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, 2000.
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 October 31, 2000
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,
2000 1999 2000 1999 2000 1999
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 59,552 $ 54,823 $328,246 $297,299 $480,884 $459,327
OPERATING EXPENSES
Natural gas purchases 32,619 26,839 190,828 162,302 285,791 260,628
Operating and maintenance 24,170 23,679 73,306 73,691 102,923 97,388
Depreciation 9,182 8,909 27,220 26,194 37,452 35,639
Other taxes 2,464 2,107 8,991 6,486 10,130 7,630
TOTAL OPERATING EXPENSES 68,435 61,534 300,345 268,673 436,296 401,285
OPERATING INCOME (LOSS) (8,883) (6,711) 27,901 28,626 44,588 58,042
INTEREST AND OTHER INCOME 605 553 1,718 2,524 2,174 3,216
DEBT EXPENSE (5,265) (4,509) (15,401) (14,357) (21,106) (19,691)
INCOME (LOSS) BEFORE
INCOME TAXES (13,543) (10,667) 14,218 16,793 25,656 41,567
INCOME TAXES (5,654) (4,800) 4,722 5,238 8,496 13,842
NET INCOME (LOSS) $ (7,889) $ (5,867) $ 9,496 $ 11,555 $ 17,160 $ 27,725
</TABLE>
See note to financial statements
2
<PAGE>
QUESTAR GAS COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999 1999
(Unaudited)
(In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,708
Accounts receivable $ 21,169 $ 15,669 83,098
Inventories, at lower of average
cost or market
Gas stored underground 23,065 19,264 18,497
Materials and supplies 2,327 4,429 3,183
Purchased-gas adjustments 8,880 11,263 432
Prepaid expenses and other 2,927 2,754 3,168
Total current assets 58,368 53,379 110,086
Property, plant and equipment 1,054,589 981,176 1,013,599
Less allowances for depreciation 445,829 410,897 421,111
Net property, plant and
equipment 608,760 570,279 592,488
Other assets 19,189 21,600 20,978
$686,317 $645,258 $723,552
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $ 1,661 $ 1,716
Notes payable to Questar
Corporation 75,200 25,100 $ 79,300
Accounts payable and accrued
expenses 39,718 43,694 69,122
Total current liabilities 116,579 70,510 148,422
Long-term debt 225,000 225,000 225,000
Other liabilities 466 1,529 1,394
Deferred income taxes and investment
tax credits 89,008 86,740 85,343
Common shareholder's equity
Common stock 22,974 22,974 22,974
Additional paid-in capital 81,875 81,875 81,875
Retained earnings 150,415 156,630 158,544
Total common shareholder's
equity 255,264 261,479 263,393
$686,317 $645,258 $723,552
</TABLE>
See note to financial statements
3
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QUESTAR GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
9 Months Ended
September 30,
2000 1999
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,496 $ 11,555
Depreciation 29,817 28,200
Deferred income taxes and investment
tax credits 3,665 6,717
42,978 46,472
Change in operating assets and
liabilities 21,467 30,192
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 64,445 76,664
INVESTING ACTIVITIES
Capital expenditures (46,123) (35,602)
Proceeds from disposition of
property, plant and equipment 34 2,746
NET CASH USED IN INVESTING
ACTIVITIES (46,089) (32,856)
FINANCING ACTIVITIES
Checks outstanding in excess of
cash balances 1,661 1,716
Decrease in notes payable
to Questar Corporation (4,100) (71,600)
Equity investment 40,000
Payment of dividends (17,625) (17,250)
NET CASH USED IN FINANCING
ACTIVITIES (20,064) (47,134)
DECREASE IN CASH AND
CASH EQUIVALENTS $ (1,708) $ (3,326)
</TABLE>
See note to financial statements
4
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QUESTAR GAS COMPANY
NOTE TO FINANCIAL STATEMENTS
September 30, 2000
(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, 2000, are not
necessarily indicative of the results that may be
expected for the year ending December 31, 2000. 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, 1999.
5
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
QUESTAR GAS COMPANY
September 30, 2000
(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,
2000 1999 2000 1999 2000 1999
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 58,287 $ 53,957 $324,771 $296,002 $476,375 $457,758
From affiliates 1,265 866 3,475 1,297 4,509 1,569
Total revenues 59,552 54,823 328,246 297,299 480,884 459,327
Natural gas purchases 32,619 26,839 190,828 162,302 285,791 260,628
Margin $ 26,933 $ 27,984 $137,418 $134,997 $195,093 $198,699
Operating income (loss) $ (8,883) $ (6,711) $ 27,901 $ 28,626 $ 44,588 $ 58,042
Net income (loss) (7,889) (5,867) 9,496 11,555 17,160 27,725
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 7,462 8,252 50,567 54,822 77,946 84,249
Industrial sales 1,993 1,827 7,244 7,049 10,018 9,827
Transportation for industrial
customers 12,899 12,258 40,781 37,409 55,015 50,988
Total deliveries 22,354 22,337 98,592 99,280 142,979 145,064
Natural gas revenue (per decatherm)
Residential and commercial $ 5.79 $ 5.18 $ 5.56 $ 4.73 $ 5.37 $ 4.83
Industrial sales 4.25 2.85 3.46 2.91 3.35 2.97
Transportation for industrial
customers $ 0.12 $ 0.13 $ 0.12 $ 0.13 $ 0.12 $ 0.14
Heating degree days
Colder (warmer) than normal 7% 3% (18%) (7%) (15%) (5%)
Number of customers at September 30,
Residential and commercial 690,205 670,652
Industrial 1,345 1,361
Total 691,550 672,013
</TABLE>
The margin decreased 4% in the third quarter of 2000 when
compared with the prior-year quarter due to changes in
the rate treatment of gathering and processing costs
which reduced the margin in the third quarter of 2000.
The margin increased 2% for the nine-month period of 2000
compared with 1999 primarily from higher residential and
commercial rates and from an increased number of
residential customers.
6
<PAGE>
The Public Service Commission of Utah (PSCU) issued a
final order on August 11, 2000, which granted $6.5
million of additional annualized rate relief over and
above the $7 million interim rate relief granted on
January 1, 2000, that includes the collection of $5
million annually for gas processing costs. The rate
order also allows for an 11% return on equity. The number
of customers served by Questar Gas grew by 19,537 or
2.9% from a year ago to 691,550. The number of customer
additions for the year ending December 31, 2000 is
expected to be between 20,000 to 21,000.
Volumes delivered were unchanged in the third quarter and
were 1% lower for the nine and twelve-month periods of
2000 when compared with the same periods in 1999.
Temperature adjusted usage of gas per customer was 3%
lower in the 2000 quarter compared with the prior year
quarter and unchanged for the nine-month periods
year-to-year. Weather was 7% colder than normal in the
third quarter of 2000 and 3% colder than normal in the
1999 quarter. For the nine-month periods, weather was
18% warmer in 2000 compared with 7% warmer in the
comparable 1999 period. The effects of warmer weather
were mitigated somewhat by a weather normalization
adjustment.
Questar Gas' natural gas purchase costs increased in each
of the 2000 periods presented when compared with the 1999
periods due to higher commodity costs. Commodity rates
for the first half were $2.23 per Dth in 2000 compared to
$1.72 per Dth in 1999. In the third quarter, commodity
rates were $2.23 per Dth in 2000 compared to $1.88 per
Dth in 1999. Natural gas purchases in the third quarter
of 2000 were partially offset by $1.3 million due to a
one-time refund of gas processing costs. The Company
files for adjustment of purchased-gas costs with the Utah
and Wyoming Public Service Commissions on a semiannual
basis. Effective October 1, 2000, the PSCU approved on
an interim basis a $63 million pass-through filing that
increased Utah natural gas rates 12.7%. Also effective
October 1, 2000, the Wyoming Public Service Commission
approved a $2.5 million pass-through filing for Wyoming
natural gas rates.
Operating and maintenance (O & M) expenses increased 2%
in the third quarter of 2000 compared with the prior year
primarily from one-time expense adjustments amounting to
$2,250,000 in the 1999 quarter. O & M expenses decreased
1% for the nine months of 2000 compared with 1999 mainly
from lower information-technology costs which were
partially offset by the higher costs associated with
strong customer growth and increased bad debt expenses.
Depreciation expenses was higher in the 2000 periods
presented compared to the 1999 periods as a result of
increased investment in property, plant and equipment,
particularly technology related which have a shorter
useful life. Other taxes increased in the three- and
nine-months comparisons because of a current year
adjustment of prior year taxes and from higher property
tax rates in 2000.
Interest and other income was 32% lower in the nine-month
period of 2000 compared with the prior year. Gains from
the sale of surplus property were $649,000 less in the
2000 period.
The effective income tax rate for the nine-month period
was 33.2% in 2000 and 31.2% in 1999. The lower effective
income tax rate in 1999 was due to an adjustment of
federal income taxes in the 1999 period. The Company
realized $1,374,000 of tight-sands gas-production credits
in the 2000 period and $1,381,000 in the 1999 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities in the first
nine months of 2000 was $12.2 million less than was
generated in the same period of 1999. The decrease in
cash flows resulted partially from lower net income and
from lower cash flows generated from operating assets and
liabilities. The year-to-year decrease in cash flows
from operating assets and liabilities was primarily due
to higher customer receivables, increased underground gas
storage inventory costs, and higher tax and other
liability payments.
7
<PAGE>
Investing Activities
Capital expenditures were $46.1 million for the nine
months of 2000. Capital expenditures for calendar year
2000 are estimated at $63.3 million.
Financing Activities
Net cash generated from operating activities was used to
fund capital expenditures, repay loans to Questar and pay
dividends. Loan balances owed to Questar as of September
30, amounted to $75.2 million in 2000 and $25.1 million
in 1999. Capital expenditures for the remainder of 2000
are expected to be financed with net cash flow provided
from operating activities and borrowings from Questar.
Early Retirement Offered
On August 28, 2000, Questar's Regulated Services unit
announced an early retirement window program to be
effective October 31, 2000. A total of 281 employees and
14 disability recipients from Questar Gas, Questar
Pipeline and Questar Regulated Services were eligible for
the enhanced benefit. The offer was accepted by 262 of
Regulated Services' employees and all 14 long-term
disability recipients. The window program is projected
to result in pretax labor cost savings for Regulated
Services of over $1 million in 2000 and $6-8 million
yearly.
Regulatory Matters
Effective October 1, 2000, the PSCU approved on an
interim basis a $63 million increase in its Utah natural
gas rates which resulted in a 12.7 percent increase for
the typical residential Utah customer. The increase was
based on recent significant increases in natural gas
prices at the wellhead and was part of Questar Gas'
gas-cost-adjustment or "pass-through" filings. Such
filings enable the company to adjust rates at least twice
each year to reflect changes in gas-supply costs. These
costs are passed on to the customer on a
dollar-for-dollar basis with no markup. The impact of
the gas cost increase on customers was lessened by the
fact that close to 50% of the Company's annual supply
comes from its own wells and is priced to customers at
cost of service prices rather than market prices. Also,
effective October 1, 2000, the Wyoming Public Service
Commission approved a $2.5 million pass-through filing
for Wyoming natural gas rates.
Revenue Recognition Guideline Issued by the Securities
and Exchange Commission (SEC)
In December 1999, the SEC issued Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial
Statements." The SAB raised issues concerning the timing
of recording revenues given that sales transactions may
contain some conditions allowing customers to return
products or receive refunds. The SEC expects companies
that make conditional sales to postpone fully recognizing
revenues until the earnings process is completed. The
Company records revenues when services are provided or
products are delivered. Periodically revenues are
collected subject to refund pending final orders from
regulatory agencies. In those situations, revenues are
reported net of estimated refunds. The pronouncement is
effective for Questar Gas beginning with the fourth
quarter 2000 and is not expected to cause a change in the
method used to record revenues.
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.
8
<PAGE>
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 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.
9
<PAGE>
Part II
Other Information
Item 1. Legal Proceedings.
a. Questar Gas Company ("Questar Gas" or the "Company"), on
August 31, 2000, filed an "out-of-period" pass-on application with
the Public Service Commission of Wyoming (the PSCW"), seeking
approval to reflect higher natural gas prices in its rates. In the
application, as supplemented, the Company requested permission to
reflect annualized gas costs of $13,778,002 in rates for Wyoming
customers effective October 1, 2000. The PSCW authorized the
Company to reflect the requested gas cost increase in rates
effective October 1, 2000.
b. On September 20, 2000, Questar Gas, filed a special
pass-through application with the Public Service Commission of Utah
(the "PSCU"). In its application, Questar Gas requested permission
to reflect annualized gas costs of $354,405,075 in rates for Utah
customers effective October 1, 2000. In this out-of-period
application, the Company noted that purchased gas prices had
increased significantly higher than the estimated prices used in its
mid-year filing and reported that its 191 or gas cost account was
undercollected by approximately $5.9 million as of the end of
August. Questar Gas advised the PSCU that reflecting the increase
in its rates would increase the typical residential customer's
annual bill by approximately 12.7 percent per year.
By an interim order dated October 18, 2000, the PSCU authorized
the Company to reflect the requested increase in rates effective
October 1, 2000.
c. The Committee of Consumer Services ("Committee"), a party
to the Company's general rate case, has appealed the PSCU's order
concerning the treatment of carbon dioxide ("CO2") removal costs.
In its order concerning Questar Gas's general rate case, the PSCU,
adopted the stipulation entered into by the Company and the Division
of Public Utilities that allows Questar Gas to collect $5 million of
annual CO2 removal costs. The Committee opposed this stipulation
during the proceedings and filed a request for rehearing with the
PSCU after the PSCU approved it. When the PSCU took no action on
its request for rehearing, the Committee filed an appeal seeking
judicial review of the decision. The Company has filed a motion to
intervene in the case.
d. The Company filed an appeal with the Supreme Court of Utah
after the PSCU, by order dated December 9, 1999, denied Questar
Gas's request to recover the CO2 removal costs in its semi-annual
pass-through filing. See Questar Gas's Form 8-K Report dated
December 9, 1999 for a description of the PSCU's order denying the
Company's request to recover the costs in its pass-through
application. Oral arguments to consider the Company's appeal will
be heard on December 13, 2000. In its brief, Questar Gas noted that
the CO2 removal costs are "costs" that can be recovered through the
Company's 191 account and the PSCU's action to exclude such costs
should only be done prospectively, not retroactively. Questar Gas
also defended its decision to pay processing plant costs as a
reasonable, prudent, and low-cost means to solve a problem caused by
the combustion settings on appliances used in its service area.
10
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Item 5. Other Information.
Messrs. Gary W. DeBernardi, Lowell F. Gill, and Stephen C.
Yeager retired as officers and employees of the Company effective
October 31, 2000. Mr. DeBernardi, age 57, had served as Vice
President, Technical Services, for Questar Gas and its primary
affiliates, Questar Pipeline Company ("Pipeline") and Questar
Regulated Services Company ("QRS") and had 31 years of service at
retirement. Mr. Gill, age 58, had served as Vice President,
Transportation Operations, for the Company and QRS and as Vice
President and General Manager for Pipeline; he had 38 years of
service. Mr. Yeager, age 53, had served as Vice President,
Business, Development, for all three entities and had over 24 years
of service.
The retirements of these officers, coupled with the retirements
of other employees, led to a reorganization of responsibilities and
the appointment of two new officers. Ms. Susan Glasmann, age 53,
was named to serve as Vice President, Operations, for the Company,
Pipeline, and QRS effective November 1. She had been serving as the
Company's Vice President and General Manager since August 1, 1998.
Mr. Alan K. Allred, age 50, was named to serve as Vice
President, Business Development, for Questar Gas and its affiliates
in the Regulated Services group. Mr. Allred has more than 22 years
of experience with the Company and its affiliates and had been
serving as Manager, Regulatory Affairs. In his new position, Mr.
Allred has responsibility for regulatory affairs, gas supply
management, capacity marketing, gas control, parnterships,
acquisitions and new ventures.
Mr. Shahab Saeed, age 41, was named to serve as Vice President,
Support Services, for Questar Gas and its affiliates in the
Regulated Services group. He has more than 19 years of service and
had been serving as Manager, Administrative Services. Mr. Saeed, in
his new position, has responsibility for engineering, human
resources, information services, system integrity, safety and
environmental activities, research and development, materials and
equipment, and facilities.
Messrs. R. D. Cash, D. N. Rose and S. E. Parks will continue to
serve in their executive officer positions as Chairman of the Board,
President and Chief Executive Officer and Vice President, Treasurer,
and Chief Financial Officer, respectively.
Item 6. Exhibits and Reports on Form 8-K
a. The following exhibit has been filed as part of this report.
Exhibit No. Exhibit
10.1.* Joint Annual Management Incentive Plan adopted
by Questar Gas Company, Questar Pipeline
Company, and Questar Regulated Services Company
as amended and restated effective October 26, 2000.
10.2.* Questar Gas Company Deferred Compensation Plan
for Directors as amended and restated effective
October 26, 2000.
11
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10.3.* Questar Corporation Long-term Stock Incentive
Plan as amended and restated effective October
26, 2000. (Exhibit No. 10.3. to Questar
Corporation's Form 10-Q Report for Quarter Ended
September 30, 2000.)
*Exhibit so marked is a management contract or compensation
plan or arrangement.
(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)
November 13, 2000 /s/ D. N. Rose
D. N. Rose
President and Chief
Executive Officer
November 13, 2000 /s/ S. E. Parks
S. E. Parks
Vice President, Treasurer,
and Chief Financial Officer
12
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EXHIBIT INDEX
Exhibit
Number Exhibit
10.1.* Joint Annual Management Incentive Plan adopted by
Questar Gas Company, Questar Pipeline Company, and
Questar Regulated Services Company as amended and
restated effective October 26, 2000.
10.2.* Questar Gas Company Deferred Compensation Plan for
Directors as amended and restated effective October
26, 2000.
10.3.* Questar Corporation Long-term Stock Incentive Plan
as amended and restated effective October 26, 2000.
(Exhibit No. 10.3. to Questar Corporation's Form
10-Q Report for Quarter Ended September 30, 2000.)
*Exhibit so marked is a management contract or compensation plan
or arrangement.
