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, 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. 1-935
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 April 30, 1999
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.
<PAGE>
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,
1999 1998 1999 1998
(In Thousands)
<S> <C> <C> <C> <C>
REVENUES $172,302 $191,789 $457,336 $464,699
OPERATING EXPENSES
Natural gas purchases 98,722 118,098 261,628 269,820
Operating and maintenance 24,881 25,277 96,527 99,592
Depreciation 8,666 7,831 34,096 31,058
Other taxes 2,226 2,372 8,039 7,803
TOTAL OPERATING EXPENSES 134,495 153,578 400,290 408,273
OPERATING INCOME 37,807 38,211 57,046 56,426
INTEREST AND OTHER INCOME 505 732 3,339 3,397
DEBT EXPENSE (5,105) (5,126) (19,771) (19,903)
INCOME BEFORE INCOME TAXES 33,207 33,817 40,614 39,920
INCOME TAXES 12,949 13,103 13,662 12,501
NET INCOME $20,258 $20,714 $26,952 $27,419
</TABLE>
See note to financial statements
<PAGE>
QUESTAR GAS COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1998
(In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short-term investments $3,326
Accounts receivable $76,298 $91,842 80,512
Inventories 12,996 7,738 22,296
Purchased-gas adjustments 5,587 2,067
Other current assets 2,231 3,643 2,838
Total current assets 91,525 108,810 111,039
Property, plant and equipment 950,684 887,403 948,280
Less allowances for depreciation 392,018 361,225 382,657
Net property, plant and equipment 558,666 526,178 565,623
Other assets 22,604 19,732 23,853
$672,795 $654,720 $700,515
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $2,557 $1,194
Notes payable to Questar
Corporation 48,800 35,700 $96,700
Accounts payable and accrued
expenses 67,030 75,593 71,288
Purchased-gas adjustments 12,598
Total current liabilities 130,985 112,487 167,988
Long-term debt 225,000 225,000 225,000
Other liabilities 1,603 5,593 330
Deferred income taxes and investment
tax credits 73,525 74,285 80,023
Common shareholder's equity
Common stock 22,974 22,974 22,974
Additional paid-in capital 41,875 41,875 41,875
Retained earnings 176,833 172,506 162,325
Total common shareholder's equity 241,682 237,355 227,174
$672,795 $654,720 $700,515
</TABLE>
See note to financial statements
<PAGE>
QUESTAR GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended
March 31,
1999 1998
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $20,258 $20,714
Depreciation 9,362 8,419
Deferred income taxes and investment
tax credits (6,498) (12,824)
23,122 16,309
Change in operating assets and
liabilities 27,050 52,097
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 50,172 68,406
INVESTING ACTIVITIES
Capital expenditures (5,109) (9,514)
Proceeds from disposition of property,
plant and equipment 2,704 3,092
NET CASH USED IN INVESTING
ACTIVITIES (2,405) (6,422)
FINANCING ACTIVITIES
Checks outstanding in excess of
cash balances 2,557 1,194
Decrease in notes payable
to Questar Corporation (47,900) (64,300)
Payment of dividends (5,750) (5,625)
NET CASH USED IN FINANCING
ACTIVITIES (51,093) (68,731)
DECREASE IN CASH AND
SHORT-TERM INVESTMENTS ($3,326) ($6,747)
</TABLE>
See note to financial statements
<PAGE>
QUESTAR GAS COMPANY
NOTE TO FINANCIAL STATEMENTS
March 31, 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-month period ended
March 31, 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.
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
QUESTAR GAS COMPANY
March 31, 1999
(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,
1999 1998 1999 1998
(Dollars In Thousands)
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
Revenues
From unaffiliated customers $172,093 $191,789 $456,058 $463,251
From affiliates 209 1,278 1,448
Total revenues 172,302 191,789 457,336 464,699
Natural gas purchases 98,722 118,098 261,628 269,820
Revenues less natural gas
purchases $73,580 $73,691 $195,708 $194,879
Operating income $37,807 $38,211 $57,046 $56,426
Net income 20,258 20,714 26,952 27,419
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 32,425 34,314 81,342 83,656
Industrial sales 2,940 2,830 9,791 9,451
Transportation for industrial
customers 13,351 14,832 53,980 53,193
Total deliveries 48,716 51,976 145,113 146,300
Natural gas revenue (per decatherm)
Residential and commercial $4.87 $5.20 $4.98 $4.96
Industrial sales 3.01 3.10 3.02 2.79
Transportation for industrial
customers 0.13 0.11 0.13 0.12
Heating degree days
Actual 2,296 2,392 5,366 5,402
Normal 2,743 2,743 5,801 5,801
Warmer than normal 16% 13% 7% 7%
Number of customers at March 31,
Residential and commercial 666,301 643,891
Industrial 1,329 1,242
Total 667,630 645,133
</TABLE>
Revenues less natural gas purchases, or the margin, was unchanged in
the first quarter of 1999 compared with the first quarter of 1998.
The additional margin resulting from adding customers was offset by
lower usage per customer and the expiration of a surcharge for
extending service into southern Utah in 1988. 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.
The number of customers served by Questar Gas grew by 22,497 or 3.5%
from a year ago to 667,630 at March 31, 1999. Customer additions in
1999 are expected to reach 20,000 or 21,000.
Volumes delivered to industrial customers decreased 8% in the first
quarter 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 and
therefore, the reduced volumes did not have a significant effect on
the margin earned.
Questar Gas' natural gas purchases decreased in the 1999 periods
because of lower gas costs and lower sales volumes. Commodity or gas
costs in Utah rates decreased from $2.27 per Decatherm in the first
quarter of 1998 to $1.72 per Decatherm in the first quarter of 1999.
The reduction reflects lower prices paid to producers. The Company
files for adjustment of purchased-gas costs with the Utah and Wyoming
Public Service Commissions on a semiannual basis.
Operating and maintenance expenses were lower in the 3- and 12-month
periods of 1999 due to labor cost savings from an early retirement
program effective August 1998. Labor cost savings amounted to $1.3
million in the first quarter of 1999. Higher data processing costs
for various projects, such as communications equipment, system
enhancements and Year 2000 testing and the costs of serving more
customers, partially offset the impact of the reduced labor costs.
Depreciation expense was higher in the 1999 periods presented when
compared with the 1998 periods primarily as a result of increased
investment in property, plant and equipment. Lower payroll taxes
resulting from fewer employees caused in a decline in other taxes
in the first quarter of 1999. Interest and other income was lower in
the first quarter of 1999 due to nonrecurring gains from selling
surplus properties in 1998.
The effective income tax rate was 39.0% in the first quarter of 1999
and 38.7% in the first quarter of 1998. The Company realized $502,000
of tight-sands gas-production credits in the 1999 period and $577,000
in the 1998 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of $50,172,000 was
$18,234,000 less than was generated in the first quarter of 1998.
The decrease in cash flow resulted primarily from timing differences
in the collection of purchased gas costs and payment on accounts to
vendors.
Investing Activities
Capital expenditures were $5,109,000 in the first quarter of 1999
compared with $9,514,000 in the first quarter of 1998. Capital
expenditures for calendar year 1999 are estimated at $60 million.
Financing Activities
The Company has a short-term borrowing arrangement with its parent
company, Questar Corporation. As of March 31, Questar Gas had loan
balances payable to Questar of $48.8 million in 1999 and $35.7
million in 1998. Capital expenditures for 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 carbon dioxide from the gas
stream. The contract covers the costs of a new plant being
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. Both agencies have filed a motion for summary
judgement with the PSCU. Hearings on the issues are scheduled for
June 1999. The contracts annual cost of service ranges between $7.5 -
$8.5 million.
Year 2000 Issues
Questar Coporation 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
has identified 59 projects that are in varying stages of remediation
and the scope includes Questar and its affiliated companies. The
projects fit into the general classifications of application
software, infrastructure, noninformation technology equipment and
critical third-party associations. Questar Gas estimates that Y2K
costs will be $2.3 million and expects to be Y2K compliant before the
end of 1999. 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
adversly affect the Company's results of operations, liquidity and
financial condition.
The infrastructure section of the plan addresses hardware and systems
software other than applications software. Currently, there are 19
projects identified: 1 in start-up, 8 in assessment, 6 in
remediation, 0 in testing and 4 completed and deemed to be Y2K ready.
The applications software section addresses either the conversion or
replacement of applications software that is not Y2K compliant.
Currently, there are 39 projects in this section: 10 in start-up, 7
in assesssment, 4 in remediation, 4 in testing and 14 completed and
deemed to be Y2K compliant.
Non-information technology equipment is considered to be one project
and addresses hardware, software and associated embedded computer
chips used in the operation of all facilities operated by the
Company. Because this section has unique charateristics and is large,
the Company has employed the services of a consultant to assist in
the effort. The project is in the assessment phase and is expected
to be completed by year-end 1999.
Inquiries of critical third parties have been taking place with more
contacts scheduled. Contacting parties is scheduled to be completed
by mid-year. Contingency plans for dealing with third-party issues
will be developed by the end of 1999.
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.
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.
Questar Gas Company (Questar Gas or the Company) is involved in
regulatory proceedings to consider its request to recover the costs of
a contract to process gas as "gas costs" eligible for pass-through treatment.
The processing plant, which is owned by an affiliate of the Company,
strips carbon dioxide from natural gas volumes extracted
from coal seams in order to increase the heating content of such gas
and make such gas more efficient and safer to use in appliances that
have been set historically to burn gas at a higher Btu level. The
Division of Public Utilities and the Committee of Consumer Services,
which are parties to the proceedings, have filed a motion for summary
judgment seeking a determination from the Public Service Commission of
Utah (PSCU) that such costs not be considered as eligible for
pass-through treatment. Public hearings, which were originally
scheduled for April of 1999, will be conducted on June 7th on the
motion for summary judgment and on June 22, 1999, on other issues
if the PSCU does not grant the motion for summary judgment.
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, 1999 /s/ D. N. Rose
D. N. Rose
President and Chief Executive
Officer
May 13, 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 financial information extracted from the
Questar Gas Company Income Statements and Balance Sheets for the period
ended March 31, 1999, and is qualified in its entirety by reference to such
unaudited financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 76,298
<ALLOWANCES> 0
<INVENTORY> 12,996
<CURRENT-ASSETS> 91,525
<PP&E> 950,684
<DEPRECIATION> 392,018
<TOTAL-ASSETS> 672,795
<CURRENT-LIABILITIES> 130,985
<BONDS> 225,000
0
0
<COMMON> 22,974
<OTHER-SE> 218,708
<TOTAL-LIABILITY-AND-EQUITY> 762,795
<SALES> 0
<TOTAL-REVENUES> 172,302
<CGS> 0
<TOTAL-COSTS> 123,603
<OTHER-EXPENSES> 10,892
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,105
<INCOME-PRETAX> 33,207
<INCOME-TAX> 12,949
<INCOME-CONTINUING> 20,258
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,258
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
