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
JUNE 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. 1-8796
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 July 31, 2000
Common Stock, without par value 80,113,584 shares
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2000 1999 2000 1999 2000 1999
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 232,542 $ 177,858 $ 569,244 $ 455,672 $1,037,791 $ 882,688
OPERATING EXPENSES
Natural gas and other product purchases 74,999 55,030 219,501 171,035 390,595 333,911
Cost of goods sold 6,434 1,035 11,299 1,781 19,943 4,029
Operating and maintenance 58,549 50,042 115,585 101,701 235,163 207,380
Depreciation and amortization 35,960 33,570 71,842 67,202 142,384 133,950
Write-down of oil and gas properties 34,000
Other taxes 11,551 7,632 23,828 16,042 40,510 30,866
TOTAL OPERATING EXPENSES 187,493 147,309 442,055 357,761 828,595 744,136
OPERATING INCOME 45,049 30,549 127,189 97,911 209,196 138,552
INTEREST AND OTHER INCOME 10,831 16,428 23,043 28,496 69,247 32,921
OPERATIONS OF UNCONSOLIDATED
AFFILIATES
Income (loss) 482 (1,586) 1,701 (126) (2,529) 2,151
Write-down of investment in partnership (49,700)
482 (1,586) 1,701 (126) (52,229) 2,151
DEBT EXPENSE (16,282) (12,428) (31,842) (25,399) (60,387) (50,910)
INCOME BEFORE INCOME TAXES 40,080 32,963 120,091 100,882 165,827 122,714
INCOME TAXES 13,875 9,893 43,656 34,448 56,996 36,459
NET INCOME $ 26,205 $ 23,070 $ 76,435 $ 66,434 $ 108,831 $ 86,255
EARNINGS PER COMMON SHARE
Basic and diluted $ 0.33 $ 0.28 $ 0.95 $ 0.80 $ 1.35 $ 1.04
Average common shares outstanding
Basic 80,078 82,678 80,414 82,660 80,971 82,665
Diluted 80,352 82,870 80,551 82,814 81,091 82,890
Dividends per common share $ 0.17 $ 0.165 $ 0.34 $ 0.33 $ 0.68 $ 0.66
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 1999
(Unaudited)
(In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short-term investments $ 19,559 $ 8,291
Accounts receivable 172,198 $ 109,479 181,274
Inventories 26,616 23,262 37,614
Purchased-gas adjustments 432
Other current assets 10,515 8,962 11,249
Total current assets 228,888 141,703 238,860
Property, plant and equipment 3,413,170 3,178,668 3,258,773
Less allowances for depreciation and
amortization 1,542,561 1,424,361 1,471,859
Net property, plant and equipment 1,870,609 1,754,307 1,786,914
Securities available for sale 89,470 80,032 94,945
Investment in unconsolidated affiliat 33,601 70,877 25,269
Other assets 74,218 50,158 92,009
$2,296,786 $2,097,077 $2,237,997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Checks outstanding in excess
of cash balances $ 1,629
Short-term loans $ 146,309 112,100 $ 144,115
Accounts payable and accrued expense 158,879 139,711 179,673
Purchased-gas adjustments 3,301 1,453
Current portion of long-term debt 7 6,006 7
Total current liabilities 308,496 260,899 323,795
Long-term debt, less current portion 764,704 656,189 735,043
Other liabilities 43,504 27,275 36,554
Deferred income taxes and investment
tax credits 224,846 216,069 216,760
Common shareholders' equity
Common stock 257,361 300,283 278,437
Retained earnings 657,585 604,159 608,498
Other comprehensive income 40,290 36,158 38,910
Note receivable from ESOP (3,955)
Total common shareholders' equity 955,236 936,645 925,845
$2,296,786 $2,097,077 $2,237,997
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
6 Months Ended
June 30,
2000 1999
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 76,435 $ 66,434
Depreciation and amortization 74,622 70,525
Deferred income taxes and
investment tax credits 1,573 1,426
(Income) loss from unconsolidated affiliates,
net of cash distributions (1,537) 1,337
Gain from sales of securities (16,609) (19,780)
134,484 119,942
Changes in operating assets and liabilities (3,557) 21,281
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 130,927 141,223
INVESTING ACTIVITIES
Capital expenditures
Property, plant and equipment (155,263) (79,884)
Other investments (7,324) (16,332)
Total capital expenditures (162,587) (96,216)
Proceeds from the disposition of
property, plant and equipment 1,764 4,900
Proceeds from the sales of securities 24,931 27,466
NET CASH USED IN INVESTING
ACTIVITIES (135,892) (63,850)
FINANCING ACTIVITIES
Issuance of common stock 2,141 3,629
Common stock repurchased (23,217) (2,235)
Issuance of long-term debt 37,476 174,327
Repayment of long-term debt (6,342) (136,002)
Change in short-term loans 1,751 (109,000)
Cash released from escrow account 32,414
Checks outstanding in excess of cash balances 1,629
Payment of dividends (27,348) (27,271)
Other 38
NET CASH USED IN FINANCING
ACTIVITIES 16,875 (94,885)
Foreign currency translation
adjustment (642) 23
INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS $ 11,268 $ (17,489)
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 six-month periods ended June 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 consolidated financial statements and
footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1999.
Note 2 - Purchase of Companies
On January 26, 2000, a subsidiary of Questar Market Resources
(QMR or the Company) acquired 100% of the outstanding shares
of Canor Energy Ltd from NI Canada ULC, a subsidiary of
Northwest Natural Gas Co for cash of $US 61 million plus the
assumption of $5.4 million of short-term debt. The
transaction was accounted for as a purchase. Canor owns
and/or operates more than 800 wells located in Alberta,
British Columbia and Saskatchewan provinces of Canada. Canor's
proven gas and oil reserves are estimated at 61.1 billion
cubic feet equivalent.
On June 1, 2000, Questar MetroNet, a subsidiary of Questar
InfoComm, purchased 100% of the outstanding shares of Consonus
of Portland, in exchange for shares of Questar MetroNet, cash
and an assumption of debt. On the same day, Consonus was
merged with Questar MetroNet and the Consonus name was
retained. Consonus is a provider of e-business consulting,
application development and managed hosting services. The
transaction was accounted for as a purchase.
Note 3 - 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 6 Months Ended
June 30, June 30,
2000 1999 2000 1999
(In thousands)
<S> <C> <C> <C> <C>
Comprehensive Income:
Net income $ 26,205 $ 23,070 $ 76,435 $ 66,434
Other comprehensive income (loss)
Unrealized gain (loss) on securities
available for sale (15,586) 8,150 2,576 29,786
Foreign currency translation adjustment (1,040) (272) (1,560) (491)
Other comprehensive income (loss) before
income taxes (16,626) 7,878 1,016 29,295
Income taxes on other comprehensive
income (loss) (6,485) 3,014 (364) 11,204
Net other comprehensive income (loss) (10,141) 4,864 1,380 18,091
Total comprehensive income $ 16,064 $ 27,934 $ 77,815 $ 84,525
</TABLE>
Note 4 - Operations by Line of Business
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2000 1999 2000 1999 2000 1999
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
REVENUES FROM UNAFFILIATED CUSTOMERS
Questar Market Resources $144,089 $95,848 $263,560 $190,491 $491,672 $380,942
Questar Regulated Services
Natural gas distribution 66,957 69,952 266,484 242,045 472,045 451,742
Natural gas transmission 10,305 9,754 19,901 18,775 38,048 37,778
Other 1,324 563 1,949 1,112 3,097 2,443
Total Regulated Services 78,586 80,269 288,334 261,932 513,190 491,963
Corporate and other operations 9,867 1,741 17,350 3,249 32,929 9,783
$232,542 $177,858 $569,244 $455,672 $1,037,791 $882,688
REVENUES FROM AFFILIATES
Questar Market Resources $ 21,112 $ 18,374 $ 43,402 $ 39,577 $ 83,533 $ 80,288
Questar Regulated Services
Natural gas distribution 1,217 222 2,210 431 4,110 1,381
Natural gas transmission 19,102 17,282 39,364 35,427 79,175 71,133
Other 68 52 136 80 252 138
Corporate and other operations 7,743 10,480 17,047 22,915 32,983 42,356
$ 49,242 $ 46,410 $ 102,159 $ 98,430 $ 200,053 $195,296
OPERATING INCOME (LOSS)
Questar Market Resources $ 30,455 $ 16,911 $ 56,130 $ 31,254 $ 101,654 $ 23,842
Questar Regulated Services
Natural gas distribution (1,965) (2,470) 36,784 35,337 46,760 56,117
Natural gas transmission 14,684 13,908 29,719 26,972 57,142 53,318
Other 130 (149) 84 (217) 245 (683)
Total Regulated Services 12,849 11,289 66,587 62,092 104,147 108,752
Corporate and other operations 1,745 2,349 4,472 4,565 3,395 5,958
OPERATING INCOME $ 45,049 $ 30,549 $ 127,189 $ 97,911 $ 209,196 $138,552
NET INCOME (LOSS)
Questar Market Resources $ 17,182 $ 10,432 $ 32,231 $ 18,685 $ 59,412 $ 12,935
Questar Regulated Services
Natural gas distribution (3,330) (2,836) 17,385 17,422 19,182 26,497
Natural gas transmission 7,076 7,032 14,200 13,994 (8,185) 28,271
Other 173 (10) 232 (10) 493 (179)
Total Regulated Services 3,919 4,186 31,817 31,406 11,490 54,589
Corporate and other operations 5,104 8,452 12,387 16,343 37,929 18,731
NET INCOME $ 26,205 $ 23,070 $ 76,435 $ 66,434 $ 108,831 $ 86,255
</TABLE>
Note 5 - Debt Offering
On April 12, 2000, Questar Market Resources filed a
registration statement with the Securities and Exchange
Commission for a public debt offering. Following
effectiveness of such registration statement, Questar Market
Resources intends to issue $150 million of notes and use the
proceeds to repay a portion of the outstanding debt of Questar
Market Resources.
Note 6 - Reclassifications
Certain reclassifications were made to the 1999 financial
statements to conform with the 2000 presentation.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
QUESTAR CORPORATION AND SUBSIDIARIES
June 30, 2000
(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 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2000 1999 2000 1999 2000 1999
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $144,089 $ 95,848 $263,560 $190,491 $491,672 $380,942
From affiliates 21,112 18,374 43,402 39,577 83,533 80,288
Total revenues $165,201 $114,222 $306,962 $230,068 $575,205 $461,230
Operating income $ 30,455 $ 16,911 $ 56,130 $ 31,254 $101,654 $ 27,942
Net income 17,182 10,432 32,231 18,685 59,412 12,935
OPERATING STATISTICS
Production volumes
Natural gas (in million cubic
feet) 17,674 15,341 34,624 30,389 66,947 57,609
Oil and natural gas liquids
(in thousands of barrels)
Questar Exploration & Production 563 588 1,117 1,194 2,234 2,415
Wexpro 140 127 268 268 555 570
Total oil and NGL production 703 715 1,385 1,462 2,789 2,985
Production revenue
Natural gas (per thousand
cubic feet) $ 2.48 $ 1.93 $ 2.33 $ 1.90 $ 2.21 $ 1.89
Oil and natural gas liquids
(per barrel) $ 20.98 $ 13.99 $ 21.62 $ 12.28 $ 19.18 $ 12.05
Marketing volumes in energy
equivalent decatherms (in
thousands of decatherms) 25,180 26,158 52,205 60,317 104,870 118,474
Natural gas gathering volumes (in
thousands of decatherms)
For unaffiliated customers 23,261 21,835 45,039 42,126 87,874 78,731
For Questar Gas 9,235 8,682 19,088 16,919 34,219 31,213
For other affiliated customers 6,514 4,560 11,678 9,119 22,218 18,055
Total gathering 39,010 35,077 75,805 68,164 144,311 127,999
Gathering revenue (per decatherm) $ 0.13 $ 0.15 $ 0.14 $ 0.15 $ 0.14 $ 0.15
</TABLE>
Revenues reported for the 2000 periods presented were
substantially higher than the revenues for the comparable
1999 periods as a result of higher prices for gas and oil
and increased gas production. The average natural gas
price per thousand cubic feet (Mcf) rose 28% in the second
quarter and 23% in the first half of 2000 when compared
with the same periods of 1999. The increase in gas prices
reflected a strong demand caused largely by the use of
natural gas in the generation of electricity. Oil and
natural gas liquids (NGL) prices increased 45% in the
second quarter and 71% per barrel in the first half of
2000 (excluding Wexpro oil production). Oil and NGL prices
have increased steadily over the past year as
production generally declined and demand rose.
Of the current 6 Bcf per month gas production,
approximately 42% is covered by hedge contracts at an
average price of $2.20 per Mcf, net back to the wellhead.
