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
JUNE 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, Utah84145-0433
(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 July 31, 1999
Common Stock, without par value 82,699,909 shares
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
(In Thousands, Except Per Share Amounts)
REVENUES $ 177,858 $ 179,157 $ 455,672 $ 479,240 $ 882,688 $ 905,746
OPERATING EXPENSES
Natural gas and other
product purchases 55,030 60,250 171,035 202,292 333,911 375,253
Operating and maintenance 51,077 53,529 103,482 104,431 211,409 203,838
Depreciation and amortization 33,570 28,337 67,202 58,409 133,950 116,928
Write-down of oil and gas properties 34,000 6,000
Other taxes 7,632 11,957 16,042 21,968 30,866 36,802
TOTAL OPERATING EXPENSES 147,309 154,073 357,761 387,100 744,136 738,821
OPERATING INCOME 30,549 25,084 97,911 92,140 138,552 166,925
INTEREST AND OTHER INCOME 16,428 7,449 28,496 13,777 32,921 26,950
EARNINGS (LOSS) FROM
UNCONSOLIDATED AFFILIATES (1,586) 288 (126) 640 2,151 4,816
DEBT EXPENSE (12,428) (10,946) (25,399) (22,460) (50,910) (44,740)
INCOME BEFORE INCOME TAXES 32,963 21,875 100,882 84,097 122,714 153,951
INCOME TAXES 9,893 5,679 34,448 27,019 36,459 46,659
NET INCOME $ 23,070 $ 16,196 $ 66,434 $ 57,078 $ 86,255 $ 107,292
EARNINGS PER COMMON SHARE
Basic and diluted $ 0.28 $ 0.19 $ 0.80 $ 0.69 $ 1.04 $ 1.30
Average common shares outstanding
Basic 82,678 82,308 82,660 82,255 82,665 82,230
Diluted 82,870 82,864 82,814 82,863 82,890 82,830
Dividends per common share $ 0.165 $ 0.165 $ 0.33 $ 0.3225 $ 0.66 $ 0.6375
See notes to consolidated financial statements
QUESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998 1998
(Unaudited)
(In Thousands)
ASSETS
Current assets
Cash and short-term investments $ 17,489
Accounts receivable $ 109,479 $ 104,080 177,630
Inventories 23,262 22,650 37,817
Purchased-gas adjustments 12,506 2,067
Other current assets 8,962 11,195 11,864
Total current assets 141,703 150,431 246,867
Property, plant and equipment 3,178,668 2,810,468 3,104,522
Less allowances for depreciation
and amortization 1,424,361 1,265,470 1,356,881
Net property, plant and equipment 1,754,307 1,544,998 1,747,641
Securities available for sale,
approximates fair value 80,032 55,949 56,910
Investment in unconsolidated
affiliates 70,877 44,031 58,638
Other assets 50,158 47,702 51,225
$2,097,077 $1,843,111 $2,161,281
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $ 1,629 $ 7,274
Short-term loans 112,100 77,600 $ 221,100
Accounts payable and accrued
expenses 139,711 132,477 209,756
Purchased-gas adjustments 1,453
Current portion of long-term debt 6,006 6,096 6,006
Total current liabilities 260,899 223,447 436,862
Long-term debt, less current
portion 656,189 503,644 615,770
Other liabilities 27,275 27,960 27,450
Deferred income taxes and investment
tax credits 216,069 210,859 203,241
Common shareholders' equity
Common stock 302,521 294,530 298,888
Retained earnings 601,921 572,303 564,958
Other comprehensive income 36,158 20,541 18,067
Note receivable from ESOP (3,955) (10,173) (3,955)
Total common
shareholders' equity 936,645 877,201 877,958
$2,097,077 $1,843,111 $2,161,281
See notes to consolidated financial statements
QUESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
6 Months Ended
June 30,
1999 1998
(In Thousands)
OPERATING ACTIVITIES
Net income $ 66,434 $ 57,078
Depreciation and amortization 70,525 60,218
Deferred income taxes and
