Mcf) increased 47% in the third
quarter and 31% in the first nine months of 2000 when
compared with the same periods of 1999. Double-digit gas
production growth also contributed to the increase in
revenues in the 2000 periods. Oil and natural gas
liquids prices increased 30% in the third quarter and 55%
per barrel in the first nine months of 2000 (excluding
Wexpro's oil production).
The higher gas price realizations were the combined
results of hedging contracts on a portion of the gas
produced and higher spot prices on the remainder.
Approximately 42% of the gas produced in the third
quarter was sold under hedge contracts at an average
price of $2.20 per Mcf, net back to the wellhead. About
one-third of the contracts are collars and the remainder
are fixed price contracts. The floor price of collar
arrangements was used in calculating the average hedged
price. Approximately 77% of oil produced in the third
quarter, excluding Wexpro production, was hedged at an
average price of $17.03 per barrel, net back to the
wellhead.
Gas production benefited from a successful development
drilling program and the first quarter acquisition of
Canadian producing properties. In the third quarter,
Canadian gas production grew 143% to 1.8 billion cubic
feet (Bcf). U.S. gas production was 5% above year-ago
levels at 15.6 Bcf as increased drilling activity offset
a property sale in the fourth quarter of 1999. However,
the increased drilling did not fully replace the
production of oil and NGL's as a result of selling
nonstrategic properties in the fourth-quarter of 1999.
QMR's third quarter net income increased $12.7 million
representing a 112% improvement over the third quarter of
1999. Net income for the first nine months of 2000 was
88% higher compared with the same period of 1999. Higher
commodity prices and gas production were the primary
reasons for the increase. Also, earnings for Wexpro and
gathering, processing and marketing were higher.
Wexpro's net income increased $2.7 million in the first
nine months of 2000 due to increased investment in
development-drilling projects. Wexpro develops gas
reserves on behalf of affiliated company, Questar Gas,
which is a rate-regulated distributor of natural gas. In
addition, higher oil and NGL prices contributed to
Wexpro's improved earnings.
Gathering, processing and marketing operations reported a
$4.3 million increase of earnings for the first nine
months of 2000 versus the 1999 period. The increase
resulted primarily from higher liquids prices realized
from processing plants and QMR's share of AFUDC recorded
on a storage facility.
Questar Regulated Services
Questar Gas and Questar Pipeline conduct the Company's
regulated services of natural gas distribution,
transmission and storage.
9
Natural Gas Distribution
Questar Gas conducts the Company's natural gas
distribution operations. Following is a summary of
financial results and operating information.
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
2000 1999 2000 1999 2000 1999
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 58,287 $ 53,957 $324,771 $296,002 $476,375 $457,758
From affiliates 1,265 866 3,475 1,297 4,509 1,569
Total revenues 59,552 54,823 328,246 297,299 480,884 459,327
Natural gas purchases 32,619 26,839 190,828 162,302 285,791 260,628
Margin $ 26,933 $ 27,984 $137,418 $134,997 $195,093 $198,699
Operating income (loss) $ (8,883) $ (6,711) $ 27,901 $ 28,626 $ 44,588 $ 58,042
Net income (loss) (7,889) (5,867) 9,496 11,555 17,160 27,725
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 7,462 8,252 50,567 54,822 77,946 84,249
Industrial sales 1,993 1,827 7,244 7,049 10,018 9,827
Transportation for industrial
customers 12,899 12,258 40,781 37,409 55,015 50,988
Total deliveries 22,354 22,337 98,592 99,280 142,979 145,064
Natural gas revenue (per decatherm)
Residential and commercial $ 5.79 $ 5.18 $ 5.56 $ 4.73 $ 5.37 $ 4.83
Industrial sales 4.25 2.85 3.46 2.91 3.35 2.97
Transportation for industrial
customers $ 0.12 $ 0.13 $ 0.12 $ 0.13 $ 0.12 $ 0.14
Heating degree days
Colder (warmer) than normal 7% 3% (18%) (7%) (15%) (5%)
Number of customers at September 30,
Residential and commercial 690,205 670,652
Industrial 1,345 1,361
Total 691,550 672,013
The margin decreased 4% in the third quarter of 2000 when
compared with the prior-year quarter due to changes in
the rate treatment of gathering and processing costs.
