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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, 2001.
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. 1-935
QUESTAR GAS COMPANY
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(Exact name of registrant as specified in its charter)
STATE OF UTAH 87-0155877
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 324-5555
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, 2001
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Common Stock, $2.50 par value 9,189,626 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.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR GAS COMPANY
STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- --------- ---------
(In Thousands)
REVENUES $ 110,705 $ 68,174 $ 420,834 $ 268,694 $ 688,902 $ 476,155
OPERATING EXPENSES
Cost of natural gas sold 76,600 35,779 306,754 158,209 482,738 280,011
Operating and maintenance 22,977 22,965 48,066 49,136 100,416 102,432
Depreciation 8,390 8,857 17,151 18,038 33,563 37,179
Other taxes 2,744 2,538 5,542 6,527 9,228 9,773
--------- --------- --------- --------- --------- ---------
TOTAL OPERATING EXPENSES 110,711 70,139 377,513 231,910 625,945 429,395
--------- --------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) (6) (1,965) 43,321 36,784 62,957 46,760
INTEREST AND OTHER INCOME 1,031 684 2,439 1,113 2,999 2,122
DEBT EXPENSE (5,955) (4,959) (11,838) (10,136) (22,743) (20,350)
--------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES (4,930) (6,240) 33,922 27,761 43,213 28,532
INCOME TAXES (2,402) (2,910) 12,730 10,376 15,243 9,350
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (2,528) $ (3,330) $ 21,192 $ 17,385 $ 27,970 $ 19,182
========= ========= ========= ========= ========= =========
</Table>
See notes to financial statements
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QUESTAR GAS COMPANY
CONDENSED BALANCE SHEETS
<Table>
<Caption>
June 30, December 31,
2001 2000 2000
(Unaudited)
---------- ---------- ------------
(In Thousands)
ASSETS
Current assets
Cash and cash equivalents $ 882
Accounts receivable $ 56,092 $ 34,470 120,120
Inventories, at lower of average
cost or market
Gas stored underground 28,791 14,431 22,444
Materials and supplies 4,338 3,052 3,542
Purchased-gas adjustments 46,874 35,565
Prepaid expenses and other 264 2,465 773
---------- ---------- ----------
Total current assets 136,359 54,418 183,326
Property, plant and equipment 1,089,705 1,041,456 1,067,362
Less accumulated depreciation 463,715 440,158 447,496
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Net property, plant and equipment 625,990 601,298 619,866
Regulatory and other assets 26,253 18,240 27,134
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$ 788,602 $ 673,956 $ 830,326
========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $ 1,512 $ 2,296
Notes payable to Questar Corporation 136,600 46,000 $ 105,600
Accounts payable and accrued expenses 49,773 42,648 136,183
Deferred income taxes - current 17,812 13,515
Purchased-gas adjustments 3,301
---------- ---------- ----------
Total current liabilities 205,697 94,245 255,298
Long-term debt 225,000 225,000 225,000
Other liabilities 421 1,321 507
Deferred income taxes and investment
tax credits 84,236 84,362 85,465
Common shareholder's equity
Common stock 22,974 22,974 22,974
Additional paid-in capital 81,875 81,875 81,875
Retained earnings 168,399 164,179 159,207
---------- ---------- ----------
Total common shareholder's equity 273,248 269,028 264,056
---------- ---------- ----------
$ 788,602 $ 673,956 $ 830,326
========== ========== ==========
</Table>
See notes to financial statements
3
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QUESTAR GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
6 Months Ended
June 30,
2001 2000
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(In Thousands)
OPERATING ACTIVITIES
Net income $ 21,192 $ 17,385
Depreciation 18,705 19,736
Deferred income taxes and investment
tax credits 3,068 (2,235)
-------- --------
42,965 34,886
Change in operating assets and
liabilities (39,530) 34,706
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NET CASH PROVIDED FROM
OPERATING ACTIVITIES 3,435 69,592
INVESTING ACTIVITIES
Capital expenditures (27,835) (28,580)
Proceeds from disposition
of property, plant and equipment 3,006 34
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NET CASH USED IN INVESTING
ACTIVITIES (24,829) (28,546)
FINANCING ACTIVITIES
Checks outstanding in excess of
cash balance 1,512 2,296
Change in notes payable to Questar 31,000 (33,300)
Payment of dividends (12,000) (11,750)
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NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES 20,512 (42,754)
-------- --------
Change in cash and cash equivalents (882) (1,708)
Beginning cash and cash equivalents 882 1,708
-------- --------
Ending cash and cash equivalents $ -- $ --
======== ========
</Table>
See notes to financial statements
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QUESTAR GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 2001
(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-, six- and twelve-month periods ended June 30, 2001, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. 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, 2000.
Note 2 - Acquisition
Questar Gas completed the purchase of 100% of the stock of Utah Gas Service
Company and Wyoming Industrial Gas in a stock for stock exchange on July 12,
2001. With the acquisition, Questar Gas will serve about 10,500 customers in
Moab, Monticello and Vernal in eastern Utah and Kemmerer and Diamondville,
Wyoming. The acquisition cost $10.9 million and Questar Gas exchanged 390,000
shares of Questar common stock. The transaction will be accounted for as a
purchase.
Note 3 - Reclassifications
Certain reclassifications were made to the 2000 financial statements to conform
with the 2001 presentation.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
QUESTAR GAS COMPANY
June 30, 2001
(Unaudited)
Operating Results
Following is a summary of financial and operating information for the Company:
<Table>
<Caption>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- --------- ---------
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 109,859 $ 66,957 $ 418,798 $ 266,484 $ 684,302 $ 472,045
From affiliates 846 1,217 2,036 2,210 4,600 4,110
--------- --------- --------- --------- --------- ---------
Total revenues 110,705 68,174 420,834 268,694 688,902 476,155
Cost of natural gas sold 76,600 35,779 306,754 158,209 482,738 280,011
--------- --------- --------- --------- --------- ---------
Margin $ 34,105 $ 32,395 $ 114,080 $ 110,485 $ 206,164 $ 196,144
========= ========= ========= ========= ========= =========
Operating income (loss) $ (6) $ (1,965) $ 43,321 $ 36,784 $ 62,957 $ 46,760
Net income (loss) $ (2,528) $ (3,330) $ 21,192 $ 17,385 $ 27,970 $ 19,182
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 11,422 9,197 48,126 43,105 88,394 78,736
Industrial sales 2,519 2,047 5,786 5,251 10,849 9,852
Transportation for industrial
customers 14,571 13,865 29,285 27,882 56,239 54,374
--------- --------- --------- --------- --------- ---------
Total deliveries 28,512 25,109 83,197 76,238 155,482 142,962
========= ========= ========= ========= ========= =========
=========
Natural gas revenue (per decatherm)
Residential and commercial $ 7.81 $ 5.93 $ 7.75 $ 5.52 $ 6.82 $ 5.31
Industrial sales 5.02 2.99 5.37 3.16 4.93 3.07
Transportation for industrial
customers $ 0.13 $ 0.11 $ 0.13 $ 0.12 $ 0.13 $ 0.12
Heating degree days
Colder (warmer) than normal (12%) (31%) (2%) (15%) 4% (12%)
Number of customers at June 30,
Residential and commercial 700,602 686,827
Industrial 1,325 1,352
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Total 701,927 688,179
========= =========
</Table>
Questar Gas' margin increased 5% in the second quarter and 3% in the first half
of 2001 when compared with the same periods of 2000. The higher margin was the
result of a 3.9% general rate increase which went into effect August 11, 2000
higher volumes delivered and new customers. Usage per customer was down 4.5% for
the six-month period in 2001. Total volumes delivered were 14% higher in the
second quarter and 9% higher year-to-date in 2001 compared with 2000 due to new
customers and to colder weather in 2001. Residential volumes were up 24% in the
second quarter and 12% for the first half of 2001 compared with 2000. The number
of new customers added to the system for the year ended December 31, 2001 is
expected to be between 25,000 to 28,000 including the Utah Gas acquisition.
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Questar Gas' cost of natural gas sold increased 94% for the six-month period of
2001 compared with the 2000 period due to higher gas costs which was the
continuation of a trend which began in the second half of 2000. Gas costs in
rates for the first half of 2001 were $4.67 per Dth compared to $2.23 per Dth in
2000.
Operating and maintenance expenses decreased 2% in the first half of 2001
compared with the prior year period as a result of early retirement labor
savings of $2.3 million which were partially offset by an increase in bad debt
costs of $1 million. Depreciation expenses were 5% lower in both the second
quarter and first half of 2001 when compared with the same period in 2000 due to
computer equipment and software being fully depreciated. Other taxes decreased
15% in the first half of 2001 due to an adjustment of prior year taxes in 2000.
Interest and other income was 119% higher in the first half and 51% higher for
the second quarter of 2001 compared with the prior year primarily due to
interest earned on the undercollected purchased-gas adjustment balance and the
return earned on the investment in gas stored underground.
The effective income tax rate for the six-month period was 37.5% in 2001 and
37.4% in 2000. The Company realized nonconventional fuel tax credits of $.9
million in both periods.
Liquidity and Capital Resources
Operating Activities
Operating activities in the first six months resulted in a $3.4 million source
of funds in 2001 compared to a $69.6 million source of funds in the same period
of 2000. The decrease in cash flows resulted primarily from changes in operating
assets and liabilities. In 2001, higher gas costs charged by suppliers were not
yet recovered from customers resulting in an increase in the balance of
unrecovered purchased-gas costs. In addition, accounts payable were paid down.
Inventory costs increased reflecting higher costs of gas placed into underground
storage.
Investing Activities
Capital expenditures were $27.8 million for the first half of 2001. Capital
expenditures for calendar year 2001 are estimated at $74.9 million.
Financing Activities
The Company borrowed $31.0 million from Questar to fund operating and investing
activities. Loan balances owed to Questar as of June 30, amounted to $136.6
million in 2001 and $46.0 million in 2000. Capital expenditures for the
remainder of 2001 are expected to be financed with net cash flow provided from
operating activities and borrowings from Questar.
Regulatory Matters
Questar Gas filed semi-annual gas cost filings in June 2001 without changing the
gas costs in rates. The filings were approved by the Public Service Commissions
of Utah and Wyoming effective July 1, 2001. Depending upon the market
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prices of natural gas, the Company may file to adjust gas costs in rates for the
fourth quarter of 2001.
Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of Section
27(a) of the Securities Act of 1933, as amended, and Section 21(e) of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included or incorporated by reference in this
report, including, without limitation, statements regarding the Company's future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
In addition, forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may", "will", "could", "expect",
"intend", "project", "estimate", "anticipate", "believe", "forecast", or
"continue" or the negative thereof or variations thereon or similar terminology.
Although 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 expressed or implied in forward-looking
statements include changes in general economic conditions, gas and oil prices
and supplies, competition, rate and regulatory issues, and other factors beyond
the control of the Company. These other factors include the rate of inflation,
quoted prices of securities available for sale, the weather and other natural
phenomena, the effect of accounting policies issued periodically by accounting
standard-setting bodies, and adverse changes in the business or financial
condition of the Company.
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Part II
Other Information
ITEM 1. LEGAL PROCEEDINGS.
a. On May 30, 2001, Questar Gas Company (the "Company") filed a
semi-annual application with the Public Service Commission of Wyoming (the
"PSCW"), requesting permission to continue its rates for gas service to retail
customers in effect. The Company, in its application, noted that estimates for
purchased gas costs had decreased since its last application, which became
effective January 1, 2001, but proposed to offset the decrease in purchased gas
costs with an increase in the surcharge associated with amortizing the under
collection balance in its gas balancing account. Finally, the Company requested
permission to increase rates for interruptible customers. By notice and order
issued on July 13, 2001, the PSCW approved the Company's application.
b. On May 31, 2001, the Public Service Commission of Utah (the "PSCU")
issued a final report and order approving the pass-through application filed by
the Company that became effective on January 1, 2001. (See the Company's Form
10-Q Report for the quarter ended March 31, 2001, Part II. Legal Proceedings.)
The PSCU's order also specifically recognized that price stability, reliability,
and cost are three factors to consider when the Company obtains gas supplies and
reflects the costs of such supplies in its rates for natural gas service.
c. The PSCU, by an interim order dated July 3, 2001, approved the
Company's application to continue rates for gas service in effect. In its Utah
application, which was filed on June 8, 2001, the Company presented the same
position as it had with its Wyoming application--gas price estimates are
decreasing, but rates should be kept stable to allow the Company to reduce the
size of the under collection in its gas balancing account. The PSCU also ordered
the Company to provide updated gas-cost information to the Division of Public
Utilities, a state agency, during September 2001, to determine if the Company's
rates for natural gas service should be adjusted effective October 1, 2001.
d. On July 12, 2001, the Company acquired and merged Utah Gas Service
Company ("Utah Gas") and Wyoming Industrial Gas Company ("Wyoming Industrial")
into it. The Company took such action after the PSCU and PSCW officially
approved the Company's formal applications to acquire Utah Gas and Wyoming
Industrial. Utah Gas and Wyoming Industrial were affiliated companies and served
approximately 10,500 customers in eastern Utah (Vernal, Moab, Monticello) and
western Wyoming (Kemmerer and Diamondville). The PSCU agreed to allow the
Company to continue Utah Gas's current non-gas costs in its rates to Utah Gas's
customers for six years or until the Company's next general rate case.
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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 GAS COMPANY
(Registrant)
August 10, 2001 /s/ D. N. Rose
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D. N. Rose
President and Chief Executive Officer
August 10, 2001 /s/ S. E. Parks
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S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer