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, 1999
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. 1-8796
QUESTAR CORPORATION
(Exact name of registrant as specified in its charter)
STATE OF UTAH 87-0407509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 45433, 180 East 100 South, Salt Lake City, Utah 84145-0433
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(801) 324-5000
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, 1999
Common Stock, without par value 82,441,432 shares
<PAGE>
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,
1999 1998 1999 1998 1999 1998
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 54,823 $ 48,619 $ 297,299 $ 314,795 $ 459,327 $476,903
OPERATING EXPENSES
Natural gas purchases 26,839 22,615 162,302 182,678 260,628 283,015
Operating and maintenance 23,679 24,214 73,691 73,226 97,388 98,636
Depreciation 8,909 8,288 26,194 23,816 35,639 32,485
Other taxes 2,107 2,138 6,486 7,041 7,630 7,841
TOTAL OPERATING EXPENSES 61,534 57,255 268,673 286,761 401,285 421,977
OPERATING INCOME (LOSS) (6,711) (8,636) 28,626 28,034 58,042 54,926
INTEREST AND OTHER INCOME 553 846 2,524 2,874 3,216 3,621
DEBT EXPENSE (4,509) (4,762) (14,357) (14,458) (19,691) (19,884)
INCOME (LOSS) BEFORE
INCOME TAXES (10,667) (12,552) 16,793 16,450 41,567 38,663
INCOME TAXES (CREDITS) (4,800) (5,457) 5,238 5,212 13,842 12,343
NET INCOME (LOSS) $ (5,867) $ (7,095) $ 11,555 $ 11,238 $ 27,725 $ 26,320
</TABLE>
See notes to financial statements
<PAGE>
QUESTAR GAS COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 1998
(Unaudited)
(In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short-term investments $ 3,326
Accounts receivable $ 15,669 $ 12,753 80,512
Inventories 23,693 24,854 22,296
Purchased-gas adjustments 11,263 25,257 2,067
Other current assets 2,754 3,309 2,838
Total current assets 53,379 66,173 111,039
Property, plant and equipment 981,176 914,799 948,280
Less allowances for depreciation 410,897 373,250 382,657
Net property, plant and equipment 570,279 541,549 565,623
Other assets 21,600 24,222 23,853
$645,258 $631,944 $ 700,515
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $ 1,716 $ 3,288
Notes payable to Questar
Corporation 25,100 56,600 $ 96,700
Accounts payable and accrued
expenses 43,694 40,797 71,288
Total current liabilities 70,510 100,685 167,988
Long-term debt 225,000 225,000 225,000
Other liabilities 1,529 5,488 330
Deferred income taxes and investment
tax credits 86,740 84,142 80,023
Common shareholder's equity
Common stock 22,974 22,974 22,974
Additional paid-in capital 81,875 41,875 41,875
Retained earnings 156,630 151,780 162,325
Total common shareholder's equity 261,479 216,629 227,174
$645,258 $631,944 $ 700,515
</TABLE>
See notes to financial statements
<PAGE>
QUESTAR GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
9 Months Ended
September 30,
1999 1998
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 11,555 $ 11,238
Depreciation 28,200 25,639
Deferred income taxes and investment
tax credits 6,717 (2,967)
46,472 33,910
Change in operating assets and
liabilities 30,192 55,343
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 76,664 89,253
INVESTING ACTIVITIES
Capital expenditures (35,602) (42,233)
Proceeds from disposition of property,
plant and equipment 2,746 3,220
NET CASH USED IN INVESTING
ACTIVITIES (32,856) (39,013)
FINANCING ACTIVITIES
Checks outstanding in excess of
cash balances 1,716 3,288
Decrease in notes payable
to Questar Corporation (71,600) (43,400)
Capital contribution 40,000
Payment of dividends (17,250) (16,875)
NET CASH USED IN FINANCING
ACTIVITIES (47,134) (56,987)
DECREASE IN CASH AND
SHORT-TERM INVESTMENTS $ (3,326) $ (6,747)
</TABLE>
See notes to financial statements
<PAGE>
QUESTAR GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(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 nine-month
periods ended September 30, 1999, are not necessarily indicative of
the results that may be expected for the year ending December 31,
1999. 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, 1998.
Note 2 - Receipt of Contribution of Capital
On June 30, 1999, Questar Gas received a $40 million contribution of
capital from its parent company that was used to repay short-term
debt owed to Questar Corporation.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
QUESTAR GAS COMPANY
September 30, 1999
(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,
1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 53,957 $ 47,941 $ 296,002 $ 313,998 $ 457,758 $475,801
From affiliates 866 678 1,297 797 1,569 1,102
Total revenues 54,823 48,619 297,299 314,795 459,327 476,903
Natural gas purchases 26,839 22,615 162,302 182,678 260,628 283,015
Revenues less natural gas
purchases (non-gas cost margin) $ 27,984 $ 26,004 $ 134,997 $ 132,117 $ 198,699 $193,888
Operating income (loss) $ (6,711) $ (8,636) $ 28,626 $ 28,034 $ 58,042 $ 54,926
Net income (loss) (5,867) (7,095) 11,555 11,238 27,725 26,320
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 8,252 6,312 54,822 53,804 84,249 84,190
Industrial sales 1,827 1,806 7,049 6,903 9,827 9,677
Transportation for industrial
customers 12,258 13,935 37,409 41,882 50,988 56,228
Total deliveries 22,337 22,053 99,280 102,589 145,064 150,095
Natural gas revenue (per decatherm)
Residential and commercial $ 5.18 $ 5.91 $ 4.73 $ 5.16 $ 4.83 $ 5.06
Industrial sales 2.85 3.05 2.91 3.02 2.97 2.99
Transportation for industrial
customers 0.13 0.11 0.13 0.11 0.14 0.11
Heating degree days
Actual 113 0 3,355 3,291 5,526 5,541
Normal 110 110 3,594 3,594 5,801 5,801
Colder (warmer) than normal 3% (7%) (8%) (5%) (4%)
Number of customers at September 30,
Residential and commercial 670,652 647,078
Industrial 1,361 1,311
Total 672,013 648,389
</TABLE>
The non-gas cost margin increased 8% in the third quarter and 2% in
the first nine months of 1999 compared with the same periods of 1998
resulting primarily from gas volumes delivered to new customers and
adjustments to deliveries for residential and commercial customers
from prior periods. Temperature adjusted usage per customer was
approximately 1.8 decatherms or 2% lower in the first nine months of
1999 compared with 1998. Temperatures were 7% warmer than normal in
1999 and 8% warmer than normal in 1998. However, the effect of
warmer than normal temperatures on earnings has been mitigated by a
weather-normalization adjustment.
The number of customers served by Questar Gas grew by 23,624 or 3.6%
from a year ago to 672,013. The number of customer additions for the
year ending December 31, 1999 is expected to be between 20,000 to
22,000.
Volumes delivered to industrial customers decreased in the 3-and
9-month periods of 1999 when compared with the same period of 1998
because a major steel-producing customer reduced operations. The
margin earned from gas delivered to industrial customers is
substantially lower than from gas delivered to residential and
commercial customers.
Questar Gas' natural gas purchase costs declined 11% in the first
nine months of 1999 when compared with the 1998 period due to lower
commodity costs. Commodity costs dropped from $2.17 per decatherm in
the third quarter of 1998 to $1.88 per decatherm in the third quarter
of 1999 because of amortizing the purchase-gas cost account.
However, natural gas purchase costs rose 19% in the third quarter of
1999 over the third quarter of 1998 due to a 31% increase in gas
volumes delivered to residential and commercial customers. The
Company files for adjustment of purchased-gas costs with the Utah and
Wyoming Public Service Commissions on a semiannual basis. Gas costs
included charges from an affiliated company for removing carbon
dioxide from gas in its southern system.
Operating and maintenance expenses increased $465,000 or 1% in the
first nine months of 1999 compared with 1998 due primarily to higher
information-technology costs. These increases were partially offset
by early retirement labor-cost savings of $3 million in the 1999
period. Information-technology costs have been rising due to various
projects, such as, enhanced communications, improvements in
accounting and customer information systems, testing for Year 2000
issues.
Depreciation expense increased in the 1999 periods presented when
compared with the 1998 periods primarily as a result of continuing
investment in property, plant and equipment, including data
processing systems. Other taxes, which include payroll taxes, were
lower in 1999 as a result of the early retirement program.
The effective income tax rate was 31.2% in 1999 and 31.7% in 1998.
The Company realized $1,381,000 of tight-sands gas-production credits
in the 1999 period and $1,638,000 in the 1998 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities in the first nine months
of 1999 was $12,589,000 less than was generated in the first nine
months of 1998. The decrease in cash flow resulted primarily from
timing differences in the collection of purchased gas costs and
payment on account to vendors.
Investing Activities
Capital expenditures were $35,602,000 in 1999 compared with
$42,233,000 in 1998. Capital expenditures for calendar year 1999 are
estimated at $62.5 million.
Financing Activities
On June 30, 1999, Questar Gas received a $40 million contribution of
capital from its parent company. The proceeds of the capital
contribution plus cash generated from operations allowed the Company
to repay $71.6 million of short-term debt borrowed from Questar
Corporation. Loan balances owed to Questar as of September 30,
amounted to $25.1 million in 1999 and $56.6 million in 1998. Capital
expenditures for the remainder of 1999 are expected to be financed
with net cash flow provided from operating activities and borrowings
from Questar.
Regulatory and Other Matters
Questar Gas filed an application on November 25, 1998 with the Public
Service Commission of Utah (PSCU) to recover the costs associated
with a contract for the removal of a portion of the carbon dioxide
from pipeline gas. The contract covers the costs of a new plant
constructed and operated by an affiliate of Questar Gas. The
Division of Public Utilities and the Committee of Consumer Services
have filed testimony questioning the Company's decision to enter into
the contract and opposing pass-through rate coverage for the costs
under the contract. The Committee objected to any cost recovery in
rates for the plant processing costs. The case has been heard by the
PSCU but no decision has been entered at this time. The contract's
annual cost of service ranges between $7.5 and $8.5 million.
Declining usage of gas per customer and the increasing investment
resulting from significant growth in number of customers will likely
cause Questar Gas to file a general rate case in the last quarter of
1999 or early in 2000. The last general rate case filed by the
Company was in 1995.
Year 2000 Issues
Questar Corporation 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 team
identified 55 projects among Questar and its affiliated companies
that were classified into application software, infrastructure,
non-information technology equipment or critical third-party
associations. As of September 30, 1999 those 55 projects have been
assessed, remediated, tested and determined to be completed. In the
process, Questar employees contacted more than 8,000 vendors and
suppliers to assess their readiness to meet obligations to the
Company. The estimated cost of the Y2K project is $5.1 million.
Questar Gas' portion of Y2K costs is estimated to be $2.3 million.
The Company has no cause to believe that Y2K will disrupt operations,
but has developed contingency plans to ensure service is not
disrupted due to Y2K problems. Operators, engineers,
information-technology, communications and other employees will be
available during the last half of December 1999 and into January
2000, to be prepared to respond to unforeseen contingencies that may
arise. Failure to correct a material Y2K problem could result in an
interruption, 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.
The complete text of Questar Gas' Y2K disclosure can be viewed in
Form 10-K for December 31, 1998, filed with the Securities and
Exchange Commission or on Questar's website at www.questar.com.
Forward-Looking Statements
This 10-Q contains forward-looking statements about future
operations, capital spending, regulatory matters and expectations of
Questar Gas. According to management, 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 discussed in
forward-looking statements include changes in: general economic
conditions, gas prices and availability of gas supplies, competition,
regulatory issues, weather conditions and other factors beyond the
control of the Company. These other factors include the rate of
inflation, the adverse effects of failure to achieve Y2K compliance
and adverse changes in the business or financial condition of the
Company.
These factors are not necessarily all of the important factors that
could cause actual results to differ significantly from those
expressed in any forward-looking statements. Other unknown or
unpredictable factors could also have a significant adverse effect on
future results. The Company does not undertake an obligation to
update forward-looking information contained herein or elsewhere to
reflect actual results, changes in assumptions or changes in other
factors affecting such forward-looking information.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
a. The Public Service Commission of Utah (PSCU) has not yet
issued a decision on the contested application filed by Questar Gas
Company (Questar Gas or the Company) seeking pass-through treatment of
the processing costs incurred to remove carbon dioxide from gas
volumes. See the Company's Report on Form 10-Q for the quarter ended
June 30, 1999, Item 1. Legal Proceedings. The Division of Public
Utilities and the Committee of Consumer Services, which are two state
agencies, are opposing the Company's application. Questar Gas and
both state agencies have filed written briefs on the issues. The
Company estimates that it will pay approximately $7.5-$8.5 million per
year in processing costs and began paying these costs when the
plant opened in June of 1999.
b. The Public Service Commission of Wyoming (PSCW) has set a
calendar to consider contested issues, primarily return on equity, in
the Company's general rate case. Questar Gas will submit testimony
on November 19, 1999, followed by public hearings on November 29 and 30,
1999. The Company is seeking authorization for a general rate decrease
of $315,872.
c. On October 26, 1999, Questar Gas, the Division of Public
Utilities, the municipality of Hilldale, and a group of the Company's
industrial customers reached a settlement of the issues raised by
Hilldale's request that the Company be required to transport gas
volumes that would be resold by it to town residents. See the
Company's Report on Form 10-Q for the quarter ended June 30, Item 1.
Legal Proceedings. The settlement was subsequently approved by the
PSCU on October 27, 1999, through a bench order, but the approval had
not been reduced to writing as of the date of this report. Under the
terms of the settlement, Questar Gas will offer municipal
transportation service to cities or towns where it does not provide
general service or have a franchise and where such service will not
subject it to regulation by the Federal Energy Regulatory Commission
(FERC). The settlement also calls for the Company to cooperate with
Hilldale in seeking a determination from the FERC about jurisdictional
issues associated with Hilldale's desire to extend service to a sister
community across the Arizona border.
d. The Company filed a semi-annual pass-through application
with the PSCW on November 1, 1999, seeking authorization to increase
its rates effective December 1, 1999. Questar Gas's application
reflects an increase in commodity costs and results in an annualized
revenue increase of approximately $850,000. The Company will also
request a December 1 effective date for its pass-through application
that will be filed with the PSCU in mid-November.
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 10, 1999 /s/ D. N. Rose
D. N. Rose
President and Chief Executive
Officer
November 10, 1999 /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 Income Statement and Balance Sheet for the
period ended September 30, 1999, 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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 15,669
<ALLOWANCES> 0
<INVENTORY> 23,693
<CURRENT-ASSETS> 53,379
<PP&E> 981,176
<DEPRECIATION> 410,897
<TOTAL-ASSETS> 645,258
<CURRENT-LIABILITIES> 70,510
<BONDS> 225,000
0
0
<COMMON> 22,974
<OTHER-SE> 238,505
<TOTAL-LIABILITY-AND-EQUITY> 645,258
<SALES> 0
<TOTAL-REVENUES> 297,299
<CGS> 0
<TOTAL-COSTS> 235,993
<OTHER-EXPENSES> 32,680
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,357
<INCOME-PRETAX> 16,793
<INCOME-TAX> 5,238
<INCOME-CONTINUING> 11,555
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,555
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