The margin increased 2% for the nine-month period of 2000
compared with 1999 primarily from higher residential and
commercial rates and from an increased number of
residential customers.
The Public Service Commission of Utah (PSCU) issued a
final order on August 11, 2000, which granted $6.5
million of additional annualized rate relief over and
above the $7 million interim rate relief granted on
January 1, 2000, that includes the collection of $5
million annually for gas processing costs. The rate
order also allows for an 11% return on equity. The number
of customers served by Questar Gas grew by 19,537 or
2.9% from a year ago to 691,550. The number of customer
additions for the year ending December 31, 2000 is
expected to be between 20,000 to 21,000.
10
Volumes delivered were unchanged in the third quarter and
were 1% lower for the nine and twelve-month periods of
2000 when compared with the same periods in 1999.
Temperature adjusted usage of gas per customer was 3%
lower in the 2000 quarter compared with the prior year
quarter and unchanged for the nine-month periods
year-to-year. Weather was 7% colder than normal in the
third quarter of 2000 and 3% colder than normal in the
1999 quarter. For the nine-month periods, weather was
18% warmer in 2000 compared with 7% warmer in the
comparable 1999 period. The effects of warmer weather
were mitigated somewhat by a weather normalization
adjustment.
Questar Gas' natural gas purchase costs increased in each
of the 2000 periods presented when compared with the 1999
periods due to higher commodity costs. Commodity rates
for the first half were $2.23 per Dth in 2000 compared to
$1.72 per Dth in 1999. In the third quarter, commodity
rates were $2.23 per Dth in 2000 compared to $1.88 per
Dth in 1999. Natural gas purchases in the third quarter
of 2000 were partially offset by $1.3 million due to a
one-time refund of gas processing costs. The Company
files for adjustment of purchased-gas costs with the Utah
and Wyoming Public Service Commissions on a semiannual
basis. Effective October 1, 2000, the PSCU approved on
an interim basis a $63 million pass-through filing that
increased Utah natural gas rates 12.7%. Also effective
October 1, 2000, the Wyoming Public Service Commission
approved a $2.5 million pass-through filing for Wyoming
natural gas rates.
Natural Gas Transmission
Questar Pipeline conducts the Company's natural gas
transmission and storage operations. Following is a
summary of financial results and operating information.
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
2000 1999 2000 1999 2000 1999
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 10,454 $ 8,863 $ 30,355 $ 27,638 $ 39,639 $ 37,063
From affiliates 17,733 19,481 57,097 54,908 77,427 72,959
Total revenues $ 28,187 $ 28,344 $ 87,452 $ 82,546 $117,066 $110,022
Operating income $ 13,739 $ 13,428 $ 43,458 $ 40,400 $ 57,453 $ 54,495
Net income (loss) 6,566 4,468 20,766 18,462 (6,087) 26,768
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 35,803 34,765 64,898 60,711 140,073 117,391
For Questar Gas 13,357 14,236 73,718 75,955 103,262 103,073
For other affiliated customers 1,676 5,078 3,001 8,458 6,696 22,929
Total transportation 50,836 54,079 141,617 145,124 250,031 243,393
Transportation revenue
(per decatherm) $ 0.28 $ 0.32 $ 0.28 $ 0.28 $ 0.28 $ 0.29
Revenues were higher in the nine months and twelve months
ended September 30, 2000 when compared with the same
periods of 1999 due to gas-processing operations added
mid-year 1999 and increased transportation demand. A
$1.3 million reduction in and subsequent refund of
processing fees in September 2000 caused third quarter
2000 revenues to fall below third quarter 1999 levels.
