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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 SEPTEMBER 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
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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 OCTOBER 31, 2001
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 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- --------- ---------
(In Thousands)
REVENUES $ 72,698 $ 59,552 $ 493,532 $ 328,246 $ 702,048 $ 480,884
OPERATING EXPENSES
Cost of natural gas sold 47,061 32,619 353,815 190,828 497,180 285,791
Operating and maintenance 23,703 24,170 71,769 73,306 99,949 102,923
Depreciation 8,566 9,182 25,717 27,220 32,947 37,452
Other taxes 2,271 2,464 7,813 8,991 9,035 10,130
--------- --------- --------- --------- --------- ---------
TOTAL OPERATING EXPENSES 81,601 68,435 459,114 300,345 639,111 436,296
--------- --------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) (8,903) (8,883) 34,418 27,901 62,937 44,588
INTEREST AND OTHER INCOME 1,087 605 3,526 1,718 3,481 2,174
DEBT EXPENSE (5,863) (5,265) (17,701) (15,401) (23,341) (21,106)
--------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES (13,679) (13,543) 20,243 14,218 43,077 25,656
INCOME TAXES (5,852) (5,654) 6,878 4,722 15,045 8,496
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (7,827) $ (7,889) $ 13,365 $ 9,496 $ 28,032 $ 17,160
========= ========= ========= ========= ========= =========
</Table>
See notes to financial statements
2
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QUESTAR GAS COMPANY
CONDENSED BALANCE SHEETS
<Table>
<Caption>
September 30, December 31,
2001 2000 2000
(Unaudited)
----------- ----------- -----------
(In Thousands)
ASSETS
Current assets
Cash and cash equivalents $ 882
Accounts receivable $ 30,983 $ 21,169 120,120
Inventories, at lower of average
cost or market
Gas stored underground 43,571 23,065 22,444
Materials and supplies 4,191 2,327 3,542
Purchased-gas adjustments 42,934 8,880 35,565
Prepaid expenses and other 462 2,927 773
----------- ----------- -----------
Total current assets 122,141 58,368 183,326
Property, plant and equipment 1,118,550 1,054,589 1,067,362
Less accumulated depreciation 479,398 445,829 447,496
----------- ----------- -----------
Net property, plant and equipment 639,152 608,760 619,866
Regulatory and other assets 25,598 19,189 27,134
Goodwill 5,995
----------- ----------- -----------
$ 792,886 $ 686,317 $ 830,326
=========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $ 1,883 $ 1,661
Notes payable to Questar Corporation 147,200 75,200 $ 105,600
Accounts payable and accrued expenses 57,466 39,718 136,183
Deferred income taxes - current 16,315 3,374 13,515
----------- ----------- -----------
Total current liabilities 222,864 119,953 255,298
Long-term debt 225,000 225,000 225,000
Other liabilities 356 466 507
Deferred income taxes and investment 0
tax credits 85,245 85,634 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 154,572 150,415 159,207
----------- ----------- -----------
Total common shareholder's equity 259,421 255,264 264,056
----------- ----------- -----------
$ 792,886 $ 686,317 $ 830,326
=========== =========== ===========
</Table>
See notes to financial statements
3
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QUESTAR GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
9 Months Ended
September 30,
2001 2000
-------- --------
(In Thousands)
OPERATING ACTIVITIES
Net income $ 13,365 $ 9,496
Depreciation 20,417 29,817
Deferred income taxes and investment
tax credits 2,580 3,665
-------- --------
36,362 42,978
Change in operating assets and
liabilities (18,922) 21,467
-------- --------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 17,440 64,445
INVESTING ACTIVITIES
Capital expenditures (53,332) (46,123)
Proceeds from disposition
of property, plant and equipment 9,527 34
-------- --------
NET CASH USED IN INVESTING
ACTIVITIES (43,805) (46,089)
FINANCING ACTIVITIES
Checks outstanding in excess of
cash balance 1,883 1,661
Change in notes payable to Questar 41,600 (4,100)
Payment of dividends (18,000) (17,625)
-------- --------
NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES 25,483 (20,064)
-------- --------
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
4
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QUESTAR GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
September 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-, nine- and twelve-month periods ended September 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 exchange for 390,000 shares of Questar
common stock on July 12, 2001. With the acquisition, Questar Gas will serve
about 10,500 customers in Moab, Monticello and Vernal in Utah and Kemmerer and
Diamondville, Wyoming. The acquisition cost $10.9 million, including $6 million
of goodwill, and was accounted for as a purchase.
Note 3 - Financing
During the third quarter of 2001, Questar Gas filed a Form S-3 with the
Securities and Exchange Commission for the issue of up to $100 million of
medium-term notes, series D, with maturities of nine months to 30 years. On
October 9, 2001, Questar Gas issued $60 million of 11-year notes with a 6.3%
coupon rate.
Note 4 - Reclassifications
Certain reclassifications were made to the 2000 financial statements to conform
with the 2001 presentation.
5
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
QUESTAR GAS COMPANY
September 30, 2001
(Unaudited)
Operating Results
Following is a summary of financial and operating information for the Company:
<Table>
<Caption>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- --------- ---------
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 72,120 $ 58,287 $ 490,918 $ 324,771 $ 698,135 $ 476,375
From affiliates 578 1,265 2,614 3,475 3,913 4,509
--------- --------- --------- --------- --------- ---------
Total revenues 72,698 59,552 493,532 328,246 702,048 480,884
Cost of natural gas sold 47,061 32,619 353,815 190,828 497,180 285,791
--------- --------- --------- --------- --------- ---------
Margin $ 25,637 $ 26,933 $ 139,717 $ 137,418 $ 204,868 $ 195,093
========= ========= ========= ========= ========= =========
Operating income (loss) $ (8,903) $ (8,883) $ 34,418 $ 27,901 $ 62,937 $ 44,588
Net income (loss) $ (7,827) $ (7,889) $ 13,365 $ 9,496 $ 28,032 $ 17,160
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 6,285 7,462 54,411 50,567 87,217 77,946
Industrial sales 1,988 1,993 7,774 7,244 10,844 10,018
Transportation for industrial
customers 13,421 12,899 42,706 40,781 56,761 55,015
--------- --------- --------- --------- --------- ---------
Total deliveries 21,694 22,354 104,891 98,592 154,822 142,979
========= ========= ========= ========= ========= =========
Natural gas revenue (per decatherm)
Residential and commercial $ 8.79 $ 5.79 $ 7.87 $ 5.56 $ 7.04 $ 5.37
Industrial sales 5.45 4.25 5.39 3.46 5.15 3.35
Transportation for industrial
customers 0.13 0.12 0.13 0.12 0.14 0.12
Heating degree days
Colder (warmer) than normal (67%) 22% (4%) (14%) 2% (12%)
Number of customers at September 30,
Residential and commercial 714,941 690,205
Industrial 1,329 1,345
--------- ---------
Total 716,270 691,550
========= =========
</Table>
Questar Gas' margin was 5% lower in the third quarter of 2001 when compared with
the third quarter of 2000. In the third quarter of 2000, the Company received a
$1.3 million refund of gas processing charges that reduced gas costs. The refund
represented charges from several previous quarters. The margin was $2.3 million
higher in the comparison of the nine-month periods ended September 30, 2001 and
2000 as a result of a 3.9% general rate increase, effective August 11, 2000,
increased gas deliveries and new customers. These factors more than offset a
4.6% decline in temperature-adjusted usage per customer in the same nine-month
comparison.
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Total gas volumes delivered were 6% higher in the first nine months of 2001
compared with the same period of 2000. Volumes delivered to residential
customers were up 8% due to temperatures that were near normal in the 2001
period compared with 14% warmer than normal in the 2000 period and a 3.6%
increase in the number of customers. The third quarter 2001 acquisition of Utah
Gas and Wyoming Industrial Gas added about 10,500 customers. The Company expects
its customer base at December 31, 2001 will be 25,000 to 28,000 above the
previous year.
Operating and maintenance expenses were lower in the 2001 periods when compared
with the 2000 periods presented due primarily to lower labor costs resulting
from an early retirement program effective October 31, 2000. The reduction of
labor costs amounted to about $4 million in the first nine months of 2001
partially offset by a $1.3 million increase in bad debt costs. Bad debt costs
have risen in the last 12 months because of the convergence of higher gas
prices, increasing number of customers and higher frequency of personal and
business bankruptcies. Management is closely monitoring its receivables and is
enforcing its credit policies to minimize future uncollectible receivables.
Depreciation expense was lower in the 2001 periods when compared with the same
periods in 2000 due to computer equipment and software being fully depreciated.
Other taxes decreased 13% in the first nine months of 2001 due to an adjustment
of prior year taxes in 2000.
Interest and other income was higher in the 2001 periods when compared with the
prior year periods primarily due to interest earned on the undercollected
purchased-gas adjustment balance and the investment in gas stored underground.
The effective income tax rate for the nine-month period was 34% in 2001 and
33.2% in 2000. The Company realized nonconventional fuel tax credits of $1.4
million in both periods.
Liquidity and Capital Resources
Operating Activities
Net cash from operating activities the first nine months provided $17.4 million
2001 compared to $64.4 million 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 paid to suppliers were not yet recovered from customers
resulting in an increase in the balance of unrecovered purchased-gas costs.
Inventory costs increased because of higher costs and volumes of gas placed into
underground storage.
Investing Activities
Capital expenditures were $53.3 million for the first nine months of 2001 and
included $10.9 million for an acquisition of a gas-distribution business.
Capital expenditures for calendar year 2001 are estimated at $76.2 million.
Financing Activities
The Company borrowed $41.6 million from Questar to fund operating and investing
activities. Loan balances owed to Questar as of September 30, amounted to $147.2
million in 2001 and $75.2 million in 2000. Questar Gas filed a registration
statement with the Securities and Exchange Commission in the third quarter of
2001 and issued $60 million of eleven year notes in October 2001. Proceeds were
used to reduce loans outstanding. Capital expenditures for the remainder of 2001
are expected to be financed with net cash flow provided from operating
activities and loans.
7
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Regulatory Matters
On October 23, 2001, the Utah Supreme Court unanimously reversed a Public
Service Commission of Utah (PSCU) decision and agreed with Questar Gas' position
that certain gas processing costs should have been considered for recovery
through usual pass-through proceedings. In December 1999, PSCU denied the
Company's request to recover certain costs of processing gas to remove carbon
dioxide on procedural grounds. In denying the Company's request, the PSCU
provided guidance to seek recovery of future processing fees through other rate
making procedures. The Company filed a general rate case that, when settled in
August 2000, provided $5 million yearly toward processing costs. The Company
appealed to the Utah Supreme Court, maintaining that the gas-balancing account
and pass-through proceedings were the proper mechanisms for recovering those
processing costs. The Court's decision sends the case back to the PSCU and
allows the opportunity for the Company to seek recovery of incurred costs. The
Company does not know if its further requests for recovery will be contested on
other grounds.
On August 30, 2001, the Company filed a pass-on request with the Public Service
Commission of Wyoming (PSCW) seeking a $4.6 million reduction of future gas
costs collected in rates. The PSCW approved the request. On September 17, 2001,
Questar Gas filed a pass-through request with the PSCU that will reduce gas
costs in Utah rates by $110.9 millions over the 12 months following an October
1, 2001 effective date. The PSCU gave tentative approval of the request.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards (SFAS) 141, "Business Combinations," which
addresses financial accounting and reporting for business combinations. SFAS 141
is effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for under the pooling method initiated
before but completed after June 30, 2001. The Company complied with this new
accounting pronouncement in recording its acquisition closed in the third
quarter of 2001.
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets,"
which addresses, among other things, the financial accounting and reporting for
goodwill subsequent to an acquisition. The new standard eliminates the
requirement to amortize acquired goodwill; instead, such goodwill shall be
reviewed at least annually for impairment. SFAS 142 is effective for fiscal
years beginning after December 15, 2001. The Company will not be amortizing
goodwill acquired subsequent to July 1, 2001, but will test for impairment. The
Company has not yet fully evaluated the impact the remaining provisions of SFAS
142.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations," which addresses, among other things, the financial accounting and
reporting of the fair value of legal obligations associated with the retirement
of tangible long-lived assets. The new standard requires that retirement costs
be estimated at fair value, capitalized and depreciated over the life of the
assets. The new standard may affect the cost basis of rate-regulated assets.
SFAS 143 is effective for years beginning after June 15, 2002. The Company has
not evaluated the impact of SFAS 143.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The new standard addresses financial accounting
and reporting for the impairment or disposal of long-lived assets, specifically,
for a segment of a business accounted for as a discontinued operation. SFAS 144
is effective for years beginning after December 15, 2001. The Company has not
evaluated the impact of SFAS 144.
8
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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.
9
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Part II
Other Information
Item 1. Legal Proceedings.
a. On August 31, 2001, Questar Gas Company ("Questar Gas" or the
"Company") filed a special pass-on application with the Public Service
Commission of Wyoming (the "PSCW") seeking approval to reflect lower natural gas
prices in its rates. In the application, the Company requested permission to
reflect annualized gas costs of $13,488,618 in rates for Wyoming customers
effective October 1, 2001. Questar Gas, in the filing, noted that the new gas
cost number reflected a decrease of approximately $4,584,000. The PSCW issued a
bench ruling on September 20, 2001, authorizing the Company to reflect the
requested gas cost decrease in rates effective October 1, 2001.
b. Questar Gas filed a similar application with the Public Service
Commission of Utah (the "PSCU") on September 17, 2001. In its application, the
Company advised the PSCU that its gas costs had decreased and requested
regulatory approval to reflect annualized gas costs of $337,484,793, resulting
in an annualized revenue decrease of $110,936,000, in its rates effective
October 1, 2001. By an interim order dated October 4, 2001, the PSCU authorized
the Company to reflect the requested decrease in its rates effective October 1,
2001.
c. On October 23, 2001, the Utah Supreme Court reversed the decision
rendered by the PSCU in the 1999 application filed by the Company for
pass-through treatment of carbon dioxide removal costs. See the Company's
Current Report on Form 8-K dated December 8, 1999 and the Company's 2000 Annual
Report on Form 10-K, ITEMS 1. AND 2. BUSINESS AND PROPERTIES, "Regulation." The
PSCU's order, issued on December 3, 1999, concluded that Questar Gas's carbon
dioxide removal costs could not be considered as appropriate for pass-through
treatment and disallowed rate coverage for approximately $3.4 million of such
costs incurred in 1999.
The Utah Supreme Court, in a unanimous decision, determined that the PSCU
was required to consider the Company's application according to previously
approved balancing account procedures and remanded the case back to the PSCU for
a decision on the merits of Questar Gas's inclusion of carbon dioxide removal
costs in its gas balancing account for pass-through treatment. The Company will
pursue recovery of costs incurred for the period from June 1999 to August 2000
in the case remanded to the PSCU.
The PSCU's 1999 decision forced Questar Gas to file a general rate
application in late 1999 in which it was subsequently permitted by the PSCU to
reflect a specified amount of carbon dioxide removal costs in its general rates
for natural gas service. The PSCU's general rate case order was issued in August
of 2000.
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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.
Exhibit No. Exhibit
12. Ratio of earnings to fixed charges.
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 GAS COMPANY
(Registrant)
/s/ D. N. Rose
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November 13, 2001 D. N. Rose
President and Chief Executive Officer
/s/ S. E. Parks
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November 13, 2001 S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer
11
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EXHIBIT INDEX
<Table>
<Caption>
Exhibit
Number Exhibit
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12. Ratio of earnings to fixed charges.
</Table>
12