investment tax credits 1,426 (11,047)
(Earnings) losses from unconsolidated
affiliates, net of cash distributions 1,337 (505)
Gain from the sales of securities (19,780) (4,083)
Gain from the conversion of ownership
interest in Nextlink affiliate (3,536)
119,942 98,125
Changes in operating assets and liabilities 21,281 76,686
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 141,223 174,811
INVESTING ACTIVITIES
Capital expenditures
Property, plant and equipment (79,884) (76,447)
Other investments (16,332) (17,074)
Total capital expenditures (96,216) (93,521)
Proceeds from disposition of property,
plant and equipment 4,923 2,263
Proceeds from the sales of securities 27,466 5,800
NET CASH USED IN INVESTING
ACTIVITIES (63,827) (85,458)
FINANCING ACTIVITIES
Issuance of common stock 3,629 3,792
Common stock repurchased (2,235) (584)
Issuance of long-term debt 174,327 1,300
Repayment of long-term debt (136,002) (38,368)
Decrease in short-term loans (109,000) (53,600)
Checks outstanding in excess
of cash balances 1,629 7,274
Payment of dividends (27,271) (26,533)
Other 38 95
NET CASH USED IN FINANCING
ACTIVITIES (94,885) (106,624)
DECREASE IN CASH AND
SHORT-TERM INVESTMENTS $ (17,489) $ (17,271)
See notes to consolidated financial statements
QUESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 six-month periods ended June 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 consolidated 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 - 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 6 Months Ended
June 30, June 30,
1999 1998 1999 1998
(In thousands)
Comprehensive Income:
Net income $ 23,070 $ 16,196 $ 66,434 $ 57,078
Other comprehensive income
Unrealized gain (loss) on securities
available for sale 8,150 (15,960) 29,786 (3,986)
Foreign currency translation
adjustments (272) 71 (491) 55
Other comprehensive income
before income taxes 7,878 (15,889) 29,295 (3,931)
Income taxes on other
comprehensive income 3,014 (6,081) 11,204 (1,506)
Other comprehensive income after
income taxes 4,864 (9,808) 18,091 (2,425)
Total comprehensive income $ 27,934 $ 6,388 $ 84,525 $ 54,653
Note 3 - Operations by Line of Business
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
(In Thousands)
REVENUES FROM UNAFFILIATED CUSTOMERS
Market Resources $ 95,848 $ 94,214 $ 190,491 $192,340 $380,942 $389,585
Regulated Services
Natural gas distribution 69,952 74,268 242,045 266,057 451,742 474,887
Natural gas transmission 9,754 9,088 18,775 18,153 37,778 36,633
Other 563 588 1,112 1,024 2,443 1,462
Total Regulated Services 80,269 83,944 261,932 285,234 491,963 512,982
Other operations 1,741 999 3,249 1,666 9,783 3,179
$ 177,858 $ 179,157 $ 455,672 $479,240 $882,688 $905,746
REVENUES FROM AFFILIATES
Market Resources $ 18,374 $ 19,744 $ 39,577 $ 36,612 $ 80,288 $ 67,030
Regulated Services
Natural gas distribution 222 119 431 119 1,381 876
Natural gas transmission 17,282 17,511 35,427 35,695 71,133 70,024
Other 52 21 80 41 138 98
Other operations 10,480 9,705 22,915 20,266 42,356 39,685
$ 46,410 $ 47,100 $ 98,430 $ 92,733 $195,296 $177,713
OPERATING INCOME (LOSS)
Market Resources $ 16,911 $ 14,586 $ 31,254 $ 28,941 $ 23,842 $ 57,689
Regulated Services
Natural gas distribution (2,470) (1,541) 35,337 36,670 56,117 56,948
Natural gas transmission 13,908 14,046 26,972 26,852 53,318 51,885
Other (149) (399) (217) (615) (683) (1,614)
Total Regulated Services 11,289 12,106 62,092 62,907 108,752 107,219
Other operations 2,349 (1,608) 4,565 292 5,958 2,017
OPERATING INCOME $ 30,549 $ 25,084 $ 97,911 $ 92,140 $138,552 $166,925
NET INCOME (LOSS)
Market Resources $ 10,432 $ 9,468 $ 18,685 $ 19,487 $ 12,935 $ 41,115
Regulated Services
Natural gas distribution (2,836) (2,381) 17,422 18,333 26,497 27,641
Natural gas transmission 7,032 7,060 13,994 13,614 28,271 28,400
Other (10) (207) (10) (303) (179) (840)
Total Regulated Services 4,186 4,472 31,406 31,644 54,589 55,201
Other operations 8,452 2,256 16,343 5,947 18,731 10,976
NET INCOME $ 23,070 $ 16,196 $ 66,434 $ 57,078 $ 86,255 $107,292
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
QUESTAR CORPORATION AND SUBSIDIARIES
June 30, 1999
(Unaudited)
Results of Operations
Questar Market Resources
Questar Exploration and Production (USA), Celsius Energy Resources
Ltd. (Canada), 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 6 Months Ended 12 Months Ended
June 30 June 30 June 30
1999 1998 1999 1998 1999 1998
(Dollars in Thousands)
FINANCIAL RESULTS
Revenues
From unaffiliated customers $ 95,848 $ 94,214 $190,491 $192,340 $380,942 $389,585
From affiliated companies 18,374 19,744 39,577 36,612 80,288 67,030
Total revenues $114,222 $113,958 $230,068 $228,952 $461,230 $456,615
Operating income $ 16,911 $ 14,586 $ 31,254 $ 28,941 $ 23,842 $ 57,689
Net income 10,432 9,468 18,685 19,487 12,935 41,115
OPERATING STATISTICS
Production volumes
Natural gas (in million cubic feet) 15,341 11,995 30,389 24,089 57,609 47,893
Oil and natural gas liquids
(in thousands of barrels) 715 717 1,462 1,371 2,985 2,795
Production revenue
Natural gas (per thousand
cubic feet) $ 1.93 $ 1.97 $ 1.90 $ 1.97 $ 1.89 $ 1.98
Oil and natural gas liquids
(per barrel) $ 13.99 $ 12.87 $ 12.28 $ 13.65 $ 12.05 $ 15.38
Marketing volumes in energy
equivalent decatherms (in
thousands of decatherms) 26,158 27,007 60,317 55,356 118,474 121,886
Natural gas gathering volumes (in
thousands of decatherms)
For unaffiliated customers 21,835 17,780 42,126 36,303 78,731 66,957
For Questar Gas 8,682 7,048 16,919 15,599 31,213 28,703
For other affiliated customers 4,560 4,515 9,119 8,784 18,055 17,118
Total gathering 35,077 29,343 68,164 60,686 127,999 112,778
Gathering revenue (per decatherm) $ 0.15 $ 0.17 $ 0.15 $ 0.16 $ 0.15 $ 0.17
Revenues from Market Resource operations were slightly higher in the
3-, 6- and 12-month period ended June 30, 1999 when compared with the
same periods of 1998 due primarily to increases in natural gas
production. Gas production was 26% higher in the first half of 1999
because of a large 1998 reserve acquisition and expanded development
activities. Higher prices for oil and natural gas liquids (NGL)
benefited the second quarter of 1999.
Questar Exploration and Production (Questar E & P) and Wexpro have
commenced a drilling program in an area known as the Pinedale
Anticline in Sublette County, Wyoming. Three successful wells drilled
by Ultra Petroleum had initial daily production rates ranging between
4 MMcf and 15MMcf and currently are producing about 2.5 MMcf per day.
In June 1999, Questar E & P acquired 50% of Ultra's interest in the
Pinedale Anticline and now operates the three wells. Questar E & P
has a working interest of approximately 60% in 13,500 gross acres in
the area and Wexpro has a similar working interest in 2,000 gross
acres. Depending on permitting issues and the results of a well
currently being drilled, the Company envisions a multi-rig drilling
program involving 135 to 350 drilling locations.