Processing fees are determined on the basis of cost of
service. The refund was the result of lower depreciation
costs. Even considering the refund, gas-processing
revenues for the first nine months of 2000 were $2.7
million higher than was reported for the same period of
1999. The gas-processing operations remove carbon
dioxide from certain gas supplies to make them suitable
for Questar Gas' system. Transportation revenues
11
increased 3% in the third quarter and the first nine
months of 2000 as a result of the addition of several
short-term firm-transportation contracts. Storage
revenues were 1% lower in the third quarter and the first
nine months of 2000.
Earnings from unconsolidated affiliates in 1999 included
the Company's share of losses reported by TransColorado
of $2.6 million for the third quarter and $3.2 million
for the first nine months that were not repeated in the
same periods of 2000. In the fourth quarter of 1999, the
Company wrote down its subsidiary's investment in the
TransColorado Pipeline.
On June 15, 2000, a lawsuit was filed against Questar
Pipeline Company and several of its affiliates by the
partner in the TransColorado Pipeline. The Company filed
a counterclaim July 27, 2000. The Company has been
incurring expenses in the defense of its position in the
case.
Consolidated Results of Operations
Higher prices for natural gas, oil and natural gas
liquids (NGL) and increased natural gas production were
the primary reasons of higher consolidated revenues in
the 3-, 9- and 12-month periods of 2000 when compared
with the same periods in 1999. Higher natural gas
prices also resulted in an increase in gas-distribution
revenues in the 2000 periods presented, because the cost
of natural gas is recovered from customers.
Natural gas and other product purchases increased in the
2000 periods presented because of higher prices paid for
natural gas, reflected in distribution operations and
energy-trading activities.
The costs of goods sold primarily includes the costs of
computer equipment and services for resale by Consonus.
The gross margin associated amounted to $5.9 million in
the first nine months of 2000 compared with $1.1 million
in the first nine months of 1999. Consonus is a new
operation that began in the last half of 1999. The
activities include providing secure data processing
centers, and configuring and selling hardware and
software for networking.
Operating and maintenance (O & M) expenses were higher in
the 2000 periods presented when compared with the same
periods in 1999 primarily due to adding gas and oil
properties, including a purchase of a Canadian gas and
oil company, and an increasing number of gas-distribution
customers. In addition, the O & M expense for the nine
months of 1999 was reduced by approximately $4 million
for some one-time expense adjustments in the regulated
companies due to capitalizing costs incurred in
constructing plant assets. As a result of higher gas
prices, the cost of replacing gas in extraction plant
operations has increased in 2000. Another factor for
higher O & M expenses in the 2000 periods was the cost
associated with defense in several ongoing legal cases.
The combined U.S. and Canadian full-cost amortization
rate for the first nine months of 2000 declined $.02 to
$.79 per thousand cubic feet equivalent of production
(Mcfe) compared with the rate a year ago. The lower
rate was due to successfully adding reserves through
drilling and purchases, while selling nonstrategic
properties at favorable prices. Depreciation and
amortization expenses were higher in the 2000 periods
presented when compared with the 1999 periods because
increased production volumes from full-cost properties
more than offset the lower amortization rates. Also,
increased investment in other properties resulted in a
higher depreciation expense in the 2000 periods. The
fourth quarter full-cost amortization rate is expected to
be $.78 per Mcfe. Depreciation expense was reduced by
$1.3 million in the third quarter of 2000 reflecting a
change from 10 years to 20 years in the estimated useful
life of the gas processing plant.
Higher commodity prices and increased production volumes
resulted in an increase in production-related taxes
reported in other taxes on the income statement. Debt
expense was higher in the 2000 periods presented because
of increased borrowings and higher floating interest
rates.
