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
MARCH 31, 1998
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 March 31, 1998
Common Stock, without par value 41,123,687 shares
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
3 Months Ended 12 Months Ended
March 31, March 31,
1998 1997 1998 1997
(In Thousands, Except Per Share Amounts)
REVENUES $300,083 $358,378 $874,979 $950,636
OPERATING EXPENSES
Natural gas and other
product purchases 142,042 189,432 352,551 423,235
Operating and maintenance 50,902 54,078 201,658 201,289
Depreciation and amortization 30,072 29,844 124,265 109,332
Other taxes 10,011 13,102 31,216 34,296
TOTAL OPERATING EXPENSES 233,027 286,456 709,690 768,152
OPERATING INCOME 67,056 71,922 165,289 182,484
INTEREST AND OTHER INCOME 6,680 1,848 28,840 10,779
DEBT EXPENSE (11,514) (10,887) (44,393) (40,845)
INCOME BEFORE INCOME TAXES 62,222 62,883 149,736 152,418
INCOME TAXES 21,340 21,909 45,033 47,895
NET INCOME $40,882 $40,974 $104,703 $104,523
Earnings per common share
Basic $0.99 $1.00 $2.54 $2.54
Diluted 0.99 0.99 2.53 2.53
Average common shares outstanding
Basic 41,104 41,053 41,103 40,951
Diluted 41,434 41,235 41,391 41,170
Dividends per common share $0.315 $0.305 $1.25 $1.20
See notes to consolidated financial statements.
QUESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1998 1997 1997
(In Thousands)
ASSETS
Current assets
Cash and short-term investments $17,271
Accounts receivable $166,203 $173,742 187,014
Inventories 13,617 12,854 29,068
Purchased-gas adjustments 5,587 29,331 37,251
Other current assets 12,249 13,231 14,420
Total current assets 197,656 229,158 285,024
Property, plant and equipment 2,765,272 2,591,024 2,741,937
Less allowances for depreciation and
amortization 1,240,173 1,128,681 1,210,717
Net property, plant and equipment 1,525,099 1,462,343 1,531,220
Securities available for resale,
approximates fair value 66,182 39,536 55,925
Other assets 74,965 52,365 72,848
$1,863,902 $1,783,402 $1,945,017
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $1,216 $3,773
Short-term loans 27,000 36,500 $131,200
Accounts payable and accrued expenses 166,898 151,312 168,944
Current portion of long-term debt 6,096 5,442 6,068
Total current liabilities 201,210 197,027 306,212
Long-term debt, less current portion 542,683 538,706 541,986
Other liabilities 26,162 35,987 29,801
Deferred income taxes and investment
tax credits 211,622 203,368 221,240
Redeemable cumulative preferred stock 4,808
Common shareholders' equity
Common stock 292,405 294,929 291,322
Retained earnings 569,644 516,228 541,663
Other comprehensive income 30,349 7,905 22,966
Note receivable from ESOP (10,173) (15,556) (10,173)
Total common shareholders' equity 882,225 803,506 845,778
$1,863,902 $1,783,402 $1,945,017
See notes to consolidated financial statements.
QUESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(Unaudited)
<CAPTON>
Other Note
Common Stock Retained Comprehensive Receivable Comprehensive
Shares Amount Earnings Income from ESOP Income
(Dollars in Thousands)
Totals at January 1, 1997 41,024,887 $292,613 $487,799 $7,229 $(15,556)
Issuance of common stock 82,075 2,776
Purchase of common stock (11,884) (460)
Net income 40,974 $40,974
Other comprehensive income
Unrealized gain on securities
available for sale,
net of income taxes of $354,000 570 570
Foreign currency translation adjustment,
net of income taxes of $57,000 106 106
Payment of dividends (12,620)
Income tax benefit of dividends
paid to ESOP 75
Totals at March 31, 1997 41,095,078 $294,929 $516,228 $7,905 $(15,556) $41,650
Totals at January 1, 1998 41,071,042 $291,322 $541,663 $22,966 $(10,173)
Issuance of common stock 64,960 1,611
Purchase of common stock (12,315) (528)
Net income
Other comprehensive income 40,882 $40,882
Unrealized gain on securities
available for sale,
net of income taxes of $4,580,000 7,394 7,394
Foreign currency translation adjustment,
net of income taxes of $5,000 (11) (11)
Payment of dividends (12,950)
Income tax benefit of dividends
paid to ESOP 49
Totals at March 31, 1998 41,123,687 $292,405 $569,644 $30,349 $(10,173) $48,265
See notes to consolidated financial statements.
QUESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
3 Months Ended
March 31,
1998 1997
(In Thousands)
OPERATING ACTIVITIES
Net income $40,882 $40,974
Depreciation and amortization 31,507 31,061
Deferred income taxes and
investment tax credits (14,198) (1,040)
Gain from the sales of securities (4,083)
54,108 70,995
Changes in operating assets and
liabilities 65,307 3,248
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 119,415 74,243
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (30,614) (21,146)
Other investments (3,023) (36)
Total capital expenditures (33,637) (21,182)
Proceeds from disposition of property,
plant and equipment 5,324 5,078
Proceeds from the sales of securities 5,800
NET CASH USED IN INVESTING
ACTIVITIES (22,513) (16,104)
FINANCING ACTIVITIES
Issuance of common stock 1,611 2,776
Common stock repurchased (528) (460)
Redemption of preferred stock (20)
Issuance of long-term debt 1,000 68,430
Repayment of long-term debt (371) (84,496)
Decrease in short-term loans (104,200) (41,300)
Checks outstanding in excess of
cash balances 1,216 3,773
Payment of dividends (12,950) (12,620)
Other 49 75
NET CASH USED IN FINANCING
ACTIVITIES (114,173) (63,842)
DECREASE IN CASH AND
SHORT-TERM INVESTMENTS ($17,271) ($5,703)
See notes to consolidated financial statements.
QUESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
Note 1 - Basis of Presentation
The interim financial statements furnished 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-month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1998. 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, 1997.
Note 2 - Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income".
SFAS No. 130 establishes new rules for reporting comprehensive income
and its components. However, the adoption of this statement had no
impact on Questar's net income and its shareholders' equity. SFAS
No. 130 requires unrealized gains or losses on available-for-sale
securities and foreign currency translation adjustments to be
included in other comprehensive income. Formerly, these transactions
were reported separately in shareholders' equity. Prior year
financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
QUESTAR CORPORATION AND SUBSIDIARIES
March 31, 1998
(Unaudited)
Results of Operations
Market Resources
Celsius Energy (US and Canada), Universal Resources, Wexpro, Questar
Gas Management, Questar Energy Trading, and Questar Energy Services
(Market Resources) conduct the Company's exploration and production,
gas gathering and processing, and energy marketing operations.
Following is a summary of financial results and operating information.
3 Months Ended 12 Months Ended
March 31, March 31,
1998 1997 1998 1997
(Dollars in Thousands)
FINANCIAL RESULTS
Revenues
From unaffiliated customers $98,562 $174,538 $372,789 $510,034
From affiliates 16,868 27,774 63,678 81,983
Total revenues $115,430 $202,312 $436,467 $592,017
Operating income $14,119 $17,492 $53,791 $67,085
Net income 9,909 11,646 39,326 44,152
OPERATING STATISTICS
Production volumes
Natural gas (in million
cubic feet) 12,094 11,774 47,762 43,148
Oil and natural gas liquids
(in thousands of barrels) 654 766 2,826 2,696
Production revenue
Natural gas (per thousand
cubic feet) $1.96 $1.99 $1.88 $1.64
Oil and natural gas liquids
(per barrel) $14.51 $20.45 $16.83 $19.77
Marketing volumes
Gas marketing volumes (in
thousands of decatherms) 24,809 39,196 111,156 150,935
Oil (in thousands of barrels) 554 472 1,760 1,595
Electricity (in thousands of
megawatt hours) 21 342 378 546
Natural gas gathering volumes (in
thousands of decatherms)
For unaffiliated customers 18,523 14,319 61,790 52,010
For Questar Gas 8,551 9,286 27,771 29,667
For other affiliated customer 4,269 4,173 17,775 11,051
Total gathering 31,343 27,778 107,336 92,728
Gathering revenue (per
decatherm) $0.16 $0.22 $0.19 $0.23
Revenues from Market Resource operations were lower in the 1998 periods
presented when compared with the 1997 periods primarily as a result of
decreased energy-marketing activities, particularly gas, and lower oil
prices and production volumes. Gas-marketing volumes were 37% lower in
the first quarter and 26% lower for the 12-months ended March 31, 1998
when compared with the same periods of 1997. The Company has recently
reorganized its trading operation and brought in some new personnel.
Energy marketing activities reported $290,000 of net income in the
first quarter of 1998 compared with a $790,000 loss in the first
quarter of 1997. The 1997 loss was primarily the result of paying
higher prices for affiliate production.
Oil and NGL revenues were $6,173,000 lower in the first quarter
comparison due to a 29% drop in prices and a 15% decline in production.
The production decline was the result of the sale of nonstrategic
assets in 1997, normal production declines and a temporary shutdown of
the Brady processing plant due to a construction project.
Gas production increased 3% in the first quarter of 1998 when compared
with the first quarter of 1997, but the effect was offset by a 2% lower
average price. The increase in production resulted from gas wells
drilled in 1997.
Market Resources hedged 37-40% of its gas production in the first
quarter of 1998 at prices of $2.10- 2.20 per Mcf, net back to the well.
The quantity increases to 50% through October with a price of about $2
per Mcf. Roughly 10% of oil production was hedged in the first quarter
of 1998 at prices between $18 and $19 per bbl. The quantity increases
to 18% and the price drops to $17 per bbl for the remainder of the
year.
Revenues for Questar Gas Management (QGM) were 47% lower in the first
quarter of 1998 compared with the same period in 1997 due to a
gathering contract revision and the sale of two processing plants in
1997. Net income reported by QGM was $786,000 below last year's income
as a result of these factors. The new contract with Questar's
gas-distribution company become effective September 1, 1997.
Regulated Services
Questar Gas and Questar Pipeline conduct the Company's regulated
services of natural gas distribution, transmission and storage.
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 12 Months Ended
March 31, March 31,
1998 1997 1998 1997
(Dollars in Thousands)
FINANCIAL RESULTS
Revenues
From unaffiliated customers $191,789 $174,222 $463,251 $398,560
From affiliates 1,091 1,448 3,778
Total revenues 191,789 175,313 464,699 402,338
Natural gas purchases 118,098 97,211 269,820 204,146
Revenues less natural
gas purchases $73,691 $78,102 $194,879 $198,192
Operating income $38,211 $40,022 $56,426 $62,263
Net income 20,714 22,309 27,419 32,446
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sale 34,314 36,405 83,656 82,832
Industrial sales 2,830 2,902 9,451 8,992
Transportation for industrial
customers 14,832 12,952 53,193 48,722
Total deliveries 51,976 52,259 146,300 140,546
Natural gas revenue (per
decatherm) $5.20 $4.47 $4.96 $4.30
Residential and commercial 3.10 2.37 2.79 2.21
Industrial sales
Transportation for industrial 0.11 0.14 0.12 0.13
customers
Heating degree days
Actual 2,392 2,455 5,402 5,166
Normal 2,743 2,743 5,801 5,801
Warmer than normal 13% 10% 7% 11%
Number of customers at March 31 645,133 623,184
Revenues, less natural gas purchases, were $4,411,000 lower in the
first quarter of 1998 and $3,313,000 lower in the 12-month period ended
March 31, 1998 when compared with the same periods in 1997 because of
several rate changes affecting the first quarter of 1998. A rate
surcharge, associated with construction of a distribution pipeline into
southern Utah and in effect for the past 10 years, was discontinued in
September 1997. Some general-service customers, who met higher load
factor standards, shifted to firm commercial rates, which have a lower
margin. Retail usage of gas per customer has returned to a more-normal
quantity after reaching an unusually high mark in the first quarter of
1997. Questar Gas agreed to a negotiated annual rate reduction of $2.8
million of revenues in Utah that went into effect February 18, 1997.
The growth rate in the number of customers served by Questar Gas
continued at a strong pace. The number of customers served grew by
3.5% from a year ago to 645,133 at March 31, 1998.
Temperatures, as measured in degree days, were warmer than normal in
the 1998 and 1997 periods. However, Questar Gas' rates include a
weather-normalization adjustment that reduces the revenue impact of
weather fluctuations. Virtually all of Questar Gas' residential and
commercial volumes were covered under the weather-normalization
adjustment in the first quarters of 1998 and 1997.
In March 1998, the Public Service Commission of Wyoming approved
Questar Gas' gas-merchant unbundling proposal that was filed in Wyoming
in 1997. Under this plan, a transportation service option is extended
to residential and commercial customers as well as industrial
customers. Customers choosing transportation service are allowed to
secure gas supplies directly from producers and marketers and pay
Questar Gas a fee for transportation services. Questar Gas continues
to offer a traditional bundled sales service as well. The unbundling
proposal called for an open enrollment period to be held from March 1
through April 30. However, no suppliers signed up to provide gas to
Wyoming customers. Another open enrollment will be held next year.
Questar expects that the option of unbundled service in Wyoming will
not have a material effect on earnings.
Volumes delivered to industrial customers increased 11% in the first
quarter of 1998 when compared with the same quarter of 1997 due to
additions and expanded operations with several ongoing customers.
Margins from gas delivered to industrial customers are substantially
lower than from gas delivered to residential and commercial customers.
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 12 Months Ended
March 31, March 31,
1998 1997 1998 1997
(Dollars in Thousands)
FINANCIAL RESULTS
Revenues
From unaffiliated customers $9,065 $9,131 $36,277 $39,881
From affiliates 18,184 17,590 69,688 64,942
Total revenues $27,249 $26,721 $105,965 $104,823
Operating income $12,806 $13,465 $49,831 $49,564
Net income 6,554 6,322 26,800 23,714
OPERATING STATISTICS
Natural gas transportation volumes
(in thousands of decatherms)
For unaffiliated customers 32,778 33,303 115,690 128,325
For Questar Gas 38,331 42,264 106,378 105,269
For other affiliated customer 4,858 6,816 35,839 46,545
Total transportation 75,967 82,383 257,907 280,139
Transportation revenue
(per decatherm) $0.24 $0.21 $0.27 $0.24
Revenues were higher in the 3- and 12-month periods of 1998 due
primarily to increased firm-transportation reservation charges.
Questar Pipeline is expanding working gas capacity at Clay Basin in
1998 by 5 Bcf at an estimated cost of $4 million. In an open season
sign-up conducted in January 1998, all potential new capacity was
pledged under long-term commitments. The expansion is expected to add
about $3 million in annual storage revenues beginning in the second
quarter of 1998.
Income from unconsolidated affiliates in the 1998 periods includes
Questar Pipeline's share of earnings reported by TransColorado Gas
Transmission Co. The earnings reflect capitalization of interest and
equity costs (AFUDC) associated with the construction of the
TransColorado pipeline amounting to $318,000 in the 3 months ended
March 31, 1998 and $4,774,000 in the 12 months ended March 31, 1998.
A regulatory proceeding involving Questar Pipeline, Federal Energy
Regulatory Commission (FERC) Docket No. IN97-1, has been resolved by an
order issued March 2, 1998. The FERC found that Questar Pipeline was
not liable for any refunds related to charges made to Questar Gas for
rendering gathering services.
Consolidated Results of Operations
Consolidated revenues were lower in the 3- and 12-month periods ended
March 31, 1998 when compared with the same periods of 1997 due
primarily to decreased energy-marketing activities, oil prices and oil
production, which more than offset higher gas-distribution revenues
during these same reporting periods.
Natural gas and other product purchases were lower in the 1998 periods
due primarily to a decrease in the quantity of gas purchased for
energy-marketing activities. Gas marketing volumes were 37% lower in
the first quarter and 26% lower in the 12-month period ended March 31,
1998 when compared with the 1997 periods. The effect of the decrease in
gas marketing volumes more than offset higher gas costs recovered by
gas distribution operations. The gas cost included in distribution
rates has increased from $1.54 per dth a year ago to $2.27 per dth in
the first quarter of 1998.
Operating and maintenance expenses were 6% lower in the first quarter
of 1998 when compared with the same period in the prior year. The
decrease resulted from cost-containment efforts, capitalizing labor
costs associated with construction projects and lower bad debt expenses
in 1998, and because of a write-off of obsolete inventory in 1997.
Depreciation expenses were higher in the 1998 periods when compared to
the 1997 periods because of increased investment in property, plant and
equipment. The full-cost amortization rate for combined US and
Canadian operations was $.84 per equivalent Mcf for the first quarters
of 1998 and 1997. Other taxes, primarily production and property
taxes, were lower in the 1998 periods because of lower oil prices and
production, and refunds of state property taxes.
Interest and other income was higher in the 3-month period of 1998 due
primarily to a pretax gain of $4,083,000 from the sale of 190,000
shares of Nextel and $322,000 of interest earned on a fiber-optics
communications project with an outside party. Higher pretax gains from
selling Nextel shares and increased earnings from unconsolidated
affiliates resulted in an increase in interest and other income
reported in the 12-month period ended March 31, 1998.
The effective income tax rate for the first three months was 34.3% in
1998 and 34.8% in 1997. The Company recognized $2,218,000 of
production-related tax credits in the 1998 period and $2,320,000 in the
1997 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of $119,415,000 for the
first three months of 1998 was $45,172,000 higher than was generated in
the same period of 1997. The increase in cash flow resulted primarily
from collection of gas costs incurred by natural gas distribution
operations, which were under-collected in the first quarter of 1997.
Investing Activities
Capital expenditures were $33,637,000 for the first three months of
1998, up $12,455,000 from the $21,182,000 reported for the same period
a year ago. A comparison of capital expenditures by lines of business
for the first three months of 1998 and 1997 plus an estimate for
calendar year 1998 are as follows:
Estimated
Actual 12 Months
Three Months Ended Ended
March 31, Dec. 31,
1998 1997 1998
(In Thousands)
Capital Expenditures
Market Resources $16,929 $11,181 $144,400
Regulated Services
Natural gas distribution 9,521 3,974 65,400
Natural gas transmission 5,084 3,270 76,100
Total Regulated Service 14,605 7,244 141,500
Other operations 2,103 2,757 43,500
$33,637 $21,182 $329,400
Financing Activities
In the first three months of 1998 short-term debt decreased
$104,200,000 as a result of applying net cash provided from operations
to repay debt and to fund capital expenditures. The Company intends to
finance forecasted 1998 capital expenditures through net cash provided
from operating activities, bank borrowings and issuing long-term debt.
Short-term borrowings, represented by commercial paper, amounted to
$27,000,000 of at March 31, 1998 and $36,500,000 at March 31, 1997. The
Company has short-term bank lines of credit, which serve as backup to
borrowings made under the commercial paper program. The Company's
lines of credit borrowing capacity was $135,000,000 at March 31, 1998,
but decreases to $100,000,000 April 1 through September 30 to match
seasonal-borrowing patterns.
Forward Looking Statements
This 10-Q contains forward-looking statements about the future
operations and expectations of Questar Corporation. 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.
PART II
OTHER INFORMATION
Questar Corporation has nothing to disclose in this section of
the report.
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)
May 13, 1998 /s/R. D. Cash
(Date) R. D. Cash
Chairman of the Board, President
and Chief Executive Officer
May 13, 1998 /s/ S. E. Parks
(Date) S. E. Parks
Vice President, Treasurer and
Chief Financial Officer