Market Resources uses hedging to secure commodity prices. The hedges
for gas change from 53% of production at $1.87 per Mcf in August to
36.5% of production at $1.92 per Mcf in December, net back to the
well. Approximately 57% of oil production, excluding oil produced by
Wexpro, is hedged at $14.55 per bbl, net back to the well, through
the end of 1999.
Wexpro Co., which manages and develops cost-of-service gas reserves
for Questar Gas, reported a 15% increase in earnings in the first
half. Wexpro benefited from an increase in investment base.
Lower oil and NGL prices resulted in reduced margins generated by
processing plants in the first half of 1999. Reduced value of
firm-transportation contracts caused a decrease in marketing margins
in the first half of 1999. Marketing volumes were 9% higher in the
first half of 1999 compared to the prior year.
Questar 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 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
(Dollars In Thousands)
FINANCIAL RESULTS
Revenues
From unaffiliated customers $ 69,952 $ 74,268 $242,045 $266,057 $451,742 $474,887
From affiliates 222 119 431 119 1,381 876
Total revenues 70,174 74,387 242,476 266,176 453,123 475,763
Natural gas purchases 36,741 41,965 135,463 160,063 256,404 282,116
Revenues less natural gas
purchases $ 33,433 $ 32,422 $107,013 $106,113 $196,719 $193,647
Operating income (loss) $ (2,470) $ (1,541) $ 35,337 $ 36,670 $ 56,117 $ 56,948
Net income (loss) (2,836) (2,381) 17,422 18,333 26,497 27,641
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 14,145 13,178 46,570 47,492 82,309 84,677
Industrial sales 2,282 2,267 5,222 5,097 9,806 9,614
Transportation for industrial
customers 11,800 13,115 25,151 27,947 52,665 54,683
Total deliveries 28,227 28,560 76,943 80,536 144,780 148,974
Natural gas revenue (per decatherm)
Residential and commercial $ 4.15 $ 4.70 $ 4.65 $ 5.06 $ 4.88 $ 5.02
Industrial sales 2.83 2.90 2.93 3.01 3.01 2.92
Transportation for industrial
customers 0.13 0.11 0.13 0.11 0.13 0.12
Heating degree days
Actual 946 899 3,242 3,291 5,413 5,623
Normal 741 741 3,484 3,484 5,801 5,801
Colder (warmer) than normal 28% 21% (7%) (6%) (7%) (3%)
Number of customers at June 30,
Residential and commercial 665,221 642,399
Industrial 1,356 1,297
Total 666,577 643,696
Revenues less natural gas purchases, or nongas-cost margin, increased
3% in the second quarter and 1% in the first half of 1999 compared
with the same periods of 1998. The increase in the margin resulted
primarily from gas volumes delivered to new customers and more than
offset the effect of lower usage per customer. Temperature adjusted
usage per customer was approximately 3 decatherms lower in the first
half of 1999 compared with the prior year period. Temperatures, as
measured in degree days, were warmer than normal in the 6-and
12-months periods and colder than normal in the second quarter.
However, the impact on earnings of temperature variations from normal
has been mitigated by a weather-normalization adjustment.
The number of customers served by Questar Gas grew by 22,881 or 3.6%
from a year ago to 666,577 as of June 30, 1999. 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 8% in the first
half 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 purchases decreased in the 1999 periods when
compared with the 1998 periods due to lower sales volumes and lower
gas costs. Sales volumes were 2% lower in the first half of 1999 due
to lower usage per customer. The commodity or gas costs in Utah
rates decreased from $2.27 per Decatherm in the first half of 1998 to
$1.72 per Decatherm in the first half of 1999. The reduction
reflects lower prices paid to producers. The Company files for
adjustment of purchased-gas costs with the Utah and Wyoming Public
Service Commissions on a semiannual basis.
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 carbon dioxide from the gas
stream. The contract covers the costs of a new plant being
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. Hearings were held on the
issues June 22 and 23. Briefs are to be filed by August 27 and reply
briefs are due September 13. The contract's annual cost of service
ranges between $7.5 - $8.5 million.
Declining usage of gas per customer and increasing operating costs
may cause Questar Gas to file a general rate case. The last general
rate case filed by the Questar Gas was in 1995.
Cost savings from consolidating operations enabled Questar Gas to
file on June 10, 1999 for a decrease in general rates in Wyoming.
The decrease is in effect on an interim basis pending hearings and
will reduce annualized revenues by $735,000.
Questar Gas requested pass-through commodity cost increases in Utah
and Wyoming in the second quarter of 1999. The Company was authorized
to collect on an interim basis beginning in the third quarter of
1999, annualized revenues of $16,865,000 in Utah rates and $380,262
in Wyoming 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 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
(Dollars In Thousands)
FINANCIAL RESULTS
Revenues
From unaffiliated customers $ 9,754 $ 9,088 $ 18,775 $ 18,153 $ 37,778 $ 36,633
From affiliates 17,282 17,511 35,427 35,695 71,133 70,024
Total revenues $ 27,036 $ 26,599 $ 54,202 $ 53,848 $108,911 $106,657
Operating income $ 13,908 $ 14,046 $ 26,972 $ 26,852 $ 53,318 $ 51,885
Net income 7,032 7,060 13,994 13,614 28,271 28,400
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 34,765 31,289 60,711 64,067 117,391 119,346
For Questar Gas 26,084 27,051 61,719 65,382 103,838 107,418
For other affiliated customers 5,078 7,549 8,458 12,407 22,929 32,395
Total transportation 65,927 65,889 130,888 141,856 244,158 259,159
Transportation revenue
(per decatherm) $ 0.26 $ 0.26 $ 0.27 $ 0.25 $ 0.29 $ 0.27
Revenues were 2% higher in the second quarter of 1999 and 1% higher
in the first half of 1999 due primarily to increased firm-storage
revenues. Billings from an expansion of the Clay Basin storage
complex began in May of 1998. However, the full impact of higher
storage revenues was partially offset by lower firm-transportation
revenues. Average daily demand in the first half of 1999 was 88,000
decatherms or 8% lower as a result of the expiration of several
firm-transportation contracts.
Earnings from unconsolidated affiliates includes the Company's share
of earnings reported by TransColorado Gas Transmission Co. and
Overthrust Pipeline Co. Phase II of the TransColorado Pipeline was
placed into service March 31, 1999. Earnings prior to the second
quarter of 1999 were attributable primarily to AFUDC (captialized financing
costs). The TransColorado Pipeline is generating operating losses of about
$700,000 a month, representing Questar Pipeline's interest. Phase II
of the pipeline has flowed as much as 80 MDth per day, but at a
discounted rate. The cost of the pipeline, including Phase I, has
recently been revised upward to about $308 million. Questar Pipeline
has guaranteed $100 million or 50% of a TransColorado Gas
Transmission Co. bank loan used to finance construction of the
pipeline.
In the second quarter of 1999, Questar Pipeline reversed a $2.5
million contingency reserve related to completion of the
TransColorado Pipeline.
Consolidated Results of Operations
Consolidated revenues were lower in the 1999 periods presented when
compared with the 1998 periods due primarily to reduced rates and
decreased usage per customer by gas-distribution customers. The
lower rates reflect a reduction of the gas-cost component collected
from gas-distribution customers. Revenues from the sale of natural
gas were higher in the 3-and 6-month periods of 1999 because higher
production more than offset lower prices.
A 16% drop in natural gas and other product purchases was primarily
the result of lower sales of gas distribution volumes and lower gas
costs in the first half of 1999. The gas cost included in
distribution rates in Utah declined from $2.27 per decatherm to $1.72
per decatherm in 1999.
Operating and maintenance expenses were lower in the 3- and 6- month
periods of 1999 when compared with the same periods in 1998. The
labor-cost savings associated with an early retirement program for
eligible Regulated Services employees plus capitalization of labor
costs included with construction projects more than offset the
effects of adding gas and oil properties through acquisitions, adding
gas-distribution customers and incurring data processing and
communications related costs for such programs as Year 2000
compliance. Labor-cost savings have amounted to about $2 million per
quarter in 1999 as a results of the early retirement program.
Depreciation expenses were higher in the 1999 periods when compared
to the 1998 periods primarily due to increased investment in
property, plant and equipment and increased gas production. The
full-cost amortization rate for combined U.S. and Canadian operations
was $.82 per equivalent Mcf for the first half of 1999 and $.83 in
1998. The decrease in other taxes in the 1999 periods was the result
of lower production taxes and payroll taxes.
Interest and other income was higher 1999 periods presented compared
with the prior year periods primarily due to increased selling prices
and the number of shares of Nextel Communications sold. Questar sold
702,469 shares in the first half of 1999 and realized a pretax gain
of $19.4 million. The Company sold 190,000 shares and a pretax gain
of $4.1 million a year earlier. The sales resulted in after-tax
gains of $11.8 million or $.14 per share in 1999 and $2.4 million and
$.03 per share in 1998. A $5.7 million pretax gain was recorded in
the second quarter of 1998 on an exchange of an interest in a local
affiliate for shares of Nextlink.
Debt expense was 13% higher in the first half of 1999 as a result of
increased borrowings beginning in the second half of 1998 and
extending into the first half of 1999 to fund capital projects.
The effective income tax rate for the first half was 34.1% in 1999
and 32.1% in 1998. The Company recognized $3,547,000 of
production-related tax credits in the 1999 period and $3,910,000 in
the 1998 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of $141,223,000 for the
first half of 1999 was $33,588,000 less than was generated in the
same period of 1998. The decrease in cash flow resulted primarily
from timing differences in the collection of gas costs by
gas-distribution operations and payment on accounts to vendors.
Investing Activities
A comparison of capital expenditures for the first half of 1999 and
1998 plus an estimate for calendar year 1999 is below. Projected
1999 spending includes $192 million designated for a gas and oil
reserve acquisition, if the Company is the successful bidder.
Estimate
Actual 12 Months
6 Months Ended Ended
June 30, Dec. 31,
1999 1998 1999
(In Thousands)
Market Resources $53,791 $41,032 $353,600
Regulated Services
Natural gas distribution 19,960 24,974 62,500
Natural gas transmission 16,661 20,761 76,100
Other 655 324 3,800
Total Regulated Services 37,276 46,059 142,400
Other operations 5,149 6,430 49,500
$96,216 $93,521 $545,500
Financing Activities
The Company used cash flow generated from operations, from the sale
of investments and from a net increase in long-term debt to fund
capital expenditures, reduce short-term borrowings, repurchase shares
of its common stock and pay dividends to holders of common stock. The
Company intends to finance 1999 capital expenditures through net cash
provided from operating activities, bank borrowings and issuing
long-term debt. If the Company completes a large gas and oil reserve
acquisition, it may issue equity to pay for a portion of the
transaction.
In April, the Company announced plans to repurchase up to $50 million
worth of its shares over the next two years. It intends to use the
proceeds from the sales of Nextel shares to fund a portion of those
repurchases. The Company had repurchased 184,800 shares through the
first part of August.
Short-term borrowings amounted to $112.1 million of commercial paper
at June 30, 1999 and $77.6 million at June 30, 1998. The Company has
bank lines of credit, which serve as backup to borrowings made under
the commercial paper program. The Company's lines of credit borrowing
capacity is $245 million. In 1999, the Market Resources' group
entered into a senior revolving credit facility with a syndication of
banks and having a $295 million capacity. Market Resources had
borrowed $228 million as of June 30, 1999 under this arrangement.
Questar Pipeline has a medium-term note program in place, but has not
borrowed under this arrangement in 1999.
