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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 MARCH 31, 2002.
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
(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 April 30, 2002
- ----------------------------- --------------------------------
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 12 Months Ended
March 31, March 31,
2002 2001 2002 2001
--------- --------- --------- ---------
(In Thousands)
REVENUES $ 261,259 $ 310,129 $ 655,243 $ 646,371
OPERATING EXPENSES
Cost of natural gas sold 177,129 230,154 445,520 441,917
Operating and maintenance 26,651 25,089 104,989 100,404
Depreciation 9,723 8,761 35,992 34,030
Other taxes 2,866 2,798 8,797 9,022
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 216,369 266,802 595,298 585,373
--------- --------- --------- ---------
OPERATING INCOME 44,890 43,327 59,945 60,998
INTEREST AND OTHER INCOME 466 1,408 4,216 2,652
DEBT EXPENSE (5,729) (5,883) (23,623) (21,747)
--------- --------- --------- ---------
INCOME BEFORE INCOME
TAXES 39,627 38,852 40,538 41,903
INCOME TAXES 15,461 15,132 14,219 14,735
--------- --------- --------- ---------
NET INCOME $ 24,166 $ 23,720 $ 26,319 $ 27,168
========= ========= ========= =========
</Table>
See notes to financial statements
2
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QUESTAR GAS COMPANY
CONDENSED BALANCE SHEETS
<Table>
<Caption>
March 31, December 31,
2002 2001 2001
(Unaudited)
---------- ---------- ----------
(In Thousands)
ASSETS
Current assets
Cash and cash equivalents $ -- $ -- $ 4,366
Notes receivable from Questar Corp. 10,500
Accounts receivable 121,404 146,799 108,249
Inventories, at lower of average
cost or market
Gas stored underground 913 24,280 22,810
Materials and supplies 3,154 5,196 4,213
Purchased-gas adjustments 48,178 8,296
Prepaid expenses and other 987 521 1,097
Deferred income taxes - current 9,063
---------- ---------- ----------
Total current assets 146,021 224,974 149,031
Property, plant and equipment 1,152,389 1,076,569 1,144,455
Less accumulated depreciation 499,006 456,039 489,583
---------- ---------- ----------
Net property, plant and equipment 653,383 620,530 654,872
Regulatory and other assets 22,351 27,051 24,065
Goodwill 5,879 5,876
---------- ---------- ----------
$ 827,634 $ 872,555 $ 833,844
========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $ 1,317 $ 2,759 $ --
Notes payable to Questar Corp. 151,200 66,600
Accounts payable and accrued expenses 107,629 108,638 88,433
Purchased-gas adjustments 23,849
Deferred income taxes - current 18,308 3,153
---------- ---------- ----------
Total current liabilities 132,795 280,905 158,186
Long-term debt 285,000 225,000 285,000
Deferred income taxes and investment
tax credits 85,394 84,410 84,277
Other liabilities 475 464 452
Common shareholder's equity
Common stock 22,974 22,974 22,974
Additional paid-in capital 121,875 81,875 121,875
Retained earnings 179,121 176,927 161,080
---------- ---------- ----------
Total common shareholder's equity 323,970 281,776 305,929
---------- ---------- ----------
$ 827,634 $ 872,555 $ 833,844
========== ========== ==========
</Table>
See notes to financial statements
3
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QUESTAR GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
3 Months Ended
March 31,
2002 2001
-------- --------
(In Thousands)
OPERATING ACTIVITIES
Net income $ 24,166 $ 23,720
Depreciation 10,518 9,564
Deferred income taxes and investment
tax credits (11,099) 3,738
Gain from sale of properties (47) (527)
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23,538 36,495
Change in operating assets and
liabilities 62,986 (70,035)
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NET CASH PROVIDED FROM (USED IN)
OPERATING ACTIVITIES 86,524 (33,540)
INVESTING ACTIVITIES
Capital expenditures (9,419) (12,765)
Proceeds from disposition
of property, plant and equipment 437 3,064
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NET CASH USED IN INVESTING
ACTIVITIES (8,982) (9,701)
FINANCING ACTIVITIES
Checks outstanding in excess of
cash balance 1,317 2,759
Increase in notes receivable from Questar Corp. (10,500)
Change in notes payable to Questar Corp. (66,600) 45,600
Payment of dividends (6,125) (6,000)
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NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES (81,908) 42,359
-------- --------
Change in cash and cash equivalents (4,366) (882)
Beginning cash and cash equivalents 4,366 882
-------- --------
Ending cash and cash equivalents $ -- $ --
======== ========
</Table>
See notes to financial statements
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QUESTAR GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
March 31, 2002
(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- and twelve-month periods ended March 31, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. 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, 2001.
Note 2 - New Accounting Standards -
"Goodwill and Other Intangible Assets"
Statement of Financial Accounting Standards 142 (SFAS 142) was issued June 2001.
SFAS 142, "Goodwill and Other Intangible Assets," addresses, among other things,
the financial accounting and reporting for goodwill subsequent to an
acquisition. According to the new standard, amortization of goodwill was
replaced by a requirement to test goodwill for impairment at least yearly or
sooner if a specific triggering event occurs. Questar Gas acquired $5.9 million
of goodwill on July 12, 2001, which was exempt from amortization under the new
guidelines in SFAS 142. The Company adopted the remaining provisions of SFAS 142
as of January 1, 2002 and completed the first test with no indication of
impaired goodwill.
Impairment or Disposal of Long-Lived Assets
The Company adopted SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" as of January 1, 2002 without an impact in the balance
sheet, income statement or statement of cash flows.
Note 3 - Reclassifications
Certain reclassifications were made to the 2001 financial statements to conform
with the 2002 presentation.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
QUESTAR GAS COMPANY
March 31, 2002
(Unaudited)
Operating Results
Following is a summary of financial and operating information for the Company:
<Table>
<Caption>
3 Months Ended 12 Months Ended
March 31, March 31,
2002 2001 2002 2001
-------- -------- -------- --------
FINANCIAL RESULTS - (in thousands)
Revenues
From unaffiliated customers $260,958 $308,939 $653,169 $641,400
From affiliates 301 1,190 2,074 4,971
-------- -------- -------- --------
Total revenues 261,259 310,129 655,243 646,371
Cost of natural gas sold 177,129 230,154 445,520 441,917
-------- -------- -------- --------
Margin $ 84,130 $ 79,975 $209,723 $204,454
======== ======== ======== ========
Operating income $ 44,890 $ 43,327 $ 59,945 $ 60,998
Net income $ 24,166 $ 23,720 $ 26,319 $ 27,168
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 43,361 36,704 90,307 86,169
Industrial sales 3,440 3,267 10,857 10,377
Transportation for industrial
customers 11,860 14,714 51,770 55,533
-------- -------- -------- --------
Total deliveries 58,661 54,685 152,934 152,079
======== ======== ======== ========
Natural gas revenue (per decatherm)
Residential and commercial $ 5.51 $ 7.73 $ 6.35 $ 6.58
Industrial sales 4.85 5.64 5.02 4.52
Transportation for industrial
customers 0.15 0.13 0.13 0.13
Heating degree days
Actual 3,159 2,641 6,005 5,690
Normal 2,616 2,616 5,609 5,609
Colder than normal 21% 1% 7% 1%
Number of customers at March 31,
Residential and commercial 733,907 704,424
Industrial 1,315 1,323
-------- --------
Total 735,222 705,747
======== ========
</Table>
Revenues less cost of gas sold (margin)
Questar Gas's margin was 5% higher in the first quarter of 2002 and 3% higher
in the 12-months ended March 31, 2002 when compared with the same periods of
the previous year. A 4.2% year-to-year increase in the number of customers,
lower processing costs and a change in the method of collecting bad debt costs
more than offset a 3.9% decline in the temperature-adjusted
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usage per customer in the first quarter of 2002. The Company added 10,500
customers in July of 2001 in an acquisition of small distribution systems in
eastern Utah and southwestern Wyoming. Declining usage per customer has been a
persistent trend experienced by Questar Gas for the past 20 years and one of the
reasons for requesting a general rate increase in Utah on May 3, 2002. A
combination of declining usage per customer and the rising costs of meeting a
customer-growth rate twice the industry average have led to less revenues to
cover increasing costs of service.
In an interim measure associated with the pass through filing in late 2001, the
Company was allowed to include the gas-cost portion of bad debt expenses in
Utah's semi-annual gas cost filings. This interim change in procedure allows an
accelerated recovery of the growing bad debt charges experienced by the Company.
The margin benefitted by approximately $900,000 in the first quarter of 2002 as
a result.
While colder temperatures in 2002 resulted in an increase in the gas volumes
delivered, the financial effect was mitigated by a weather-normalization
adjustment (WNA). Generally under the WNA, customers pay for non-gas costs based
on normal temperatures.
Gas volumes delivered to industrial customers were 19% lower in the first
quarter of 2002. A major steel-manufacturer suspended its gas deliveries when it
filed for Chapter 11 bankruptcy and shut down its facilities.
Expenses
Operating and maintenance expenses were 6% higher in the 3-month period and 5%
higher in the 12-month period ended March 31, 2002, when compared to the same
periods in the previous year due primarily to increased bad debt expenses and
higher labor-related costs. Bad debt expenses were $.6 million higher in the
first quarter of 2002 and $3.6 million higher in the 12-months ended March 31,
2002. Bad debt costs have risen because of an increasing number of customers and
a higher frequency of personal and business bankruptcies. Management is closely
monitoring its receivables and is enforcing its credit policies to minimize
future uncollectible receivables. Labor-related expenses have increased
primarily because of higher pension costs.
Higher depreciation expenses in the 2002 periods were caused by increased
investment in computer equipment and software, which are depreciated over a
relatively short life.
The effective income tax rate for the first quarter was 39.0% in 2002 and 38.9%
in 2001. The Company realized $.4 million and $.5 million of nonconventional
fuel tax credits in the first quarters of 2002 and 2001, respectively.
Other income
The Company earns a return on the balances in the purchased-gas adjustment
account if it is under-collected and from its investment in gas stored
underground. Interest and other income was lower in 2002 due to a lower
inventory balance, an over-collected purchase-gas adjustment account and a
$.5 million lower gain from selling assets.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities in the first quarter of 2002 was
$120.1 million more than was used during the first quarter of 2001. The increase
in cash flows resulted primarily from changes in operating assets and
liabilities. The purchased-gas adjustment account was in an over-collected
position in 2002 compared with an under-collected balance in 2001. Gas was
withdrawn from storage to meet the heating demands caused by an exceptionally
cold winter where temperatures were 21% colder than normal in the first quarter
of 2002.
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Investing Activities
Capital expenditures were $9.4 million for the first quarter of 2002 and are
estimated to reach $59.6 million for calendar year 2002.
Financing Activities
Net cash provided from operating activities in the first quarter allowed the
Company to finance capital expenditures, pay dividends, eliminate short-term
debt and loan excess cash to Questar Corp. Capital expenditures for the
remainder of 2002 are expected to be financed from net cash flow provided from
operating activities.
Moody's Reviews Possible Downgrade of Debt Ratings
On May 2, 2002, Moody's Investors Service placed Questar Gas Company under
review for a possible rating downgrade of the Company's A1 senior unsecured
debt. In the same notice, Moody's also placed Questar Gas's parent company,
Questar Corporation and affiliated companies, Questar Pipeline and Questar
Market Resources under review. The review was prompted by Moody's concern of
Questar's leverage following the $403 million acquisition of Shenandoah Energy
Inc. in 2001 and the shift in business mix towards nonregulated businesses.
Moody's review will assess Questar's plan to reduce its leverage and to manage
increased business risk and commodity price exposure.
Regulatory Matters
General rate case filed
Questar Gas filed a general rate case application with the Public Service
Commission of Utah (PSCU) on May 3, 2002. The Company is requesting a 5.7%
increase effective January 1, 2003, that amounts to $23 million of annualized
revenues and a 12.6% return on equity. Questar Gas is also requesting that the
PSCU approve the use of a future test year that ends January 1, 2003.
Purchased-gas filings
Effective January 1, 2002, the PSCU approved, on an interim basis, a $66.9
million decrease in natural gas rates that resulted in an 11% decrease for the
typical residential Utah customer. The decrease was based on a significant drop
in natural gas prices at the wellhead. Also, effective January 1, 2002, the
Public Service Commission of Wyoming approved a $2.9 million pass-through gas
cost decrease for Wyoming natural gas rates. Questar Gas routinely submits
purchased-gas adjustment or "pass-through" filings.
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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.
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Item 1. Legal Proceedings
a. Questar Gas Company ("Questar Gas" or the "Company") filed a general
rate case application with the Public Service Commission of Utah ("PSCU") on
May 3, 2002, seeking regulatory approval to increase its rates by 5.7 percent
effective January 1, 2003. The Company's application reflects an estimated
annual revenue deficiency of $23.0 million as of year-end 2002 and a return
on equity of 12.60 percent. Questar Gas is also requesting that the PSCU
approve the use of a future test year that ends January 1, 2003, and cited
the problems associated with regulatory lag as support for its request.
The PSCU has generally used historic test years although it has the legal
authority to adopt future test years. The Company expects that hearings on its
general rate increase application will be held during the fall. Under Utah law,
tariff sheets reflecting a general rate increase become effective 240 days after
filing if the PSCU does not render a decision concerning the requested increase
by such date.
b. The Company is continuing to work with the Division of Public
Utilities and the Committee of Consumer Services, which are state agencies that
are the most active parties in regulatory proceedings, to negotiate a settlement
of issues from the pass-through application that Questar Gas filed in late 2001.
The Company's pass-through application reflected a significant decrease in gas
costs (approximately 24.8 percent), and Questar Gas was permitted to reflect the
requested decrease in its rates effective January 1, 2002. The application,
however, also requested permission to recover carbon dioxide removal costs from
prior periods consistent with a Utah Supreme Court decision. See the Company's
For 10-K Annual Report for 2001, ITEMS 1 AND 2. BUSINESS AND PROPERTIES,
"Regulation," for a discussion of this case. Finally, the application sought
permission to include, on a prospective basis, an allowance for the commodity
and supplier non-gas cost portions of its bad debts in its balancing account.
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
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12. Ratio of earnings to fixed charges.
</Table>
b. The Company did not file any Current Reports on Form 8-K during the
first quarter of 2002.
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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)
May 13, 2002 /s/ D. N. Rose
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D. N. Rose
President and Chief Executive Officer
May 13, 2002 /s/ S. E. Parks
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S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer
11