Pretax gains from selling securities available for sale
amounted to $23.4 million in the first nine months of
2000 compared with $26.1 million in the same period of
1999. Sales of securities resulted in after tax gains of
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$14.3 million in the 2000 period compared with $15.6
million in 1999. In addition, capitalized financing
costs amounted to $3.8 million in first nine months of
2000, up from $1.4 million in 1999.
Earnings from unconsolidated affiliates in the third
quarter and first nine months of 1999 included operating
losses from the TransColorado Pipeline that were not
repeated in the same periods of 2000. In the fourth
quarter of 1999, the Company wrote down its subsidiary's
investment in the TransColorado Pipeline.
The effective income tax rate for the first nine months
was 36% in 2000 and 34% in 1999. The effective income
tax rate increased largely because of a reduction in
nonconventional fuel tax credits and a higher portion of
earnings coming from Canada, where income tax rates are
higher. The Company recognized $4.7 million of
nonconventional fuel tax credits in the 2000 period and
$5.4 million in the 1999 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities for the first
nine months of 2000 was $62.2 million higher than the
amount generated in the same period of 1999 as a result
of increased net income and not repeating the timing
differences in the payment on accounts to vendors as
occurred in 1999. In addition, the 2000 period includes
approximately $25 million cash outflow due to
interest-bearing deposits related with energy-trading
activities with no comparable amounts in the prior year
period.
Investing Activities
A comparison of capital expenditures for the first nine
months of 2000 and 1999 plus an estimate for calendar
year 2000 is presented below. The Company acquired a
Canadian company, Canor Energy LTD, in 2000 for a cash
payment of $US 61 million and assumed $US 5.4 million of
debt.
Forecast
Actual 12 Months
9 Months Ended Ended
September 30, Dec. 31,
2000 1999 2000
(In Thousands)
Questar Market Resources $137,183 $ 90,464 $189,100
Questar Regulated Services
Natural gas distribution 46,123 35,602 63,300
Natural gas transmission 32,285 27,457 58,000
Other 588 912 2,100
Total Questar Regulated
Services 78,996 63,971 123,400
Corporate and other operations 10,010 7,614 24,300
$226,189 $162,049 $336,800
Financing Activities
The Company used cash flow generated from operations,
from the sale of investments, and cash released from an
escrow account to fund capital expenditures, reduce net
long-term borrowings, repurchase shares of its common
stock and pay dividends to holders of common stock. The
Company intends to finance 2000 capital expenditures
through net cash provided from operating activities, bank
borrowings and issuing long-term debt.
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In the first nine months of 2000, Questar repurchased
approximately 1.5 million of its shares for $23 million.
Since its inception in April of 1999, the Company has
repurchased 3.2 million shares of its common stock for
$51.4 million. The Company has used proceeds from the
sales of Nextel shares to fund a portion of these
repurchases.
Short-term borrowings amounted to $152.5 million,
principally commercial paper, at September 30, 2000
compared with $130.7 million of a year earlier. In the
third quarter of 2000, Questar Market Resources (QMR)
initiated an unrated commercial paper program with a $100
million capacity. QMR had borrowed $31.5 million under
this program as of September 30. The Company has bank
lines of credit, which serve as backup to borrowings made
under the commercial paper program. QMR filed a
registration statement with the Securities and Exchange
Commission on April 12, 2000 for a public debt offering.
Following effectiveness of such registration statement,
QMR intends to borrow $150 million of notes and use the
proceeds to repay a portion of its existing debt.
Pinedale Drilling Program
Test results from four wells drilled in the Pinedale
Anticline in western Wyoming tend to validate and may
enhance earlier estimates of the field's productive
potential. In evaluating the new wells, the Company
compared them with two other Questar Pinedale Anticline
wells completed in the first quarter of 2000. The four
wells were evaluated as if flow-tested in the same manner
as the earlier wells. The two earlier wells had initial
production rates of slightly more than 11 million cubic
feet of gas and between 89 and 113 barrels of condensate
per day. The four new wells are expected to have
comparative initial production rates between 7 and 11
million cubic feet per day. The data supports our
estimation of 135-150 potential well locations, based on
80-acre spacing. If 40-acre spacing is determined to be
appropriate, the potential well locations and reserves
could double. Based on short-term testing, pressures in
the new wells have generally been higher than previously
modeled, which tends to confirm estimates of a potential
average 5 to 6 Bcfe of reserves per well. However,
short-term tests are insufficient to determine estimated
reserves.
Early Retirement Offered
On August 28, 2000, Questar's Regulated Services unit
announced an early retirement window program to be
effective October 31, 2000. A total of 281 employees and
14 disability recipients from Questar Gas, Questar
Pipeline and Questar Regulated Services were eligible for
the enhanced benefit. The offer was accepted by 262 of
Regulated Services' employees and all 14 long-term
disability recipients. The window program is projected
to result in pretax labor cost savings for Regulated
Services of over $1 million in 2000 and $6-8 million
yearly.
Regulatory Matters
Effective October 1, 2000, the PSCU approved on an
interim basis a $63 million increase in its Utah natural
gas rates which resulted in a 12.7 percent increase for
the typical residential Utah customer. The increase was
based on recent significant increases in natural gas
prices at the wellhead and was part of Questar Gas'
gas-cost-adjustment or "pass-through" filings. Such
filings enable the company to adjust rates at least twice
each year to reflect changes in gas-supply costs. These
costs are passed on to the customer on a
dollar-for-dollar basis with no markup. The impact of
the gas cost increase on customers was lessened by the
fact that close to 50% of the Company's annual supply
comes from its own wells and is priced to customers at
cost of service prices rather than market prices. Also,
effective October 1, 2000, the Wyoming Public Service
Commission approved a $2.5 million pass-through filing
for Wyoming natural gas rates.
The Federal Energy Regulatory Commission (FERC) issued a
final order granting a certificate of convenience and
necessity to Questar's Southern Trails Pipeline. The
FERC's July 28 ruling came after the agency became
satisfied that the pipeline was in the public convenience
and necessity and could be completed in an
14
environmentally sound manner. Southern Trails must
receive final environmental approvals from state and
federal agencies before conversion to carry natural gas
can begin. Under the terms of the certificate, the
Company has two years in which to convert the line to
carry natural gas. Questar Pipeline is actively working
on right-of-way issues and exploring marketing
opportunities to subscribe Southern Trails' pipeline
capacity.
Market Risk
The Company's primary market-risk exposures arise from
commodity-price changes for natural gas, oil and other
hydrocarbons and changes in floating interest rates. The
Company has an investment in a foreign operation that may
subject it to exchange-rate risk. QMR also has reserved
certain volumes of pipeline capacity for which it is
obligated to pay $3 million annually for the next seven
years, whether or not it is able to market the capacity
to others.
Energy-Price Risk Management: Energy-price risk is a
function of changes in commodity prices as supply and
demand fluctuate. Market Resource bears a majority of
the risk associated with changes in commodity prices. A
primary objective of energy-price hedging is to protect
product sales from adverse changes in energy prices. The
Company does not enter into derivative contracts for
speculative purposes.
At September 30, 2000, Questar Market Resources held
hedge contracts covering the price exposure for about
49.8 million decatherms of gas and 1.3 million barrels of oil.
The hedging contracts exist for a significant share of
QMR-owned gas and oil production and for a portion of
gas-marketing transactions. Hedge contracts at September
30, 2000, had terms extending through October 2002, with
about 22% of those contracts expiring by the end of 2000.
The mark-to-market adjustment of gas and oil
price-hedging contracts at September 30, 2000, was a
negative $80.8 million. A 10% decline in gas and oil
prices would cause a positive $18.9 million
mark-to-market adjustment resulting in a negative $61.9
million balance. Conversely, a 10% increase in prices
results in a $18.8 million negative mark-to-market
adjustment resulting in a negative $99.6 million balance
as of September 30, 2000. The calculation used energy
prices posted on the NYMEX from the last trading day of
September 2000. The sensitivity calculations do not
consider the effect of gains or losses on the associated
physical side of these transactions, which should largely
offset the change in value.
Interest-Rate Risk Management: As of September 30, 2000,
the Company owed $297.1 million of variable rate debt.
The book value of variable-rate debt approximates fair
value.
Securities Available for Sale: Securities available for
sale represent equity instruments traded on national
exchanges. The value of these investments is subject to
day to day market volatility. A 10% change in prices
would result in either an increase or decrease in value of
$6.7 million as of September 30, 2000.
Foreign Currency Risk Management: The Company does not
hedge the foreign currency exposure of its foreign
operation's net assets and long-term debt. Long-term
debt held by the foreign operation, amounts to $58.9
million (U.S.), and is expected to be repaid from future
operations of the foreign company.
New Accounting Standards
The Company is required to adopt the accounting
provisions of Statement of Financial Accounting Standard
(SFAS) 133 "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS 138, by January
2001. The new accounting rules require that the fair
value of derivative instruments be measured and recorded
as either assets or liabilities in the balance sheet.
The Statement requires that changes in the derivatives
fair value must be recognized currently in earnings
15
unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows
derivatives' gains and losses to offset related results
on the hedged items in the income statement. Companies
must formally document, designate, and assess the
effectiveness of transactions that receive hedge
accounting treatment.
The Company is evaluating its derivatives and how the new
accounting standards apply. The Company believes its
derivatives to be highly effective and would
qualify as hedges under SFAS 133 as amended by SFAS 138.
If any portion of the hedge instrument is deemed to be
ineffective, as defined, changes in the value of that
portion would be reflected in the income statement. The
Company is currently evaluating its derivatives for
ineffectiveness, as defined in the standards.
Revenue Recognition Guideline Issued by the Securities
and Exchange Commission
In December 1999, the SEC issued Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial
Statements." The SAB raised issues concerning the timing
of recording revenues given that sales transactions may
contain some conditions allowing customers to return
products or receive refunds. The SEC expects companies
that make conditional sales to postpone fully recognizing
revenues until the earnings process is completed. The
Company records revenues when services are provided or
products are delivered. Periodically revenues are
collected subject to refunds pending final orders from
regulatory agencies. In those situations, revenues are
reported net of estimated refunds. The pronouncement is
effective for Questar beginning with the fourth quarter
of 2000 and is not expected to cause a change in the
method used to record revenues.
Forward-Looking Statements
This 10-Q contains forward-looking statements about
future operations, capital spending, regulatory matters
and expectations of Questar. 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 and oil
prices and supplies, competition, regulatory issues,
weather conditions, availability of gas and oil
properties for sale and other factors beyond the control
of the Company. These other factors include the rate of
inflation, volatility of quoted prices of securities
available for sale 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.
16
Part II
Other Information
Item 1. Legal Proceedings.
a. On October 31, 2000, KN TransColorado, Inc. ("KNTC"), a
subsidiary of Kinder-Morgan, Inc. ("Kinder-Morgan") filed a motion
to dissolve the TransColorado Gas Transmission Company ("TC
Partnership") and appoint a receiver to operate the TransColorado
pipeline project. The motion was filed as part of the complex
litigation that is pending in a Colorado state district court in
which Questar Corporation ("Questar" or the "Company") has been
named as a defendant together with its affiliates Questar Pipeline
Company ("Questar Pipeline") and Questar TransColorado Inc. ("QTC").
See the Company's Form 10-Q Report for the quarter ended June 30,
2000, Item 1. Legal Proceedings, for additional information
concerning the case. The litigation involves claims and
counterclaims concerning QTC's contractual right to put its 50
percent ownership interest in the TC Partnership to KNTC during the
12-month period commencing March 31, 2001. QTC and KNTC each have a
50 percent interest in the TC Partnership.