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
has identified 56 projects that are in varying stages of remediation
and the scope includes Questar and its affiliated companies. The
projects fit into the general classifications of application
software, infrastructure, non-information technology equipment and
critical third-party associations. Subsequent to submitting the
first quarter 1999 10-Q, four applications software projects were
deemed insignificant and removed from the list and an infrastructure
project was added. Questar estimates that Y2K remediation will cost
$5.1 million and expects to be Y2K ready before the end of 1999.
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 infrastructure section of the plan addresses hardware and systems
software other than applications software. Currently, there are 20
projects identified: 0 in start-up, 4 in assessment, 3 in
remediation, 1 in testing and 12 completed and deemed to be Y2K
ready.
The applications software section addresses either the conversion or
replacement of applications software that is not Y2K compliant.
Currently, there are 35 projects in this section: 4 in start-up, 1 in
assessment, 3 in remediation, 3 in testing and 24 completed and
deemed to be Y2K compliant.
Non-information technology equipment is considered to be one project
and addresses hardware, software and associated embedded computer
chips used in the operation of all facilities operated by the
Company. Because this section has unique characteristics and is
large, the Company has employed the services of a consultant to
assist in the effort. The project is currently scheduled to be
completed by September 30, 1999.
Inquiries of critical third parties have been taking place with more
contacts scheduled. Contacting parties is scheduled to be completed
by the end of the third quarter 1999. Contingency plans for dealing
with third-party issues will be developed by the end of 1999.
Additional information regarding Questar's' Y2K program 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.questarcorp.com.
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, the adverse effects of
failure to achieve Y2K compliance, quoted price 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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
a. Questar Corporation (Questar or the Company) and several
affiliates are named defendants in an action filed by Jack J.
Grynberg, an independent producer, in Colorado's federal district
court and have officially been served copies of the complaint. The
action was filed under the Federal False Claims Act in early 1998, but
the complaint was sealed until the Department of Justice declined to
prosecute it. The complaint is one of approximately 76 actions filed
by the producer against pipelines and their affiliates. The district
court granted the motion filed by the Questar defendants to stay the
proceedings pending a determination of procedural issues relating to
the consolidation of the cases. The producer's complaints allege
mismeasurement of the heating content of natural gas volumes and
understatement of the value of gas on which royalty payments are due
the federal government. The complaint filed against the Questar
defendants does not include a claim for specific monetary damages.
b. Questar affiliates are also involved in two other actions
filed by Mr. Grynberg. One case is currently on appeal to the Tenth
Circuit Court of Appeals, which has not yet scheduled a hearing date.
This case was tried before a Wyoming federal district jury in late
1994. The jury awarded several million dollars to Mr. Grynberg, but
the presiding federal district court judge, in June of 1998, entered a
judgment that overturned most provisions of the jury verdict. Mr.
Grynberg is appealing the trial judge's action.
Pending the resolution of the appeal by the Tenth Circuit, the
same federal district court judge has stayed action in another case
filed by Mr. Grynberg against Questar Gas and its affiliates alleging
fraud and antitrust violations in addition to the same claims heard in
the first case for a subsequent period of time.
Item 6. Exhibits and Reports on Form 8-K.
a. The following exhibits have been filed as part of this
report:
Exhibit No. Exhibit
10.1. Questar Corporation Annual Management Incentive Plan as
amended and restated effective May 18, 1999.
10.4. Questar Corporation Long-Term Stock Incentive Plan as
amended and restated efffective May 18, 1999.
b. The Company did not file a Current Report on Form 8-K during
the quarter.
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)
August 13, 1999 /s/R. D. Cash
(Date) R. D. Cash
Chairman of the Board, President
and Chief Executive Officer
August 13, 1999 /s/ S. E. Parks
(Date) S. E. Parks
Vice President, Treasurer and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Exhibit
10.1. Questar Corporation Annual Management Incentive Plan as
amended and restated effective May 18, 1999.
10.4. Questar Corporation Long-Term Stock Incentive Plan as
amended and restated efffective May 18, 1999.