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, 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 100 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 September 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 AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
1998 1997 1998 1997 1998 1997
(In Thousands)
REVENUES $27,233 $25,889 $81,081 $78,517 $108,001 $104,707
OPERATING EXPENSES
Operating and maintenance 10,491 8,981 29,984 27,526 39,792 38,333
Depreciation 3,794 3,758 10,109 10,969 13,937 14,726
Other taxes 697 705 1,885 2,120 2,581 2,146
TOTAL OPERATING EXPENSES 14,982 13,444 41,978 40,615 56,310 55,205
OPERATING INCOME 12,251 12,445 39,103 37,902 51,691 49,502
INTEREST AND OTHER
INCOME (EXPENSE) (13) 923 (89) 1,019 215 1,648
INCOME FROM UNCONSOLIDATED
AFFILIATES 944 4,092 2,094 4,018 2,705 3,988
DEBT EXPENSE (3,606) (3,349) (10,540) (10,014) (14,062) (13,395)
INCOME BEFORE INCOME TAXES 9,576 14,111 30,568 32,925 40,549 41,743
INCOME TAXES 3,605 5,549 10,983 12,581 14,740 15,662
NET INCOME $5,971 $8,562 $19,585 $20,344 $25,809 $26,081
See notes to financial statements
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1998 1997 1997
(In Thousands)
ASSETS
Current assets
Cash and short-term investments $2,922 $288 $7,075
Accounts receivable 10,995 5,118 10,851
Inventories 2,217 2,273 2,303
Other current assets 1,590 1,805 2,035
Total current assets 17,724 9,484 22,264
Property, plant and equipment 603,262 574,613 580,603
Less allowances for depreciation 211,643 205,007 202,427
Net property, plant and equipment 391,619 369,606 378,176
Investment in unconsolidated
affiliates 66,564 25,217 26,977
Other assets 12,957 13,404 10,147
$488,864 $417,711 $437,564
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Notes payable to Questar
Corporation $92,900 $10,600 $25,800
Accounts payable and accrued
expenses 19,803 16,922 20,069
Total current liabilities 112,703 27,522 45,869
Long-term debt 114,577 134,558 134,563
Other liabilities 4,267 5,817 4,523
Deferred income taxes 63,171 60,727 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 105,561 100,502 101,726
Total common shareholder's equity 194,146 189,087 190,311
$488,864 $417,711 $437,564
See notes to financial statements
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
9 Months Ended
September 30,
1998 1997
(In Thousands)
OPERATING ACTIVITIES
Net income $19,585 $20,344
Depreciation 11,063 11,781
Deferred income taxes 873 (45)
Income from unconsolidated
affiliates (2,094) (4,018)
29,427 28,062
Change in operating assets and
liabilities (2,931) 4,762
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 26,496 32,824
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (22,319) (11,533)
Investment in unconsolidated
affiliates (37,493) (5,064)
Total capital expenditures (59,812) (16,597)
Costs of disposition of property,
plant and equipment (2,187) (1,539)
NET CASH USED IN INVESTING
ACTIVITIES (61,999) (18,136)
FINANCING ACTIVITIES
Increase (decrease) in notes payable
to Questar Corporation 67,100 (1,200)
Decrease in long-term debt (20,000)
Payment of dividends (15,750) (15,750)
NET CASH PROVIDED FROM (USED
IN) FINANCING ACTIVITIES 31,350 (16,950)
DECREASE IN CASH AND SHORT-
TERM INVESTMENTS ($4,153) ($2,262)
See notes to financial statements
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine-month periods ended September 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
$38 million. A subsidiary of Questar Pipeline expects to complete
the purchase in the fourth quarter of 1998. The Company intends to
convert this line to transport natural gas to customers in the Los
Angeles basin. At this time, conversion is expected to add
approximately $60 million to the total cost of the project and to be
completed in 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:
9 Months Ended
September 30,
1998 1997
(In Thousands)
Revenues $3,666 $2,697
Operating income (loss) 1,306 (46)
Income before income taxes 4,668 7,982
Note 4 - Financing
Questar Pipeline filed a registration statement with the Securities
and Exchange Commission for the issuance of up to $175 million in
medium-term notes effective September 2, 1998. Questar Pipeline
issued $60.1 million of medium-term notes in October of 1998. The
notes have a weighted average coupon rate of 6.15% and a weighted
average maturity of 13 years. The net proceeds from the sale of
these notes will be used to finance a portion of capital expenditures
and repay a portion of short-term debt.
TransColorado Gas Transmission Co., a partnership in which Questar
Pipeline owns a 50% interest in through a subsidiary, entered into a
$200 million, three-year revolving credit facility on October 14,
1998. Questar Pipeline and KN Energy have guaranteed the repayment of
their 50% proportionate share of the loan. Proceeds from this debt
will be used to finance the construction of the TransColorado
pipeline. The partnership had borrowed $75 million under this
arrangement as of October 31, 1998.
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
September 30, 1998
(Unaudited)
Operating Results
Following is a summary of financial and operating information for the
Company:
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
1998 1997 1998 1997 1998 1997
(Dollars In Thousands)
FINANCIAL RESULTS
Revenues
From unaffiliated customers $9,578 $9,238 $27,731 $27,101 $36,973 $36,952
From affiliates 17,655 16,651 53,350 51,416 71,028 67,755
Total revenues $27,233 $25,889 $81,081 $78,517 $108,001 $104,707
Operating income $12,251 $12,445 $39,103 $37,902 $51,691 $49,502
Net income 5,971 8,562 19,585 20,344 25,809 26,081
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 33,052 30,912 97,119 91,848 121,486 120,210
For Questar Gas 15,001 13,217 80,383 81,492 109,202 114,036
For other affiliated customers 7,227 9,753 19,634 27,562 29,869 43,522
Total transportation 55,280 53,882 197,136 200,902 260,557 277,768
Transportation revenue
(per decatherm) $0.32 $0.32 $0.27 $0.25 $0.28 $0.24
Revenues were higher in the 3-, 9- and 12-month periods of 1998 due
primarily to increased firm-transportation and firm-storage
reservation charges. Firm-transportation revenues were approximately
$400,000 higher in the third quarter of 1998 and $1.8 million higher
in the first nine months of 1998. The Company's firm-transportation
capacity has increased in the past year. Questar Pipeline's expanded
working gas capacity at Clay Basin was placed into service in the
second quarter of 1998. The expansion adds approximately $3 million
of revenues per year.
Operating and maintenance (O & M) expenses were higher in the 1998
periods presented when compared with the 1997 periods. The increase
in 1998 O & M expenses was primarily the result of charges associated
with compressor station maintenance particularly during the third
quarter of 1998 and more than offset the labor-cost reductions from
an early retirement program. Other activities incurring higher
charges in 1998 include telecommunications and data processing for
network and Year 2000 related activities. The higher charges for
these activities occurred despite capitalizing labor costs associated
with developing computer systems in the second quarter of 1998.
Questar Gas Company and Questar Pipeline share the costs of certain
administrative, accounting, legal, engineering and related services
provided by Questar Regulated Services. The Regulated Services group
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. Questar Pipeline expects a $2 to
$3 million per year reduction of O & M expenses as a result of this
program.
Increased investment in capital projects has resulted in higher
depreciation charges in 1998. However, the full impact of increased
investment was partially offset by a downward adjustment of
depreciation expense in the second quarter of 1998. Other taxes were
lower in the 3- and 9-month periods ended September 30, 1998 when
compared with the same periods of 1997 as a result of property tax
refunds.
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 $1,369,000 in the 9-month
period of 1998 compared with $4,042,000 in the corresponding 1997
period. An adjustment of a regulatory liability in the third quarter
of 1997 increased other income by $642,000 and net income by
approximately $400,000.
The effective income tax rate was 35.9% in the first nine months of
1998 compared with 38.2% for the same period in 1997 due to
adjustments that reduced 1998 tax expenses.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of $26,496,000 in the
first nine months of 1998 was $6,328,000 less than the 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 $59,812,000 in the first nine months of
1998 compared with $16,597,000 in the corresponding 1997 period.
Capital expenditures for calendar year 1998 are estimated to be
$121.5 million which includes $23.7 million for the Company's share
of equity investments in TransColorado Gas Transmission and $38
million for purchase of an oil pipeline. Construction of the
270-mileTransColorado pipeline began in late July and Phase II is
expected to be completed in the fourth quarter of 1998. Questar
Pipeline has invested $50.3 million in TransColorado to date
including $37.5 million in 1998. Questar Pipeline expects a return of
capital from TransColorado now that financing is in place.
Financing Activities
Questar Corporation loans funds to the Company under a short-term
arrangement. As of September 30, amounts borrowed from Questar were
$92.9 million in 1998 and $10.6 million 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. In October 1998, the Company borrowed $60.1 million under its
medium-term note program with a weighted average coupon rate of 6.15%
and a weighted average maturity of 13 years. Capital expenditures
for 1998 are expected to be financed with net cash provided from
operating activities and short- and long-term debt including
borrowings from Questar. Also in October 1998, TransColorado Gas
Transmission Co., a partnership, secured a $200 million
revolving-credit facility. Future construction funding for the
TransColorado pipeline should be provided by the revolving-credit
facility. The loan is guaranteed by Questar Pipeline and KN Energy.
Year 2000 Issues
Introduction
Questar (the Company) 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 basic approach has been to provide corporate-wide management and
coordination combined with distributed compliance responsibility at
the various business units. The Y2K team is responsible for fostering
awareness, establishing corporate-level, corporate-wide, strategy;
coordinating Questar action items and information; and providing
periodic internal status reports. The composition of the team includes
representation from each major Questar business unit. The effort is
designed to be consistent with the prudent efforts of publicly traded
companies of similar size, business, and complexity.
Questar InfoComm, Inc. (an affiliate which provides information
technology services to other Questar affiliates) is responsible for
Y2K compatibility of all communications systems, networks (LANs and
WANs), corporate-wide applications and operating systems, mainframe
commercial off-the-shelf products, and for developing, implementing
and coordinating testing procedures.
General
Questar's Y2K team developed a written plan (the Plan) addressing
infrastructure, applications software (infrastructure and applications
software are sometimes collectively referred to as "IT systems"),
outside suppliers and customers, and process control and
instrumentation containing embedded chips (non-IT systems). The
Company's in-house programmers and systems analysts are primarily
responsible for the conversion and testing of certain non-compliant
application software code. In addition, the services of outside
consultants and programmers were engaged to assist program management
completion of coding for certain software programs. The general phases
common to all business units are: (1) an inventory of Y2K items (both
IT and non-IT systems); (2) assignment of priorities to identified
items; (3) assessment of the Y2K compliance of items determined to be
material to the company; (4) repair or replacement of material items
that are determined not to be Y2K compliant; (5) test material items;
and (6) design and implementation of contingency and business
continuation plans for each organization and company location.
Implementation of the Plan is generally proceeding on schedule.
Status
On September 30, 1998, the inventory and priority assessment phases
for each business unit had been completed, but they will continue to
be monitored. Material items are those the Company believes to
involve a risk to the safety of individuals; or may cause damage to
property or the environment; or affect the Company's ability to
provide gas production, transportation, and delivery.
The testing phases of the Plan are underway. The Company has
developed a testing procedure and guidelines to help system users
develop their own specific test procedures and to ensure consistency
in testing. The Company has assembled a test facility which
duplicates, in essential details, the production environment. The
test facility is now in operation and the first systems are being
tested. Responsible system users are now in the process of developing
their test plans and scheduling testing.
The infrastructure section of the Plan addresses hardware and systems
software other than applications software. This effort is on
schedule, and the Company estimates that approximately 50% of the
activities related to the section had been completed as of September
30, 1998. The testing phase has commenced and will be ongoing as
hardware or system software is remediated, upgraded or replaced.
Contingency planning for this section commenced in the third quarter
of 1998. All infrastructure activities are expected to be completed
by mid-1999.
The applications software section of the Plan addresses both the
conversion of applications software that is not Y2K compliant and,
where available from the supplier, the replacement of such software.
The Company estimates that the software conversion and replacement
phase was more than 70% complete on September 30, 1998, and the
remaining conversions and replacements are on schedule to be completed
by July 1, 1999. The testing phase of this section, is scheduled for
completion by the third quarter of 1999. The testing phase is conducted
as the software is remediated or replaced. Contingency planning for this
section began in the third quarter of 1998 and is scheduled to be
completed by mid-1999.
The outside vendors and customers section of the Plan includes the
process of identifying and prioritizing critical suppliers and
customers and communicating with them about their plans and progress
in addressing their Y2K problems. The various business units have
formed Project teams to begin the detailed evaluations of the most
critical third parties and to elicit the required information. The
process of evaluating these external agents commenced in the third
quarter of 1998 and is scheduled for completion by mid-1999, with
follow-up reviews scheduled through the remainder of 1999. This
procedure will include the development of contingency plans, scheduled
for the second quarter of 1999, with completion by late 1999. The
Company estimates that this section was behind schedule at September
30, 1998.
Inventory and assessment phases are in progress for non-IT systems.
This section of the Plan addresses the hardware, software and
associated embedded computer chips that are used in the operation of
all facilities operated by the Company. This section presents unique
problems in that it is often difficult to determine whether embedded
chips have a date function that will present a Y2K problem. It is
also difficult to take certain critical systems, such as compressors
and pipeline valves, off-line for testing. Despite these
difficulties, the Company believes the replacement, repair and testing
of non-IT systems equipment is on schedule to be completed by year-end
1999. Contingency planning for this section began in the third
quarter of 1998 and will be completed by year-end 1999.
Costs
The total cost associated with required modifications to become Y2K
compliant is not expected to be material to the Company's financial
position. The current expense estimate of the Year 2000 Project is
approximately $4.5 million, with $2.3 million attributable to Questar
Gas Company and $.8 million attributable to Questar Pipeline Company.
This estimate does not include Questar's potential share of Y2K costs
that may be incurred by partnerships and joint ventures in which the
Company participates but is not the operator. This expense estimate is
expected to change as the Project progresses. Funds for the Project
are included in existing operating budgets.
Risks
Failure to correct a material Y2K problem could result in an
interruption in, 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. Due to the general uncertainty inherent in the Y2K
problem, resulting in part from the uncertainty of the Y2K readiness
of outside suppliers and customers and the embedded chip problems, the
Company is unable to determine at this time whether the consequences
of Y2K failures will have a material impact on the Company's results
of operations, liquidity or financial condition. The Y2K Project has
reduced and is expected to continue to significantly reduce the
Company's level of uncertainty about the Y2K problem and, in
particular, about the Y2K compliance and readiness of its material
outside vendors and customers. The Company believes that the
possibility of significant interruptions of normal operations is not
great.
The 10-Q contains forward-looking statements about the future
operations and expectations of Questar Pipeline Company. According to
management, these statements are made in good faith and are reasonable
representations of Questar Pipeline'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 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits have been filed as part of this
report:
Exhibit No. Exhibits
10.4. Guaranty Agreement dated as of October 14, 1998, by
Questar Pipeline Company in favor of Bank of America
National Trust and Savings Association.
10.5. Asset Purchase Agreement dated October 23, 1998,
between Questar Line 90 Company, a wholly owned
subsidiary, and ARCO Pipeline Company.
12. Ratio of earnings to fixed charges.
(b) The Company filed a Current Report on Form 8-K, dated August
31, 1998, during the third 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 PIPELINE COMPANY
(Registrant)
November 13, 1998 /s/ D. N. Rose
D. N. Rose
President and Chief Executive
Officer
November 13, 1998 /s/ S. E. Parks
S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer