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. 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 July 31, 1999
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 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998
(In Thousands)
REVENUES $ 27,036 $ 26,599 $ 54,202 $ 53,848 $ 108,911 $106,657
OPERATING EXPENSES
Operating and maintenance 8,331 9,566 17,720 19,493 37,059 38,282
Depreciation 4,098 2,472 8,074 6,315 15,686 13,901
Other taxes 699 515 1,436 1,188 2,848 2,589
TOTAL OPERATING EXPENSES 13,128 12,553 27,230 26,996 55,593 54,772
OPERATING INCOME 13,908 14,046 26,972 26,852 53,318 51,885
INTEREST AND OTHER
INCOME (EXPENSE) 2,441 10 3,250 (76) 3,404 1,151
EARNINGS (LOSS) FROM
UNCONSOLIDATED AFFILIATES (1,555) 743 (64) 1,150 2,797 5,853
DEBT EXPENSE (4,038) (3,500) (8,215) (6,934) (15,737) (13,805)
INCOME BEFORE INCOME TAXES 10,756 11,299 21,943 20,992 43,782 45,084
INCOME TAXES 3,724 4,239 7,949 7,378 15,511 16,684
NET INCOME $ 7,032 $ 7,060 $ 13,994 $ 13,614 $ 28,271 $ 28,400
See notes to consolidated financial statements
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998 1998
(Unaudited)
(In Thousands)
ASSETS
Current assets
Cash and short-term investments $ 9,990
Accounts receivable $ 10,740 $ 17,284 21,304
Inventories 3,245 1,958 2,203
Other current assets 1,431 1,720 1,714
Total current assets 15,416 20,962 35,211
Property, plant and equipment 682,157 591,487 670,456
Less allowances for depreciation 224,039 209,610 215,589
Net property, plant and equipment 458,118 381,877 454,867
Investment in unconsolidated
affiliates 58,013 40,426 54,712
Other assets 11,954 12,484 12,506
$543,501 $455,749 $ 557,296
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $ 893 $ 1,304
Notes payable to Questar
Corporation 53,400 63,300 $ 38,000
Accounts payable and accrued
expenses 18,334 17,117 51,047
Total current liabilities 72,627 81,721 89,047
Long-term debt 202,992 114,573 202,991
Other liabilities 1,610 3,046 4,546
Deferred income taxes 65,826 62,984 63,510
Common shareholder's equity
Common stock 6,551 6,551 6,551
Additional paid-in capital 82,034 82,034 82,034
Retained earnings 111,861 104,840 108,617
Total common shareholder's equity 200,446 193,425 197,202
$543,501 $455,749 $ 557,296
See notes to consolidated financial statements
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
6 Months Ended
June 30,
1999 1998
(In Thousands)
OPERATING ACTIVITIES
Net income $ 13,994 $ 13,614
Depreciation 8,472 7,128
Deferred income taxes 2,316 686
(Earnings) losses from unconsolidated
affiliates, net of cash distributions 713 (1,150)
25,495 20,278
Change in operating assets and
liabilities (25,291) (12,529)
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 204 7,749
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (12,647) (8,462)
Investment in unconsolidated affiliates (4,014) (12,299)
Total capital expenditures (16,661) (20,761)
Proceeds from (costs of) disposition of
property, plant and equipment 924 (2,367)
NET CASH USED IN INVESTING
ACTIVITIES (15,737) (23,128)
FINANCING ACTIVITIES
Checks outstanding in excess of
cash balances 893 1,304
Increase in notes payable to
Questar Corporation 15,400 37,500
Decrease in long-term debt (20,000)
Payment of dividends (10,750) (10,500)
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 5,543 8,304
DECREASE IN CASH AND SHORT-
TERM INVESTMENTS $ (9,990) $ (7,075)
See notes to consolidated financial statements
QUESTAR PIPELINE COMPANY 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. 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 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 - 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 listed below. Income before income taxes includes
capitalized financing charges called allowance for funds used during
construction (AFUDC).
6 Months Ended
June 30,
1999 1998
(In Thousands)
Revenues $ 4,757 $ 2,360
Operating income (loss) (634) 778
Income (loss) before income taxes (1,066) 2,237
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
June 30, 1999
(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,
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.
Operating and maintenance expenses were lower in the 1999 periods
presented when compared with the 1998 periods due primarily to the
effects of an early retirement program effective August 1998 and the
Company's policy of capitalizing a portion of administrative and
general expense in connection with construction projects.
Labor-cost savings amounted to $1.4 million in the first half of
1999. Increased spending for information technology has partially
offset the expense reductions discussed.
Increased investments in capital projects have resulted in higher
depreciation charges in the first half of 1999. Depreciation expense
in the 1998 periods was affected by a $1.3 million downward
adjustment. Other taxes were higher in the first half of 1999 when
compared with the same period of 1998 as a result of higher property
taxes. Generally, property taxes have been increasing in conjunction
with the expansion of investment in plant assets.
Interest and other income in the first half of 1999 includes a reversal
of a $2.5 million contingency reserve related to completion of the
TransColorado Pipeline and $.8 million of AFUDC (capitalzed financing costs)
from Questar Pipeline's capital projects. Debt expense was higher in the
first half of 1999 as a result of borrowing $88.4 million in the
fourth quarter of 1998. The medium-term notes have a weighted average
coupon rate of 6.14% and a weighted average life of 12.6 years.
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. 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.
The effective income tax rate was 36.2% in the first half of 1999
compared with 35.1% for the same period in 1998.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities was $204,000 in the first
half of 1999 compared with $7,749,000 for the same period in 1998.
The decrease was due primarily to changes in operating assets and
liabilities caused by timing differences in paying costs of
construction projects.
Investing Activities
Capital expenditures were $16,661,000 in the first half of 1999
compared with $20,761,000 in the corresponding 1998 period. Capital
expenditures for calendar year 1999 are estimated to be $76.1 million.
Financing Activities
Questar Corporation loans funds to the Company under a short-term
arrangement. As of June 30, Questar Pipeline had borrowed from Questar
$53.4 million in 1999 and $63.3 million in 1998. Remaining 1999
capital expenditures are expected to be financed with net cash
provided from operating activities and short- and long-term debt
including borrowings on an active medium-term note program and from
Questar.
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 a scope that 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. Questar Pipeline's share of the cost is estimated to be
$1.0 million. The Company 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.
The complete text of Questar Pipeline's Y2K disclosure 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
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.
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 prices and availability of gas supplies, competition,
regulatory issues, weather conditions 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
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 Pipeline Company (Questar Pipeline or the Company)
and several other affiliates of Questar Corporation 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 Pipeline is also involved in another action filed by
Mr. Grynberg against several Questar affiliates. This case, which was
filed in Wyoming's federal district court in February of 1997,
includes allegations of fraud, antitrust violations, and gas purchase
contract breaches. It has been stayed pending the resolution of an
appeal to the Tenth Circuit Court of Appeals in another case that
involves Mr. Grynberg and an affiliate of the Company.
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. Joint Annual Management Incentive Plan adopted by
Questar Gas Company, Questar Pipeline Company and
Questar Regulated Services Company as amended and
restated effective May 18, 1999.
12. Ratio of earnings to fixed charges.
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 PIPELINE COMPANY
(Registrant)
August 13, 1999 /s/ D. N. Rose
D. N. Rose
President and Chief Executive
Officer
August 13, 1999 /s/ S. E. Parks
S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Exhibit
10.1. Joint Annual Management Incentive Plan adopted by Questar
Gas Company, Questar Pipeline Company and Questar Regulated
Services Company as amended and restated effective May 18,
1999.
12. Ratio of earnings to fixed charges.