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>
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED 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, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 183,070 $ 150,282 $ 638,742 $ 629,522 $ 915,476 $ 917,396
OPERATING EXPENSES
Natural gas and other product
purchases 55,015 41,086 226,050 243,378 347,840 380,674
Operating and maintenance 57,402 50,951 160,884 155,382 217,860 206,764
Depreciation and amortization 34,824 31,863 102,026 90,272 136,911 120,499
Write-down of oil and gas properties 34,000 6,000
Other taxes 8,433 8,209 24,475 30,177 31,090 38,703
TOTAL OPERATING EXPENSES 155,674 132,109 513,435 519,209 767,701 752,640
OPERATING INCOME 27,396 18,173 125,307 110,313 147,775 164,756
INTEREST AND OTHER INCOME 8,565 2,451 37,061 16,228 39,035 21,876
EARNINGS (LOSS) FROM
UNCONSOLIDATED AFFILIATES (1,819) 732 (1,945) 1,372 (400) 1,364
DEBT EXPENSE (13,349) (12,214) (38,748) (34,674) (52,045) (46,278)
INCOME BEFORE INCOME TAXES 20,793 9,142 121,675 93,239 134,365 141,718
INCOME TAXES 5,691 907 40,139 27,926 41,243 41,917
NET INCOME $ 15,102 $ 8,235 $ 81,536 $ 65,313 $ 93,122 $ 99,801
EARNINGS PER COMMON SHARE
Basic $ 0.19 $ 0.10 $ 0.99 $ 0.79 $ 1.13 $ 1.21
Diluted $ 0.18 $ 0.10 $ 0.98 $ 0.79 $ 1.12 $ 1.21
Average common shares outstanding
Basic 82,622 82,417 82,648 82,306 82,655 82,249
Diluted 82,827 82,661 82,820 82,792 82,871 82,763
Dividends per common share $ 0.17 $ 0.165 $ 0.50 $ 0.4875 $ 0.665 $ 0.645
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED 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 $ 965 $ 17,489
Accounts receivable $ 117,671 87,661 177,630
Inventories 36,374 37,277 37,817
Purchased-gas adjustments 13,374 25,257 2,067
Other current assets 11,263 11,277 11,864
Total current assets 178,682 162,437 246,867
Property, plant and equipment 3,227,751 3,006,587 3,104,522
Less allowances for depreciation and
amortization 1,456,652 1,291,179 1,356,881
Net property, plant and equipment 1,771,099 1,715,408 1,747,641
Securities available for sale,
approximates fair value 103,672 43,406 56,910
Investment in unconsolidated
affiliates 68,019 70,367 58,638
Other assets 46,801 50,956 51,225
$2,168,273 $2,042,574 $2,161,281
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $ 5,020
Short-term loans 130,700 $ 229,800 $ 221,100
Accounts payable and accrued expenses 139,711 133,969 209,756
Current portion of long-term debt 6 6,824 6,006
Total current liabilities 275,437 370,593 436,862
Long-term debt, less current portion 692,070 554,402 615,770
Other liabilities 25,667 30,557 27,450
Deferred income taxes and investment
tax credits 231,335 215,336 203,241
Common shareholders' equity
Common stock 302,674 296,548 298,888
Retained earnings 598,001 566,967 564,958
Other comprehensive income 43,089 13,044 18,067
Note receivable from ESOP (4,873) (3,955)
Total common shareholders' equity 943,764 871,686 877,958
$2,168,273 $2,042,574 $2,161,281
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
9 Months Ended
September 30,
1999 1998
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 81,536 $ 65,313
Depreciation and amortization 106,652 91,891
Deferred income taxes and
investment tax credits 12,382 306
(Earnings) losses from unconsolidated
affiliates, net of cash distributions 4,195 (1,147)
Gain from the sales of securities (26,115) (4,747)
Gain from the conversion of ownership interest
in Nextlink affiliate (5,727)
178,650 145,889
Changes in operating assets and liabilities (15,484) 67,186
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 163,166 213,075
INVESTING ACTIVITIES
Capital expenditures
Property, plant and equipment (132,478) (129,414)
E & P acquisition (155,200)
Other investments (29,571) (42,209)
Total capital expenditures (162,049) (326,823)
Proceeds from disposition of property,
plant and equipment 4,860 4,818
Proceeds from the sales of securities 34,666 6,759
NET CASH USED IN INVESTING
ACTIVITIES (122,523) (315,246)
FINANCING ACTIVITIES
Issuance of common stock 6,006 5,849
Common stock repurchased (9,427) (622)
Issuance of long-term debt 210,000 61,800
Repayment of long-term debt (142,000) (45,053)
Decrease in short-term loans (90,400) 98,600
Checks outstanding in excess of
cash balances 5,020
Payment of dividends (41,324) (40,128)
Other 3,993 5,419
NET CASH (USED IN) PROVIDED
FROM FINANCING ACTIVITIES (58,132) 85,865
DECREASE IN CASH AND
SHORT-TERM INVESTMENTS $ (17,489) $ (16,306)
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 consolidated 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 - Comprehensive Income
Comprehensive income is defined as any nonowner change in common equity.
