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, 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. 0-14147
QUESTAR PIPELINE COMPANY
(Exact name of registrant as specified in its charter)
STATE OF UTAH 87-0307414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 45360, 180 East First South, Salt Lake City, Utah 84145-0360
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(801) 324-2400
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes x No
Indicate 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 June 30, 1998
Common Stock, $1.00 par value 6,550,843 shares
Registrant meets the conditions set forth in General Instruction
H(a)(1) and (b) of Form 10-Q and is filing this Form 10-Q with the
reduced disclosure format.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR PIPELINE COMPANY
STATEMENTS OF INCOME
(Unaudited)
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
1998 1997 1998 1997 1998 1997
(In Thousands)
REVENUES $26,599 $25,907 $53,848 $52,628 $106,657 $105,004
OPERATING EXPENSES
Operating and maintenance 9,566 9,637 19,493 18,545 38,282 38,929
Depreciation 2,472 3,614 6,315 7,211 13,901 14,605
Other taxes 515 664 1,188 1,415 2,589 1,990
TOTAL OPERATING EXPENSES 12,553 13,915 26,996 27,171 54,772 55,524
OPERATING INCOME 14,046 11,992 26,852 25,457 51,885 49,480
INTEREST AND OTHER
INCOME (EXPENSE) 10 91 (76) 96 1,151 1,090
INCOME (LOSS) FROM
UNCONSOLIDATED AFFILIATES 743 (6) 1,150 (74) 5,853 36
DEBT EXPENSE (3,500) (3,314) (6,934) (6,665) (13,805) (13,235)
INCOME BEFORE INCOME TAXES 11,299 8,763 20,992 18,814 45,084 37,371
INCOME TAXES 4,239 3,303 7,378 7,032 16,684 13,732
NET INCOME $7,060 $5,460 $13,614 $11,782 $28,400 $23,639
See notes to financial statements
QUESTAR PIPELINE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1998 1997 1997
(In Thousands)
ASSETS
Current assets
Cash and short-term investments $5,411 $7,075
Accounts receivable $17,284 10,229 10,851
Inventories 1,958 2,363 2,303
Other current assets 1,720 1,754 2,035
Total current assets 20,962 19,757 22,264
Property, plant and equipment 591,487 566,777 580,603
Less allowances for depreciation 209,610 201,269 202,427
Net property, plant and equipment 381,877 365,508 378,176
Investment in unconsolidated
affiliates 40,426 14,323 26,977
Other assets 12,484 10,789 10,147
$455,749 $410,377 $437,564
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $1,304
Notes payable to Questar
Corporation 63,300 $11,600 $25,800
Accounts payable and accrued
expenses 17,117 15,869 20,069
Total current liabilities 81,721 27,469 45,869
Long-term debt 114,573 134,554 134,563
Other liabilities 3,046 4,257 4,523
Deferred income taxes 62,984 58,572 62,298
Common shareholder's equity
Common stock 6,551 6,551 6,551
Additional paid-in capital 82,034 82,034 82,034
Retained earnings 104,840 96,940 101,726
Total common shareholder's equity 193,425 185,525 190,311
$455,749 $410,377 $437,564
See notes to financial statements
QUESTAR PIPELINE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
6 Months Ended
June 30,
1998 1997
(In Thousands)
OPERATING ACTIVITIES
Net income $13,614 $11,782
Depreciation 7,128 7,768
Deferred income taxes 686 (196)
(Income) loss from unconsolidated
affiliates (1,150) 74
20,278 19,428
Change in operating assets and
liabilities (12,529) (606)
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 7,749 18,822
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (8,462) (4,227)
Investment in unconsolidated
affiliates (12,299) (50)
Total capital expenditures (20,761) (4,277)
Costs of disposition of property,
plant and equipment (2,367) (734)
NET CASH USED IN INVESTING
ACTIVITIES (23,128) (5,011)
FINANCING ACTIVITIES
Checks outstanding in excess
of cash balances 1,304
Increase (decrease) in notes
payable to Questar Corporation 37,500 (200)
Decrease in long-term debt (20,000)
Payment of dividends (10,500) (10,750)
NET CASH PROVIDED FROM (USED
IN) FINANCING ACTIVITIES 8,304 (10,950)
INCREASE (DECREASE) IN CASH
AND SHORT-TERM INVESTMENTS ($7,075) $2,861
See notes to financial statements
QUESTAR PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
(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. The results of operations for the
three- and six-month periods ended June 30, 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 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 - Planned Purchase of a Pipeline
On June 25, 1998, the Company announced that it had reached an
agreement in principle with ARCO Pipe Line Company to acquire an oil
pipeline running from the Paradox producing basin of northwestern New
Mexico to Long Beach, California. The purchase price of the line is
$40 million with financial closing expected on or about September 30,
1998. The Company intends to convert this line to transport natural
gas to customers in the Los Angeles basin. Conversion costs are
expected to add up to $60 million to the total cost of the project.
Such conversion is expected to continue for 18-24 months.
Note 3 - Investment in Unconsolidated Affiliates
Questar Pipeline has interests in partnerships accounted for on an
equity basis. Transportation of natural gas is the primary business
activity of these partnerships. Summarized operating results of the
partnerships are as follows:
6 Months Ended
June 30,
1998 1997
(In Thousands)
Revenues $2,360 $1,742
Operating income (loss) 778 (117)
Income (loss) before income taxes 2,237 (206)
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
QUESTAR PIPELINE COMPANY
June 30, 1998
(Unaudited)
Operating Results
Following is a summary of financial and operating information for the
Company:
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
1998 1997 1998 1997 1998 1997
(Dollars In Thousands)
FINANCIAL RESULTS
Revenues
From unaffiliated customers $9,088 $8,732 $18,153 $17,863 $36,633 $37,253
From affiliates 17,511 17,175 35,695 34,765 70,024 67,751
Total revenues $26,599 $25,907 $53,848 $52,628 $106,657 $105,004
Operating income $14,046 $11,992 $26,852 $25,457 $51,885 $49,480
Net income 7,060 5,460 13,614 11,782 28,400 23,639
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 31,289 27,633 64,067 60,936 119,346 119,800
For Questar Gas 27,051 26,011 65,382 68,275 107,418 114,854
For other affiliated customers 7,549 10,993 12,407 17,809 32,395 47,267
Total transportation 65,889 64,637 141,856 147,020 259,159 281,921
Transportation revenue (per
decatherm) $0.26 $0.26 $0.25 $0.23 $0.27 $0.23
Revenues were higher in the 3-, 6- and 12-month periods of 1998 due
primarily to increased firm-transportation and firm-storage
reservation charges. Questar Pipeline expanded working gas capacity
by 5 Bcf at Clay Basin for a capital investment of $4 million. The
expansion is expected to add about $3 million in annual storage
revenues. Service of the new capacity began in the second quarter of
1998 and all new capacity was committed to long-term contracts.
Operating and maintenance (O & M) expenses were 1% lower in the
second quarter 1998 when compared to the same period of 1997 due to
capitalizing labor costs associated with developing computer systems.
O & M expenses were 5% higher in the first half of 1998 when compared
to the prior year period due primarily to expenses associated with
increased telecommunications and data processing for network and Year
2000 related activities among other projects. The Company continues
efforts to resolve Year 2000 issues and expects that the expense of
becoming Year 2000 compliant will not be material. O & M expenses
were lower in the 12-month period ended June 30, 1998 due to cost
efficiencies resulting from sharing services with an affiliated
company. Questar Gas Company and Questar Pipeline share the costs of
certain administrative, accounting, legal, engineering and related
services under Questar Regulated Services.
The Regulated Services group recently completed a voluntary early
retirement program that was effective July 31, 1998. The program
reduced the regulated services work force by more than 10% or 177
employees, which will decrease future operating expenses. The costs
associated with the early retirement program will be deferred and
amortized over a five-year period in accordance with past regulatory
treatment. The deferred annual charge is expected to be more than
offset by lower labor-related costs.
Depreciation expense was lower in the 1998 periods. Other taxes were
lower in the 3- and 6-month periods ended June 30, 1998 when compared
with the same periods of 1997 as a result of property tax refunds and
lower tax assessments.
Income from unconsolidated affiliates in the 1998 periods include the
Company's share of earnings reported by TransColorado Gas
Transmission Co. The noncash earnings reflect capitalization of
interest and equity costs (AFUDC) associated with the construction of
the TransColorado pipeline amounting to $405,000 in the 3-month
period, $723,000 in the 6-month period and $5,179,000 in the 12-month
period ended June 30, 1998.
The effective income tax rate was 35.1% in the first half of 1998
compared with 37.4% in the first half of 1997 due to adjustments that
reduced 1998 tax expenses.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of $7,749,000 in the
first half of 1998 was 41% of the $18,822,000 reported for the same
period in 1997 due primarily to changes in operating assets and
liabilities associated with a timing difference in collecting
receivables and a premium paid to redeem long-term debt.
Investing Activities
Capital expenditures were $20,761,000 in the first half of 1998
compared with $4,277,000 in the corresponding 1997 period. Capital
expenditures for calendar year 1998 are estimated to be $162.1
million which includes $64.3 million for the Company's share of
equity investments in TransColorado Gas Transmission and $43 million
for purchase and initial reconditioning of an oil pipeline.
Construction of the 270-mile TransColorado pipeline began in late
July and Phase II is expected to be in service in the fourth quarter
of 1998.
Financing Activities
Questar Corporation loans funds to the Company under a short-term
arrangement. As of June 30, amounts borrowed from Questar were
$63,300,000 in 1998 and $11,600,000 in 1997. The Company retired
$20 million of its 9 7/8% debt in May of 1998 for a cash payment of
$23,386,000, which included a premium payment and interest due.
Capital expenditures for 1998 are expected to be financed from net
cash provided from operating activities and short- and long-term debt
including borrowings from Questar.
Forward Looking Statements
This 10-Q contains forward-looking statements about the future
operations and expectations of Questar Pipeline. 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
Item 1. Legal Proceedings.
Questar TransColorado, Inc. (Questar TransColorado), a subsidiary
of Questar Pipeline Company (the Company or Questar Pipeline) has
intervened in two proceedings challenging the Bureau of Land
Management's (BLM) decision to allow the TransColorado pipeline
project to proceed through a portion of the San Juan National Forest
in Colorado. The San Juan Citizens Alliance (Alliance) has an appeal
of the BLM's decision pending before the Interior Board of Land
Appeals. The appeal seeks to reverse the BLM's decision to allow the
project to proceed and requests a stay of the agency's decision. The
Alliance has also filed a complaint in federal district court in
Colorado. The complaint seeks declaratory and injunctive relief from
both the BLM and Forest Service. The Alliance requests the court to
declare that the BLM and Forest Service have violated the National
Environmental Policy Act and further requests the court to enjoin the
construction of the TransColorado pipeline and award costs and
attorney's fees to the Alliance. A recent motion made by the Alliance
for a temporary restraining order and preliminary injunction was
denied. In denying the motion, the federal judge found that the
Alliance did not have a substantial likelihood of prevailing on the
merits of the case and that the issuance of an injunction would cause
significant economic harm to the TransColorado pipeline. It is
unlikely that either action asserted by the Alliance will have any
financial impact on Questar TransColorado or on the construction of
the TransColorado pipeline. Construction of the project commenced in
late July.
Item 5. Other Information.
The retirement of Michael E. Benefield, age 59, as an officer and
employee of the Company effective July 31, 1998, led to a
reorganization of responsibilities among the Company's executive
officers. At the time of his retirement, Mr. Benefield was Vice
President, Business Development and Planning, for the Company and its
affiliates, Questar Gas Company (Questar Gas) and Questar Regulated
Services Company (Regulated Services) and had served in this capacity
since May of 1996. He had over 21 years of service with the Company
and its affiliates in several capacities.
Mr. S. C. Yeager, age 51, was named to serve as Vice President,
Business Development, for the Company, Questar Gas, and Regulated
Services. Mr. Yeager had previously served Questar Gas as Vice
President and General Manager. Mr. Gary W. DeBernardi, age 55, who
had formerly served as Vice President, Technical Support, was named to
the position of Vice President, Technical Services, for the Company,
Questar Gas and Regulated Services. Ms. Susan Glasmann, age 50,
resigned her position as Vice President, Business Support, and was
appointed to serve as Vice President and General Manager of Questar
Gas.
Messrs. D. N. Rose, Lowell F. Gill, S. E. Parks, and G. H.
Robinson will continue to serve in their positions as President and
Chief Executive Officer; Vice President and General Manager; Vice
President, Treasurer, and Chief Financial Officer; and Vice President
and Controller, respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit has been filed as part of this report:
Exhibit No. Exhibits
10.1. Letter of Understanding dated July 13, 1998, on
Issues Relating to Phase II of TransColorado
between Questar TransColorado, Inc., and KN
TransColorado, Inc.
10.2. Annual Management Incentive Plan adopted by
Questar Pipeline Company, Questar Gas Company, and
Questar Regulated Services Company, as amended and
restated effective May 19, 1998.
10.3. Questar Pipeline Company Deferred Compensation
Plan for Directors, as amended and restated
effective May 19, 1998.
(b) The Company filed a Current Report on Form 8-K dated July 2,
1998 concerning its intent to purchase a crude oil pipeline from ARCO
Pipe Line Company and convert it to a natural gas pipeline.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
QUESTAR PIPELINE COMPANY
(Registrant)
August 13, 1998 /s/D. N. Rose
D. N. Rose
President and Chief Executive
Officer
August 13, 1998 /s/S. E. Parks
S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer