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, 1998
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
(Exact name of registrant as specified in its charter)
STATE OF UTAH 87-0155877
(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
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 September 30, 1998
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.
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,
1998 1997 1998 1997 1998 1997
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $48,619 $47,479 $314,795 $286,115 $476,903 $413,016
OPERATING EXPENSES
Natural gas purchases 22,615 21,716 182,678 148,596 283,015 213,828
Operating and maintenance 24,214 23,103 73,226 76,309 98,636 101,652
Depreciation 8,288 7,189 23,816 22,491 32,485 30,412
Other taxes 2,138 2,085 7,041 7,374 7,841 8,160
TOTAL OPERATING EXPENSES 57,255 54,093 286,761 254,770 421,977 354,052
OPERATING INCOME (LOSS) (8,636) (6,614) 28,034 31,345 54,926 58,964
INTEREST AND OTHER INCOME 846 902 2,874 2,641 3,621 2,467
DEBT EXPENSE (4,762) (4,886) (14,458) (13,693) (19,884) (18,070)
INCOME (LOSS) BEFORE
INCOME TAXES (12,552) (10,598) 16,450 20,293 38,663 43,361
INCOME TAXES (CREDITS) (5,457) (4,824) 5,212 6,361 12,343 14,228
NET INCOME (LOSS) ($7,095) ($5,774) $11,238 $13,932 $26,320 $29,133
</TABLE>
See note to financial statements
QUESTAR GAS COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 1997
(In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short-term investments $6,747
Accounts receivable $12,753 $23,112 86,487
Inventories 24,854 19,253 20,347
Purchased-gas adjustments 25,257 59,487 37,251
Other current assets 3,309 3,644 4,356
Total current assets 66,173 105,496 155,188
Property, plant and equipment 914,799 858,741 882,936
Less allowances for depreciation 373,250 346,947 354,761
Net property, plant and equipment 541,549 511,794 528,175
Other assets 24,222 19,471 21,488
$631,944 $636,761 $704,851
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $3,288 $1,174
Notes payable to Questar
Corporation 56,600 73,100 $100,000
Accounts payable and accrued
expenses 40,797 37,188 64,487
Total current liabilities 100,685 111,462 164,487
Long-term debt 225,000 207,000 225,000
Other liabilities 5,488 10,756 5,989
Deferred income taxes and investment
tax credits 84,142 94,859 87,109
Common shareholder's equity
Common stock 22,974 22,974 22,974
Additional paid-in capital 41,875 41,875 41,875
Retained earnings 151,780 147,835 157,417
Total common shareholder's equity 216,629 212,684 222,266
$631,944 $636,761 $704,851
</TABLE>
See note to financial statements
QUESTAR GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
9 Months Ended
September 30,
1998 1997
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $11,238 $13,932
Depreciation 25,639 24,452
Deferred income taxes and
investment tax credits (2,967) 13,548
33,910 51,932
Change in operating assets and
liabilities 55,343 (24,617)
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 89,253 27,315
INVESTING ACTIVITIES
Capital expenditures (42,233) (39,473)
Proceeds from disposition of
property, plant and equipment 3,220 2,527
NET CASH USED IN INVESTING
ACTIVITIES (39,013) (36,946)
FINANCING ACTIVITIES
Checks outstanding in excess of
cash balances 3,288 1,174
Decrease in notes payable
to Questar Corporation (43,400) (3,100)
Redemption of preferred stock (4,876)
Issuance of long-term debt 32,000
Payment of dividends (16,875) (17,442)
NET CASH PROVIDED FROM
(USED IN) FINANCING ACTIVITIES (56,987) 7,756
DECREASE IN CASH AND
SHORT-TERM INVESTMENTS ($6,747) ($1,875)
</TABLE>
See note to financial statements
QUESTAR GAS COMPANY
NOTE TO FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
Note 1 - Basis of Presentation
The interim financial statements furnished 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 nine-month periods ended September 30, 1998, are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1998. 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, 1997.
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
QUESTAR GAS COMPANY
September 30, 1998
(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,
1998 1997 1998 1997 1998 1997
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS
Revenues
From unaffiliated customers $47,941 $47,027 $313,998 $283,881 $475,801 $409,704
From affiliates 678 452 797 2,234 1,102 3,312
Total revenues 48,619 47,479 314,795 286,115 476,903 413,016
Natural gas purchases 22,615 21,716 182,678 148,596 283,015 213,828
Revenues less natural gas
purchases $26,004 $25,763 $132,117 $137,519 $193,888 $199,188
Operating income (loss) ($8,636) ($6,614) $28,034 $31,345 $54,926 $58,964
Net income (loss) (7,095) (5,774) 11,238 13,932 26,320 29,133
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 6,312 6,799 53,804 55,361 84,190 82,222
Industrial sales 1,806 1,743 6,903 6,749 9,677 9,412
Transportation for industrial
customers 13,935 12,390 41,882 36,967 56,228 49,300
Total deliveries 22,053 20,932 102,589 99,077 150,095 140,934
Natural gas revenue (per decatherm)
Residential and commercial $5.91 $5.24 $5.16 $4.53 $5.06 $4.44
Industrial sales 3.05 2.69 3.02 2.43 2.99 2.35
Transportation for industrial
customers 0.11 0.13 0.11 0.13 0.11 0.13
Heating degree days
Actual 0 82 3,291 3,215 5,541 5,165
Normal 110 110 3,594 3,594 5,801 5,801
Warmer than normal 25% 8% 11% 4% 11%
Number of customers at September 30,
Residential and commercial 647,078 625,499
Industrial 1,311 1,154
Total 648,389 626,653
</TABLE>
In the first nine months of 1998, lower usage per customer and a
lower margin on certain gas sales caused a $5,402,000 or 4% decline
in revenues, less gas purchases, when compared with the 1997 period.
Retail usage of gas per customer fell during the first half of 1998
after reaching an unusually high mark in the first half of 1997. This
reduced usage appears to be a reaction to rising gas costs included
in rates during the latter part of 1997 and first part of 1998.
Revenues, less natural gas purchases, were slightly higher in the
third quarter of 1998 when compared with the third quarter of 1997.
The improvement resulted primarily from a leveling of usage per
customer.
A rate surcharge, associated with constructing a distribution
pipeline into southern Utah, and in effect for the past 10 years, was
discontinued in September 1997. Also, some general-service customers, who
met higher load factor standards, shifted to firm commercial rates in
1998, which have a lower margin.
A strong growth rate in the number of customers partially offset the
effect of lower usage per customer and margins on some gas sales.
The number of customers served by Questar Gas grew by 3.5% from a
year ago to 648,389 at September 30, 1998.
Temperatures, as measured in degree days, were warmer than normal in
all periods presented. Questar Gas' rates include a
weather-normalization adjustment that reduces the revenue impact of
weather fluctuations. Almost all of Questar Gas' residential and
commercial volumes are subject to the weather-normalization
adjustment in the first nine months of both 1998 and 1997.
Volumes delivered to industrial customers increased 12% in the first
nine months of 1998 when compared with the same period of 1997 due to
additions of new customers as well as expanded operations with
several ongoing customers. Margins from gas delivered to industrial
customers are substantially lower than from gas delivered to
residential and commercial customers.
Questar Gas' natural gas purchases were higher in the 1998 periods
presented when compared with the same periods of 1997. Higher gas
purchase prices were paid by the Company as natural gas prices
increased sharply during the 1996-1997 winter-heating season. The
increase in gas costs was first recorded as an increase in the
purchased-gas cost account balance, but was ultimately collected in
rates. In the first half of the year, Questar Gas' rates include the
recovery of gas costs which amounted to $2.27 per decatherm (dth) in
1998 compared with $1.54 per dth in 1997. Because of lower
forecasted gas prices and the fact that past gas cost increases have
been largely recovered, the Company received approval to reduce gas
costs in rates to $2.17 per dth in the third quarter of 1998. The
Company routinely files for adjustment of purchased-gas costs with
the Utah and Wyoming Public Service Commissions on a semiannual
basis.
Operating and maintenance (O & M) expenses were lower in the 9- and
12-month periods of 1998 as a result of capitalizing labor costs
associated with installing computer systems, cost reductions from
sharing services with an affiliated company, and a nonrecurring 1997
write-off of obsolete inventory. Third quarter 1997 O & M expenses
were reduced $1.3 million to capitalize labor costs associated with
installing computer systems.
Questar Gas Company and Questar Pipeline share the costs of certain
administrative, accounting, legal, engineering and related services
provided by Questar Regulated Services. The Regulated Services group
completed a voluntary early retirement program that was effective
July 31, 1998. The program reduced the regulated services work force
by more than 10% or 177 employees. Questar Gas expects a $4 to $6
million per year reduction of O & M expenses as a result of this
program.
Depreciation expense was higher in the 1998 periods presented when
compared with the 1997 periods primarily as a result of increased
investment in property, plant and equipment. Other taxes, primarily
property taxes, were lower in the 9- and 12-month periods of 1998 as
a result of property tax refunds. Interest expense was higher in the
9- and 12-month periods of 1998 due primarily to an issuance of $50
million of medium-term notes with an average interest rate of 6.88 %
in the third and fourth quarters of 1997.
The effective income tax rate was 31.7% in the first nine months of
1998 and 31.3% in the first nine months of 1997. The Company
recognized $1,638,000 of tight-sands gas-production credits in the
1998 period and $2,007,000 in the 1997 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of $89,253,000 was
$61,938,000 more than was generated in the same period of 1997. The
increase in cash flow was primarily due to increased collection of
gas costs, which were under-collected in the first half of 1997, and
collection of receivables.
Investing Activities
Capital expenditures were $42,233,000 in the first nine months of
1998 compared with $39,473,000 in the corresponding 1997 period.
Capital expenditures for calendar year 1998 are estimated at
$64,600,000.
Financing Activities
The Company has a short-term borrowing arrangement with its parent
company, Questar Corporation. As of September 30, Questar Gas had
loan balances outstanding of $56,600,000 in 1998 and $73,100,000 in
1997. Capital expenditures for 1998 are expected to be financed with
net cash flow provided from operating activities and borrowings from
Questar.
Year 2000 Issues
Introduction
Questar (the Company) 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 basic approach has been to provide corporate-wide management and
coordination combined with distributed compliance responsibility at
the various business units. The Y2K team is responsible for fostering
awareness, establishing corporate-level, corporate-wide, strategy;
coordinating Questar action items and information; and providing
periodic internal status reports. The composition of the team includes
representation from each major Questar business unit. The effort is
designed to be consistent with the prudent efforts of publicly traded
companies of similar size, business, and complexity.
Questar InfoComm, Inc. (an affiliate which provides information
technology services to other Questar affiliates) is responsible for
Y2K compatibility of all communications systems, networks (LANs and
WANs), corporate-wide applications and operating systems, mainframe
commercial off-the-shelf products, and for developing, implementing
and coordinating testing procedures.
General
Questar's Y2K team developed a written plan (the Plan) addressing
infrastructure, applications software (infrastructure and applications
software are sometimes collectively referred to as "IT systems"),
outside suppliers and customers, and process control and
instrumentation containing embedded chips (non-IT systems). The
Company's in-house programmers and systems analysts are primarily
responsible for the conversion and testing of certain non-compliant
application software code. In addition, the services of outside
consultants and programmers were engaged to assist program management
completion of coding for certain software programs. The general phases
common to all business units are: (1) an inventory of Y2K items (both
IT and non-IT systems); (2) assignment of priorities to identified
items; (3) assessment of the Y2K compliance of items determined to be
material to the company; (4) repair or replacement of material items
that are determined not to be Y2K compliant; (5) test material items;
and (6) design and implementation of contingency and business
continuation plans for each organization and company location.
Implementation of the Plan is generally proceeding on schedule.
Status
On September 30, 1998, the inventory and priority assessment phases
for each business unit had been completed, but they will continue to
be monitored. Material items are those the Company believes to
involve a risk to the safety of individuals; or may cause damage to
property or the environment; or affect the Company's ability to
provide gas production, transportation, and delivery.
The testing phases of the Plan are underway. The Company has
developed a testing procedure and guidelines to help system users
develop their own specific test procedures and to ensure consistency
in testing. The Company has assembled a test facility which
duplicates, in essential details, the production environment. The
test facility is now in operation and the first systems are being
tested. Responsible system users are now in the process of developing
their test plans and scheduling testing.
The infrastructure section of the Plan addresses hardware and systems
software other than applications software. This effort is on
schedule, and the Company estimates that approximately 50% of the
activities related to the section had been completed as of September
30, 1998. The testing phase has commenced and will be ongoing as
hardware or system software is remediated, upgraded or replaced.
Contingency planning for this section commenced in the third quarter
of 1998. All infrastructure activities are expected to be completed
by mid-1999.
The applications software section of the Plan addresses both the
conversion of applications software that is not Y2K compliant and,
where available from the supplier, the replacement of such software.
The Company estimates that the software conversion and replacement
phase was more than 70% complete on September 30, 1998, and the
remaining conversions and replacements are on schedule to be completed
by July 1, 1999. The testing phase of this section, is scheduled for
completion by the third quarter of 1999. The testing phase is conducted
as the software is remediated or replaced. Contingency planning for this
section began in the third quarter of 1998 and is scheduled to be
completed by mid-1999.
The outside vendors and customers section of the Plan includes the
process of identifying and prioritizing critical suppliers and
customers and communicating with them about their plans and progress
in addressing their Y2K problems. The various business units have
formed Project teams to begin the detailed evaluations of the most
critical third parties and to elicit the required information. The
process of evaluating these external agents commenced in the third
quarter of 1998 and is scheduled for completion by mid-1999, with
follow-up reviews scheduled through the remainder of 1999. This
procedure will include the development of contingency plans, scheduled
for the second quarter of 1999, with completion by late 1999. The
Company estimates that this section was behind schedule at September
30, 1998.
Inventory and assessment phases are in progress for non-IT systems.
This section of the Plan addresses the hardware, software and
associated embedded computer chips that are used in the operation of
all facilities operated by the Company. This section presents unique
problems in that it is often difficult to determine whether embedded
chips have a date function that will present a Y2K problem. It is
also difficult to take certain critical systems, such as compressors
and pipeline valves, off-line for testing. Despite these
difficulties, the Company believes the replacement, repair and testing
of non-IT systems equipment is on schedule to be completed by year-end
1999. Contingency planning for this section began in the third
quarter of 1998 and will be completed by year-end 1999.
Costs
The total cost associated with required modifications to become Y2K
compliant is not expected to be material to the Company's financial
position. The current expense estimate of the Year 2000 Project is
approximately $4.5 million, with $2.3 million attributable to Questar
Gas Company and $.8 million attributable to Questar Pipeline Company.
This estimate does not include Questar's potential share of Y2K costs
that may be incurred by partnerships and joint ventures in which the
Company participates but is not the operator. This expense estimate is
expected to change as the Project progresses. Funds for the Project
are included in existing operating budgets.
Risks
Failure to correct a material Y2K problem could result in an
interruption in, 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. Due to the general uncertainty inherent in the Y2K
problem, resulting in part from the uncertainty of the Y2K readiness
of outside suppliers and customers and the embedded chip problems, the
Company is unable to determine at this time whether the consequences
of Y2K failures will have a material impact on the Company's results
of operations, liquidity or financial condition. The Y2K Project has
reduced and is expected to continue to significantly reduce the
Company's level of uncertainty about the Y2K problem and, in
particular, about the Y2K compliance and readiness of its material
outside vendors and customers. The Company believes that the
possibility of significant interruptions of normal operations is not
great.
The 10-Q contains forward-looking statements about the future
operations and expectations of Questar Gas.
According to management, these statements are made in good faith and are
reasonable representations of Questar Gas' expected performance at the time.
Actual results may vary from management's stated expectations and
projections due to a variety of factors.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Public Service Commission of Utah (PSCU) has not issued an
order in a case involving the gathering rates paid by Questar Gas
Company (Questar Gas or the Company). (See the Company's Report on
Form 10-Q for the Quarter Ended June 30, 1998, Item 1. Legal
Proceedings.) The case, which was the subject of public hearings held
on September 1, 1998, involves a claim made by the Division of Public
Utilities, a state agency, that a reduction in gathering rates paid by
Questar Gas to an affiliate should be extended retroactively to March
of 1996. The Company's potential refund is approximately $7.6 million
plus interest. Questar Gas believes that its gathering costs are
reasonable and that it should not be required to retroactively adjust
such rates.
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)
November 12, 1998 /s/ D. N. Rose
D. N. Rose
President and Chief Executive
Officer
November 12, 1998 /s/ S. E. Parks
S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following schedule contains summarized financial information extracted
from the Questar Gas Company Statements of Income and Balance Sheet for the
period ended September 30, 1998, and is qualified in its entirety by
reference to such unaudited financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 12,753
<ALLOWANCES> 0
<INVENTORY> 24,854
<CURRENT-ASSETS> 66,173
<PP&E> 914,799
<DEPRECIATION> 373,250
<TOTAL-ASSETS> 631,944
<CURRENT-LIABILITIES> 100,685
<BONDS> 225,000
0
0
<COMMON> 22,974
<OTHER-SE> 193,655
<TOTAL-LIABILITY-AND-EQUITY> 631,944
<SALES> 0
<TOTAL-REVENUES> 314,795
<CGS> 0
<TOTAL-COSTS> 255,904
<OTHER-EXPENSES> 30,857
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,458
<INCOME-PRETAX> 16,450
<INCOME-TAX> 5,212
<INCOME-CONTINUING> 11,238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,238
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