QTC has submitted KNTC 's motion to dissolve the TC Partnership
and appoint a receiver to the administrative agent for the TC
Partnership's $200,000,000 credit facility to determine if it has
any impact on the terms of such facility. After the original
complaint was filed in June of 2000, QTC and KNTC, on behalf of the
TC Partnership, and Questar Pipeline and Kinder-Morgan, as
guarantors, executed an amendment to the credit agreement that the
complaint itself did not constitute an event of default. Questar
Pipeline has provided a guaranty of $100,000,000 for the credit
facility.
Questar Pipeline and its affiliates have filed a motion to
dismiss KNTC's complaint or, in the alternative, to stay the action
and refer some issues raised in the complaint to the Federal Energy
Regulatory Commission for resolution. They also filed a
counterclaim and third party complaint against KNTC and its
affiliates, including Kinder-Morgan
b. Questar Exploration and Production Company ("Questar
E&P"), an indirect wholly owned subsidiary of the Company, is
involved in a major class action case--Bridenstine v. Kaiser Francis
Oil Company-- pending in an Oklahoma state court. The trial judge
recently postponed the jury trial from January to February of 2001.
Although Questar E&P is the primary Questar defendant, Questar
itself and Questar Market Resources, Inc., the direct parent of
Questar E&P, are both named as defendants in addition to
nonaffiliated parties.
The plaintiffs' primary claim alleges that a transportation fee
charged against royalty payments was improper or excessive over the
course of a 17-year period. While the underlying complaint does not
specify damages, estimates of aggregate damage claims have been as
high as $80 million; the plaintiffs are also seeking punitive
damages. The claims involve wells connected to an intratstate
pipeline system in Oklahoma. Kaiser Francis and Questar E&P are the
major working interest owners and operators of a majority of the
wells connected to the system. Questar E&P, however, has not owned
its working interest for the duration of the period under review in
the proceedings. See the Company's Form 10-Q Report for the quarter
ended June 30, 2000, Item 1. Legal Proceedings, for additional
information concerning the case.
17
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report:
Exhibit No. Exhibit
10.1.* Questar Corporation Annual Management Incentive
Plan as amended and restated effective October
26, 2000.
10.2.* Questar Corporation Deferred Compensation Plan
for Directors as amended and restated effective
October 26, 2000.
10.3.* Questar Corporation Long-term Stock Incentive
Plan as amended and restated effective October
26, 2000.
*Exhibit so marked is a management contract or compensation
plan or arrangement.
(b) During the third quarter of 2000, Questar filed two
Current Reports on Form 8-K. In the first report, dated August 28,
2000, the Company announced that an early retirement window program
was being offered to 281 employees and 14 disability recipients in
the Regulated Services unit to be effective October 31, 2000.
Questar also disclosed expected labor cost savings associated with
the special program. The second report, which was dated September
11, 2000, disclosed some information concerning reserve estimates
associated with successful drilling activities in the Pinedale
Anticline area of southwestern Wyoming. Neither report contained
any financial statements.
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 CORPORATION
(Registrant)
November 10, 2000 /s/R. D. Cash
(Date) R. D. Cash
Chairman of the Board,
President and
Chief Executive Officer
November 10, 2000 /s/S. E. Parks
(Date) S. E. Parks
Vice President, Treasurer
and Chief Financial Officer
18
EXHIBIT LIST
Exhibit No. Exhibit
10.1.* Questar Corporation Annual Management
Incentive Plan as amended and restated
effective October 26, 2000.
10.2.* Questar Corporation Deferred Compensation Plan
for Directors as amended and restated
effective October 26, 2000.
10.3.* Questar Corporation Long-term Stock Incentive
Plan as amended and restated effective October
26, 2000.
*Exhibit so marked is a management contract or compensation plan or arrangement
19