Generally, comprehensive income includes earnings reported on the income
statement plus changes in common equity formerly reported on the balance
sheet only. Questar's other comprehensive income, which are noncash
transactions, includes changes in the market value of the investments in
securities available for sale and foreign currency translation
adjustments.
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1999 1998 1999 1998
(In thousands)
<S> <C> <C> <C> <C>
Comprehensive Income:
Net income $ 15,102 $ 8,235 $ 81,536 $ 65,313
Other comprehensive income
Unrealized gain (loss) on securities
available for sale 11,266 (12,247) 41,052 (16,233)
Foreign currency translation
adjustments (42) 101 (533) 156
Other comprehensive income before
income taxes 11,224 (12,146) 40,519 (16,077)
Income taxes (credits) on other
comprehensive income 4,293 (4,649) 15,497 (6,155)
Other comprehensive income
after income taxes 6,931 (7,497) 25,022 (9,922)
Total comprehensive income $ 22,033 $ 738 $ 106,558 $ 55,391
</TABLE>
Note 3 - Operations by Line of Business
<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 FROM UNAFFILIATED CUSTOMERS
Market Resources $ 111,943 $ 90,681 $ 302,434 $283,021 $402,204 $398,467
Regulated Services
Natural gas distribution 53,957 47,941 296,002 313,998 457,758 475,801
Natural gas transmission 8,863 9,578 27,638 27,731 37,063 36,973
Other 499 622 1,611 1,646 2,320 2,046
Total Regulated Services 63,319 58,141 325,251 343,375 497,141 514,820
Corporate and other operations 7,808 1,460 11,057 3,126 16,131 4,109
$ 183,070 $ 150,282 $ 638,742 $629,522 $915,476 $917,396
REVENUES FROM AFFILIATES
Market Resources $ 17,057 $ 19,601 $ 56,634 $ 56,213 $ 77,744 $ 74,147
Regulated Services
Natural gas distribution 866 678 1,297 797 1,569 1,102
Natural gas transmission 19,481 17,655 54,908 53,350 72,959 71,028
Other 56 30 136 71 164 95
Corporate and other operations 6,643 11,271 29,558 31,537 37,728 42,007
$ 44,103 $ 49,235 $ 142,533 $141,968 $190,164 $188,379
OPERATING INCOME (LOSS)
Market Resources $ 19,214 $ 13,442 $ 50,468 $ 42,383 $ 29,614 $ 57,658
Regulated Services
Natural gas distribution (6,711) (8,636) 28,626 28,034 58,042 54,926
Natural gas transmission 13,428 12,251 40,400 39,103 54,495 51,691
Other (59) (273) (276) (888) (469) (1,496)
Total Regulated Services 6,658 3,342 68,750 66,249 112,068 105,121
Corporate and other operations 1,524 1,389 6,089 1,681 6,093 1,977
OPERATING INCOME $ 27,396 $ 18,173 $ 125,307 $110,313 $147,775 $164,756
NET INCOME (LOSS)
Market Resources $ 11,308 $ 8,178 $ 29,993 $ 27,665 $ 16,065 $ 40,070
Regulated Services
Natural gas distribution (5,867) (7,095) 11,555 11,238 27,725 26,320
Natural gas transmission 4,468 5,971 18,462 19,585 26,768 25,809
Other 48 (114) 38 (417) (17) (702)
Total Regulated Services (1,351) (1,238) 30,055 30,406 54,476 51,427
Corporate and other operations 5,145 1,295 21,488 7,242 22,581 8,304
NET INCOME $ 15,102 $ 8,235 $ 81,536 $ 65,313 $ 93,122 $ 99,801
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
QUESTAR CORPORATION AND SUBSIDIARIES
September 30, 1999
(Unaudited)
Results of Operations
Questar Market Resources
Questar Exploration and Production, Wexpro, Questar Gas Management
and Questar Energy Trading, collectively, (Market Resources) conduct
the Company's exploration and production, gas gathering and
processing, and energy marketing operations. Following is a summary
of Market Resources' financial results and operating information.
<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 $111,943 $ 90,681 $302,434 $283,021 $402,204 $398,467
From affiliated companies 17,057 19,601 56,634 56,213 77,744 74,147
Total revenues $129,000 $110,282 $359,068 $339,234 $479,948 $472,614
Operating income $ 19,214 $ 13,442 $ 50,468 $ 42,383 $ 29,614 $ 57,658
Net income 11,308 8,178 29,993 27,665 16,065 40,070
OPERATING STATISTICS
Production volumes
Natural gas (in million cubic fee 15,557 12,810 45,946 36,899 60,356 49,263
Oil and natural gas liquids
(in thousands of barrels) 727 724 2,189 2,095 2,988 2,769
Production revenue
Natural gas (per thousand
cubic feet) $ 2.03 $ 1.84 $ 1.94 $ 1.92 $ 1.94 $ 1.99
Oil and natural gas liquids
(per barrel) $ 15.90 $ 12.02 $ 13.48 $ 13.08 $ 13.00 $ 14.14
Marketing volumes in energy
equivalent decatherms (in
thousands of decatherms) 27,512 27,083 87,829 82,432 118,910 125,377
Natural gas gathering volumes (in
thousands of decatherms)
For unaffiliated customers 22,359 18,613 64,485 54,917 82,476 70,712
For Questar Gas 5,338 5,704 22,257 21,303 30,847 30,009
For other affiliated customers 4,964 4,387 14,083 13,171 18,632 17,496
Total gathering 32,661 28,704 100,825 89,391 131,955 118,217
Gathering revenue (per decatherm) $ 0.15 $ 0.16 $ 0.15 $ 0.16 $ 0.15 $ 0.17
</TABLE>
Higher prices and increased production of natural gas, oil and
natural gas liquids (NGL) and an increased investment base at Wexpro
were the primary reasons for an improvement in revenues and earnings
from Market Resource operations in the 3-and 9-month periods ended
September 30, 1999 when compared with the same periods of 1998. Gas
prices were up 10% in the third quarter and 1% in the first nine
months of 1999. Gas production grew by 21% in the third quarter and
25% in the first nine months of 1999 due to a large 1998 reserve
acquisition and expanded development drilling activities.
Market Resources has gas forward contracts on an average of 50% of
its gas production at prices ranging between $2.09 and $2.30 per Mcf,
net back to the well, through September 2000. Between 63% and 76% of
oil production, excluding oil produced by Wexpro, is hedged in the
fourth quarter of 1999 at prices ranging from $14.55 to $14.84 per
barrel, net back to the well. This would be equivalent to between
$16 and $16.50 per barrel using the West Texas Intermediate
benchmark. The percentage of hedged oil declines to 20-40% at $16.06
to $16.32 per barrel, net back to the well, from January through
September 2000.
