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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. 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.
Common Stock, $1.00 par value Class Outstanding as of July 31, 2001
- ----------------------------- -------------------------------------
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.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONSOLIDATED 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 $ 30,912 $ 29,407 $ 61,947 $ 59,265 $ 121,758 $ 117,223
OPERATING EXPENSES
Operating and maintenance 11,071 9,768 22,208 19,733 46,236 40,547
Depreciation 4,158 4,271 8,224 8,451 15,164 17,120
Other taxes 779 684 1,575 1,362 3,284 2,414
--------- --------- --------- --------- --------- ---------
TOTAL OPERATING EXPENSES 16,008 14,723 32,007 29,546 64,684 60,081
--------- --------- --------- --------- --------- ---------
OPERATING INCOME 14,904 14,684 29,940 29,719 57,074 57,142
INTEREST AND OTHER
INCOME 1,471 705 2,741 1,585 4,181 2,564
OPERATIONS OF UNCONSOLIDATED
AFFILIATES
Income (loss) (1,385) 176 (1,320) 396 (496) (4,649)
Write-down of investment in partnership (49,700)
--------- --------- --------- --------- --------- ---------
(1,385) 176 (1,320) 396 (496) (54,349)
DEBT EXPENSE (4,046) (4,392) (8,315) (9,091) (16,808) (18,342)
--------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES 10,944 11,173 23,046 22,609 43,951 (12,985)
INCOME TAXES 4,093 4,097 8,538 8,409 13,818 (4,800)
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 6,851 $ 7,076 $ 14,508 $ 14,200 $ 30,133 $ (8,185)
========= ========= ========= ========= ========= =========
</Table>
See notes to consolidated financial statements
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QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
June 30, December 31,
2001 2000 2000
(Unaudited)
-------- -------- ------------
(In Thousands)
ASSETS
Current assets
Cash and cash equivalents $ 1,366 $ 1,662 $ 1,855
Notes receivable from Questar Corporation 20,700
Accounts receivable 7,582 9,428 11,667
Inventories - materials and supplies, at
lower of average cost or market 2,533 2,451 2,276
Prepaid expenses and other 190 1,491 477
-------- -------- --------
Total current assets 11,671 15,032 36,975
Property, plant and equipment 765,485 715,523 731,246
Less accumulated depreciation 249,189 236,247 243,006
-------- -------- --------
Net property, plant and equipment 516,296 479,276 488,240
Investment in unconsolidated affiliates 21,768 19,144 19,088
Regulatory and other assets 20,177 14,788 16,428
-------- -------- --------
$569,912 $528,240 $560,731
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Notes payable to Questar Corporation $ 16,900 $ 14,600
Accounts payable and accrued
expenses 11,785 11,308 $ 10,103
-------- -------- --------
Total current liabilities 28,685 25,908 10,103
Long-term debt 230,035 245,011 245,020
Other liabilities 4,548 5,098 7,231
Deferred income taxes 67,750 51,462 62,741
Common shareholder's equity
Common stock 6,551 6,551 6,551
Additional paid-in capital 142,034 112,034 142,034
Retained earnings 90,309 82,176 87,051
-------- -------- --------
Total common shareholder's equity 238,894 200,761 235,636
-------- -------- --------
$569,912 $528,240 $560,731
======== ======== ========
</Table>
See notes to consolidated financial statements
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QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
6 Months Ended
June 30,
2001 2000
--------- ---------
(In Thousands)
OPERATING ACTIVITIES
Net income $ 14,508 $ 14,200
Depreciation 8,820 9,002
Deferred income taxes 5,009 1,571
(Income) loss from unconsolidated
affiliates, net of cash distributions 1,320 (396)
--------- ---------
29,657 24,377
Change in operating assets and
liabilities (620) 8,298
--------- ---------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 29,037 32,675
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (36,865) (18,210)
Investment in unconsolidated affiliates (4,000) (7,024)
--------- ---------
Total capital expenditures (40,865) (25,234)
Costs of disposition of
property, plant and equipment (11) (616)
--------- ---------
NET CASH USED IN INVESTING
ACTIVITIES (40,876) (25,850)
FINANCING ACTIVITIES
Issuance of long-term debt 100,000
Repayment of long-term debt (115,000)
Change in notes receivable from Questar Corp. 20,700 1,100
Change in notes payable to Questar Corp. 16,900 (27,900)
Equity investment 30,000
Payment of dividends (11,250) (10,750)
--------- ---------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES 11,350 (7,550)
--------- ---------
Decrease in cash and cash equivalents (489) (725)
Beginning cash and cash equivalents 1,855 2,387
--------- ---------
Ending cash and cash equivalents $ 1,366 $ 1,662
========= =========
</Table>
See notes to consolidated financial statements
4
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QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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. 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 - Investment in Unconsolidated Affiliates
Questar Pipeline, directly or indirectly through subsidiaries, 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.
<Table>
<Caption>
6 Months Ended
June 30,
2001 2000
-------- --------
(In Thousands)
Revenues $ 6,250 $ 5,006
Operating loss (4,379) (4,570)
Loss before income taxes (10,470) (10,840)
</Table>
Note 3 - Financing Activities
On March 30, 2001, Questar Pipeline redeemed $30 million of its 9 7/8%
debentures. The redemption price was equal to 104.67% of the principal amount
plus interest from December 1, 2000. In addition, the Company redeemed $85
million of its 9 3/8% debentures on June 25, 2001. The redemption price was
equal to 104.51% of the principal amount plus twenty-four days of interest.
On May 11, 2001, the Company filed a Form S-3 with the Securities and Exchange
Commission to issue up to $250 million of medium-term notes, Series B, with
maturities of nine months to 30 years. On May 29, 2001, Questar Pipeline issued
$100 million of 10-year medium-term notes with a 7.09% coupon rate to refinance
of debentures and reduce short-term debt. The Company plans to apply additional
proceeds from the sale of notes to finance a portion of capital expenditures and
partnership investments, estimated at $180.3 million in 2001.
5
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Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
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 $ 12,252 $ 10,305 $ 23,094 $ 19,901 $ 45,693 $ 38,048
From affiliates 18,660 19,102 38,853 39,364 76,065 79,175
--------- --------- --------- --------- --------- ---------
Total revenues $ 30,912 $ 29,407 $ 61,947 $ 59,265 $ 121,758 $ 117,223
========= ========= ========= ========= ========= =========
Operating income $ 14,904 $ 14,684 $ 29,940 $ 29,719 $ 57,074 $ 57,142
Net income (loss) 6,851 7,076 14,508 14,200 30,133 (8,185)
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 47,572 35,803 90,006 64,898 183,712 140,073
For Questar Gas 25,746 24,046 64,432 60,361 112,254 104,141
For other affiliated customers 94 1,676 2,005 3,001 7,374 6,696
--------- --------- --------- --------- --------- ---------
Total transportation 73,412 61,525 156,443 128,260 303,340 250,910
========= ========= ========= ========= ========= =========
Transportation revenue (per decatherm) $ 0.25 $ 0.29 $ 0.24 $ 0.28 $ 0.24 $ 0.29
</Table>
Revenues were higher in the 2001 periods compared with the 2000 periods due
primarily to increased firm-transportation demand, higher gas processing
revenues, and increased selling prices for hydrocarbon liquids. Transportation
revenues increased 8% in the second quarter and 6% in the first half of 2001
compared with the 2000 periods primarily from increased firm-transportation
volumes. Firm-transportation volumes increased 12.5 million decatherms or 22% in
the 2001 quarter and 28.8 million decatherms or 24% in the first half of 2001
compared with the prior-year periods as a result of increased demand for gas for
electricity generation.
Operating and maintenance (O & M) expenses were higher in the 2001 periods
compared with the respective 2000 periods. The higher O & M expenses in the
first half of 2001 were due to increased legal costs of $1.2 million, fuel gas
expenses of $.7 million at a gas processing plant, and maintenance expenses of
$.5 million for the Southern Trails Pipeline. Labor cost savings from the early
retirement program effective October 31, 2000, totaled about $1.2 million pretax
in the six-month period of 2001.
Depreciation expense declined in the 2001 periods compared with the 2000
periods. The lower depreciation was primarily due to several information systems
being fully depreciated and an extension in the estimated useful life of a gas
processing plant in third quarter of 2000.
Other taxes were higher in each of the 2001 periods compared with the 2000
periods primarily due to increases in use or sales taxes on compressor fuel.
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Interest and other income for the 2001 periods were higher than the 2000 periods
primarily from increased AFUDC (capitalized financing costs) associated with
Questar Pipeline's construction projects.
Earnings from unconsolidated affiliates in the second quarter of 2001 include
the Company's share of operating losses from the TransColorado Pipeline
partnership of $1.7 million.
Debt expense was lower in the 2001 periods compared with the 2000 periods
because of a $60 million equity investment from its parent company in 2000 used
to repay debt owed to Questar. In addition, $115 million of long-term debt was
replaced with less expensive debt from a note offering in May 2001. The weighted
average interest rate of the new notes was 7.09%. Interest expense capitalized
in connection with construction projects in the first half of 2001 was unchanged
from the prior-year period at $1.5 million.
The effective income tax rate was 37% in the first half of 2001 compared with
37.2% in the first half of 2000.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of $29.0 million in the first half
of 2001 was $3.6 million less than the amount reported for the same period of
2000 due to changes in operating assets and liabilities. The decline resulted
from a $5.2 million premium incurred to redeem debentures and from a
reduction in regulatory liabilities. This was partially offset by higher
deferred income taxes.
Investing Activities
Capital expenditures were $40.9 million in the first half of 2001 compared with
$25.2 million in the corresponding 2000 period. The increase in the 2001 period
is primarily due to expenditures for transmission, storage, the Southern Trails
pipeline and Questar TransColorado's investment in the TransColorado
partnership. Capital expenditures for calendar year 2001 are estimated to be
$180.3 million and include two major pipeline projects. The Company received
final approvals on July 10, 2001 to begin construction on Main Line No. 104, a
75-mile pipeline located in central Utah at an estimated cost of $80 million
with $77.5 million being spent in 2001. In addition, $38 million is estimated
for the eastern segment of the Questar Southern Trails Pipeline that runs from
Blanco, New Mexico, to the California border.
Financing Activities
Net cash flow from operating activities, and funds from the note offering, plus
the collection of notes from Questar enabled Questar Pipeline to fund capital
expenditures and to refinance $115 million of its debentures. Questar makes
loans to the Company under a short-term credit arrangement. Borrowing from
Questar as of June 30, amounted to $16.9 million in 2001 and $14.6 million in
2000. Remaining 2001 capital expenditures are expected to be financed with net
cash provided from operating activities, and from funds received from the debt
offering.
7
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Regulatory Matters
Questar Southern Trails (QTS), a Questar Pipeline subsidiary, has secured a
long-term gas-transportation contract for the entire initial capacity on the
east segment of the Southern Trails Pipeline project. The east segment has the
capacity to transport 80,000 decatherms (Dth) per day from multiple receipt
points in the San Juan Basin near the Four Corners area (where Utah, Arizona,
Colorado and New Mexico meet) to multiple delivery points at or near the
California border. QTS is also currently seeking customers for Southern Trails'
west zone, which runs from near the California state line to the Long Beach
area. The west zone has a capacity of up to 120,000 Dth per day. However, QTS's
efforts to place the west zone in service have been slowed by California
regulatory issues. Specifically, the Residual Load Service (RLS) tariff penalty
imposed by Southern California Gas, the dominant gas-transportation company in
the region, deters existing customers from using alternate natural gas suppliers
if they elect to switch part of their transportation to a competing pipeline in
Southern California Gas' service area. On August 2, 2001, the California Public
Utilities Commission (CPUC) issued an order replacing the RLS with a peaking
rate. While the peaking rate is less punitive than the RLS, it does not go far
enough to remove the obstacles faced by Southern Trails. QTS has urged
California officals to seek expedited remedy in this situation. In light of the
CPUC decision, QTS will continue its efforts to market pipeline capacity on
Southern Trails, while evaluating alternative uses of the line.
Business Development
The Company announced several growth initiatives to address the western U.S.
need for expanding natural gas transportation and storage services. These growth
initiatives include the following:
Expand the interstate transmission system - the Company held "open seasons" to
confirm support for expanding its core pipeline system, which serves
gas-producing basins in Utah, Wyoming and the western slope of Colorado. The
open seasons will determine needed system expansions, optimal size of the
expansions, preferred in-service dates, and receipt and delivery points shippers
would utilize. Depending on customer response and federal approval, significant
expansion could be put in place in 2002.
Salt cavern storage facility - the Company also held an open season with good
initial response for its proposed salt-cavern storage facility. The Company is
working with potential customers to obtain the necessary market support for this
project. The storage facility, which has been under development for several
years is a high deliverability natural gas storage facility. Each of the four
caverns will hold up to 3.5 billion cubic feet of gas and could be cycled up to
12 times a year. This facility is ideal for peaking power generation and other
flexible services, which rely on immediate delivery of supplies.
Major trading hub - the Company has announce its intention to leverage on its
unique hub and spoke pipeline system by developing new hub services such as
"parking" (temporary storage) and "balancing" (matching additions and
withdrawals). Development of a hub will increase liquidity, trading and
transportation on and between Questar Pipeline and other interstate pipelines.
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
8
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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 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, the
effect of 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.
9
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
a. On July 19, 2001, the trial court judge granted the motion for partial
summary judgment filed by KN TransColorado, Inc.("KNTC") against Questar
TransColorado, Inc. ("QTC"), which is a subsidiary of Questar Pipeline Company
(the "Company"), the Company, and Questar Corporation, the Company's ultimate
parent. The judge ruled, as a matter of law, that KNTC and QTC, as the partners
in the TransColorado Gas Transmission Company ("TC Partnership"), owed fiduciary
duties to each other and to the partnership, that the partners did not waive or
limit their fiduciary responsibilities, and that the Company's officers and
directors who also served as officers and directors of QTC had fiduciary
obligations to disclose to KNTC and TC Partnership any information they learned
with the Company that affected TC Partnership's fundamental business purposes.
The Questar defendants do not agree with the judge's ruling and have filed a
motion asking the judge to reconsider the portion of his order finding that the
partners had not waived or modified their fiduciary duties.
The basic question in the lawsuit is the validity of a contractual 9right
claimed by QTC to sell or put its 50 percent interest in the TransColorado
pipeline project to KNTC during the 12-month period beginning March 31, 2001.
KNTC alleges that the Company and its affiliates breached their fiduciary duties
to KNTC and TC Partnership by developing a plan to construct and operate a new
pipeline that would compete with the TransColorado pipeline, rendering it
economically unviable. This allegation is the basis for KNTC's contention that
its obligation to purchase QTC's interest in the project be declared void and
unenforceable. The Questar defendants continue to maintain that QTC's right to
sell its interest to KNTC is binding and enforceable.
b. The Company and other Questar defendants are involved in three
separate actions filed by an independent producer, Jack Grynberg. One of these
cases is pending in Wyoming's federal district court and was stayed pending the
outcome of Grynberg's appeal to the Tenth Circuit Court of Appeals involving an
earlier case. On June 29, 2001, the presiding federal district court entered an
order in this case granting a motion for partial summary judgment filed by the
Company and other named Questar defendants that dismissed Grynberg's antitrust
claims. The Questar defendants had filed this motion before the case was stayed.
The Company and other Questar affiliates are named defendants in a case
filed by Grynberg under the federal False Claims Act. This case against the
Questar defendants is one of approximately 76 cases filed by Grynberg against
pipelines and their affiliates that have been consolidated for discovery and
pre-trial motions in Wyoming's federal district court. (The judge assigned to
this court is different than the judge presiding over the case described above.)
On May 18, 2001, the judge denied the motion filed by defendants to dismiss
Grynberg's complaints for failure to plead fraud with particularity. He also
denied the motion filed by a group of defendants, including the Questar
defendants, to certify a question of law on this issue that could be heard as an
interlocutory appeal by the Tenth Circuit Court of Appeals.
10
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibit has been filed as part of this report.
<Table>
<Caption>
Exhibit No. Exhibit
----------- -------
12. Ratio of earnings to fixed charges.
</Table>
b. The Company did not file any Current Reports 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 10, 2001 /s/ D. N. Rose
---------------------------------
D. N. Rose
President and Chief Executive Officer
August 10, 2001 /s/ S. E. Parks
---------------------------------
S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer
11
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EXHIBIT INDEX
<Table>
<Caption>
Exhibit
Number Exhibit
- ------- -------
12. Ratio of earnings to fixed charges.
</Table>
12