In addition to a major development project near Pinedale, Wyoming
that was discussed in the second quarter 10-Q, Questar Exploration
and Production (E & P) has announced an important new field discovery
well in Galveston Bay, approximately 30 miles south of Houston.
Questar E & P owns a 25% working interest in the well, which is its
first offshore venture. The well produced into a pipeline at the rate
of 12 million cubic feet (MMcf) of gas and 800 barrels of condensate
per day. The calculated open flow potential is 180 MMcf of gas per
day.
The Company also announced the sale of gas and oil properties in the
Permian Basin in southeastern New Mexico and west Texas to an
independent producer. The fourth quarter 1999 transaction includes
170 properties with combined daily production rates of 3 MMcf of gas
and 1,000 barrels of oil. The properties were not strategic to the
Company's ongoing exploration and development programs. The sale
price exceeded book value for the reserves resulting in a one cent
per Mcfe reduction in the full-cost amortization rate. As a result
of the sale of Permian properties, the percentage of volumes hedged
will increase.
Wexpro Co., which manages and develops cost-of-service gas reserves
for Questar Gas, reported an 11% increase in earnings in the first
nine months of 1999 as a result of an increased investment base.
Earnings from gas gathering and processing improved in the third
quarter and nine months of 1999 compared with the same periods of
1998 because of increased gathering volumes, higher NGL prices and
gains from selling assets. Energy trading activities reported losses
in the third quarter and nine months of 1999 due largely to reduced
margins caused by higher firm-transportation costs.
Questar Regulated Services
Questar Gas and Questar Pipeline conduct the Company's regulated
services of natural gas distribution, transmission and storage.
Natural Gas Distribution
Questar Gas conducts the Company's natural gas distribution
operations. Following is a summary of financial results and
operating information.
<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. 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. Gas costs include charges from an affiliated company for
removing carbon dioxide from gas in Questar Gas' southern system.
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 Questar Gas was in 1995.
Natural Gas Transmission
Questar Pipeline conducts the Company's natural gas transmission and storage
operations. Following is a summary of financial results and operating
information.
<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 $ 8,863 $ 9,578 $ 27,638 $ 27,731 $ 37,063 $ 36,973
From affiliates 19,481 17,655 54,908 53,350 72,959 71,028
Total revenues $ 28,344 $ 27,233 $ 82,546 $ 81,081 $110,022 $108,001
Operating income $ 13,428 $ 12,251 $ 40,400 $ 39,103 $ 54,495 $ 51,691
Net income 4,468 5,971 18,462 19,585 26,768 25,809
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 38,314 33,052 99,025 97,119 122,653 121,486
For Questar Gas 14,236 15,001 75,955 80,383 103,073 109,202
For other affiliated customers 1,006 7,227 9,464 19,634 16,708 29,869
Total transportation 53,556 55,280 184,444 197,136 242,434 260,557
Transportation revenue
(per decatherm) $ 0.32 $ 0.32 $ 0.28 $ 0.27 $ 0.29 $ 0.28
</TABLE>
Revenues were 4% higher in the third quarter of 1999 and 2% higher in the first
nine months of 1999 due primarily to the addition of carbon dioxide removal
services. Beginning in the third quarter of 1999 a subsidiary of Questar
Pipeline, Questar Transportation Services, initiated operations to remove
carbon dioxide from pipeline gas owned by Questar Gas. Revenues for gas
storage increased from an expansion of the Clay Basin storage complex beginning
in May of 1998. Lower firm-transportation revenues have partially offset the
increases in storage and carbon dioxide removal services. Average daily demand
in the first nine months of 1999 was lower than in 1998 as a result of the
expiration of several firm-transportation contracts.
Earnings from unconsolidated affiliates includes the Company's share of
operating results reported by TransColorado Gas Transmission Co. and Overthrust
Pipeline Co. Questar Pipeline's share of TransColorado's 1999 pretax operating
loss was $3.2 million. The TransColorado Pipeline has been in service since
March 31, 1999. The quantity of gas flowing through the pipeline has been
below the current capacity of 160 MDth per day and priced at discounted rates
because of poor basin differentials between the Rocky Mountains and the San
Juan basin. The Company has a right to put its 50% ownership of the pipeline to
the other owner over a 12-month period beginning March 31, 2001. Questar
Pipeline has guaranteed $100 million or 50% of a TransColorado Gas Transmission
Co. bank loan used to finance construction of the pipeline.
The Federal Energy Regulatory Commission issued a preliminary determination
approving Questar Southern Trails' proposal to convert a 700-mile pipeline from
liquid transportation to natural gas transportation. However, an issuance of a
certificate is dependent on completion of a favorable environmental review.
Questar Pipeline is actively working to complete the environmental review and
to obtain contracts with shippers to provide the market support for incurring
the conversion costs.
Consolidated Results of Operations
Improved prices and production of natural gas, oil and natural gas liquids were
the primary drivers of higher consolidated revenues in the third quarter and
first nine months of 1999 when compared with the same periods in 1998. In
addition, gas-distribution revenues increased in the third quarter reflecting
slightly higher usage per customer and an adjustment of prior quarters sales
volumes. Revenues from gas distribution were lower in the first nine months of
1999 due to a reduction of the gas-cost component collected in rates and lower
gas volumes delivered.
Natural gas and other product purchases increased 34% in the third quarter
because of increased sales to residential and commercial customers and higher
prices paid for energy-marketing gas and oil traded. In the nine month
comparison, lower sales to gas distribution customers and lower gas costs
allowed in rates caused the natural gas and other product purchases account to
fall. The gas cost included in third quarter distribution rates in Utah
declined from $2.17 per decatherm in 1998 to $1.88 per decatherm in 1999.
Operating and maintenance (O & M) expenses increased 13% in the third quarter
and 4% in the first nine months of 1999 when compared with the same periods in
1998. Increased activities due to adding gas and oil properties, gas
distribution customers and telecommunication operations resulted in higher O &
M expenses. These increases were partially offset by labor-cost savings
associated with an early retirement program for eligible Regulated Services
employees. Labor-cost savings have amounted to about $4.7 million in 1999 as a
result of the early retirement program. Questar InfoComm, which conducts
telecommunications and information-technology services, announced an
early-retirement program that will take effect November 1. Forty-eight of the
51 eligible employees took advantage of the offer.
Depreciation expenses were higher in the 1999 periods when compared to the 1998
periods primarily due to increased investment in property, plant and equipment
and increased gas production. The full-cost amortization rate for combined U.S.
and Canadian operations was $.81 per equivalent Mcf for the first nine months
of 1999 and $.84 in 1998. The decrease in other taxes in the 1999 periods was
the result of lower production and payroll taxes.
Interest and other income was higher in the 1999 periods presented compared
with the prior year periods primarily due to increased selling prices and the
number of shares of Nextel Communications sold. Questar sold 802,469 shares in
the first nine months of 1999 and realized a pretax gain of $25.7 million. The
Company sold 220,000 shares and a pretax gain of $4.7 million a year earlier.
The sales resulted in after-tax gains of $15.6 million or $.19 per share in
1999 and $2.8 million and $.03 per share in 1998. A $5.7 million pretax gain
was recorded in the second quarter of 1998 on an exchange of an interest in a
local affiliate for shares of Nextlink.
The Company's share of operating results from unconsolidated affiliates have
been net losses in the 1999 periods due primarily to TransColorado Pipeline
losses previously discussed. Earnings from gas processing plants and
Overthrust Pipeline have partially offset these losses.
Debt expense was 12% higher in the first nine months of 1999 as a result of
increased borrowings beginning in the second half of 1998 to fund capital
projects.
The effective income tax rate for the first nine months was 33% in 1999 and 30%
in 1998. The Company recognized $5,373,000 of production-related tax credits
in the 1999 period and $5,800,000 in the 1998 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities for the first nine months of 1999
was $49,909,000 less than was generated in the same period of 1998. The
decrease in cash flow resulted primarily from timing differences in the
collection of gas costs by gas-distribution operations and payment on accounts
to vendors.
Investing Activities
A comparison of capital expenditures for the first nine months of 1999 and 1998
plus an estimate for calendar year 1999 is below. The Company expects that
1999 capital spending will be lower than the forecast shown.
Forecast
Actual 12 Months
9 Months Ended Ended
September 30, Dec. 31,
1999 1998 1999
(In Thousands)
Market Resources $90,464 $216,952 $353,600
Regulated Services
Natural gas distribution 35,602 42,233 62,500
Natural gas transmission 27,457 59,812 64,300
Other 912 415 15,600
Total Regulated Services 63,971 102,460 142,400
Corporate and other operations 7,614 7,411 49,500
$162,049 $326,823 $545,500
Financing Activities
The Company used cash flow generated from operations, from the sale of
investments and from a net increase in long-term debt to fund capital
expenditures, reduce short-term borrowings, repurchase shares of its common
stock and pay dividends to holders of common stock. In the third quarter of
1999, the Company repaid the remaining $6 million balance of a loan related to
a leveraged employee stock ownership plan. The Company intends to finance 1999
capital expenditures through net cash provided from operating activities, bank
borrowings and issuing long-term debt.
In April 1999, the Company announced plans to repurchase up to $50 million
worth of its shares over the next two years. It intends to use the proceeds
from the sales of Nextel shares to fund a portion of those repurchases. The
Company repurchased 532,800 shares through the end of October.
Short-term borrowings amounted to $120.7 million of commercial paper and $10
million of bank loans at September 30, 1999. A year earlier the short-term debt
was composed of $168.8 million of commercial paper and $61 million of bank
loans. The Company has bank lines of credit, which serve as backup to
borrowings made under the commercial paper program. In 1999, Market Resources
entered into a senior revolving credit facility with a syndication of banks
which has a $295 million capacity. Market Resources had borrowed $264 million
as of September 30, 1999 under this arrangement. Questar Pipeline borrowed $42
million in October 1999 on its medium term note program. The notes have a ten
year life and a weighted average coupon rate of 7.48%.
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.
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.
Additional information regarding Questar's' Y2K program 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.questarcorp.com.
Forward-Looking Statements
This 10-Q contains forward-looking statements about future operations, capital
spending, regulatory matters and expectations of Questar. 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 and oil prices and
supplies, competition, regulatory issues, weather conditions, availability of
gas and oil properties for sale 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, quoted price of securities
available for sale 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 5. Other Information.
a. On October 28, 1999, the Board of Directors of Questar
Corporation (Questar or the Company) appointed Teresa Beck to serve as
a director for a term that will end in May of 2001. Ms. Beck, age,
45, was President of American Stores Company from March of 1998 to
June of 1999, when it merged with Albertson's. During her 17 years
with American Stores, she served in several accounting and financial
positions prior to being named President.
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 CORPORATION
(Registrant)
November 10, 1999 /s/R. D. Cash
(Date) R. D. Cash
Chairman of the Board, President
and Chief Executive Officer
November 10, 1999 /s/ S. E. Parks
(Date) 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 Corporation Consolidated 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> 117,671
<ALLOWANCES> 0
<INVENTORY> 36,374
<CURRENT-ASSETS> 178,682
<PP&E> 3,227,751
<DEPRECIATION> 1,456,652
<TOTAL-ASSETS> 2,168,273
<CURRENT-LIABILITIES> 275,437
<BONDS> 692,070
0
0
<COMMON> 302,674
<OTHER-SE> 641,090
<TOTAL-LIABILITY-AND-EQUITY> 2,168,273
<SALES> 0
<TOTAL-REVENUES> 638,742
<CGS> 0
<TOTAL-COSTS> 386,934
<OTHER-EXPENSES> 126,501
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<INTEREST-EXPENSE> 38,748
<INCOME-PRETAX> 121,675
<INCOME-TAX> 40,139
<INCOME-CONTINUING> 81,536
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