About one-third of the contracts are collars and the
remainder are fixed price contracts. The floor price of
collar arrangements is used in calculating the average
hedged price. Approximately 76% of oil, excluding Wexpro
production, is hedged at an average price of $17.14 per
barrel, net back to the wellhead through the end of 2001.
The second quarter of 2000 includes record production
levels with an average monthly production of 7 billion
cubic feet equivalent, excluding Wexpro. Production
benefited from a successful development drilling program
and the first quarter acquisition of Canadian producing
properties. Canadian gas production grew 165% to 1.9
billion cubic feet (Bcf). U.S. gas production was 8%
above year-ago levels at 15.8 Bcf as increased drilling
activity offset a property sale in the fourth quarter of
1999. However, the increased drilling did not fully
replace the oil and NGL production as a result of
selling nonstrategic properties in the fourth-quarter of
1999.
Wexpro's net income increased $1.9 million to $11.7
million in the first half of 2000. Wexpro expanded its
investment in development-drilling projects in response to
higher regional demand. Wexpro develops gas reserves on
behalf of affiliated company, Questar Gas, which is a
rate-regulated distributor of natural gas. At year-end
1999, Wexpro earned an average 18.9% after-tax return on
investment in those properties. In addition, increased oil
and NGL prices resulted in higher earnings for Wexpro and
an increase in shared oil profits for Questar Gas.
Gas-management and energy-trading operations reported $2.5
million in combined earnings for the first half of 2000
versus $1.5 million a year ago. Volumes of gas gathered
increased 11% in the first half of 2000 reflecting more
production in the areas served. Higher prices benefited
the operations of liquids-extraction plants that
experienced improved results for the second quarter and
first half of 2000. The plants extract and sell liquids
from the natural gas stream. Increased commodity prices
caused revenues from energy-marketing activities to be
higher in the 2000 periods but were offset by the low
value of transportation contracts and settlement of gas
imbalances.
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 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2000 1999 2000 1999 2000 1999
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 66,957 $ 69,952 $266,484 $242,045 $472,045 $451,742
From affiliates 1,217 222 2,210 431 4,110 1,381
Total revenues 68,174 70,174 268,694 242,476 476,155 453,123
Natural gas purchases 35,779 36,741 158,209 135,463 280,011 256,404
Margin $ 32,395 $ 33,433 $110,485 $107,013 $196,144 $196,719
Operating income (loss) $ (1,965) $ (2,470) $ 36,784 $ 35,337 $ 46,760 $ 56,117
Net income (loss) (3,330) (2,836) 17,385 17,422 19,182 26,497
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 33,908 32,425 83,684 81,342 83,684 81,342
Industrial sales 3,204 2,940 10,087 9,791 10,087 9,791
Transportation for industrial
customers 14,017 13,351 52,309 53,980 52,309 53,980
Total deliveries 51,129 48,716 146,080 145,113 146,080 145,113
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 9,197 14,145 43,105 46,570 78,736 82,309
Industrial sales 2,047 2,282 5,251 5,222 9,852 9,806
Transportation for industrial
customers 13,865 11,800 27,882 25,151 54,374 52,665
Total deliveries 25,109 28,227 76,238 76,943 142,962 144,780
Natural gas revenue (per decatherm)
Residential and commercial $ 5.93 $ 4.15 $ 5.52 $ 4.65 $ 5.31 $ 4.88
Industrial sales 2.99 2.83 3.16 2.93 3.07 3.01
Transportation for industrial
customers $ 0.11 $ 0.13 $ 0.12 $ 0.13 $ 0.12 $ 0.13
Heating degree days
Actual 492 946 2,845 3,242 4,920 5,413
Normal 741 741 3,484 3,484 5,801 5,801
Colder (Warmer) than normal (34%) 28% (18%) (7%) (15%) (7%)
Number of customers at June 30,
Residential and commercial 686,827 665,221
Industrial 1,352 1,356
Total 688,179 666,577
</TABLE>
Questar Gas experienced a seasonal loss of $3.3 million in
the 2000 period. In the comparable year-earlier quarter,
the utility recorded a $2.8 million loss. The Company
continued to see the impact of costs associated with
strong customer growth and lower usage per customer.
Questar Gas addressed these issues in a general rate case
order received August 11, 2000 and discussed below.
Questar Gas' margin decreased 3% in the second quarter of
2000 when compared with the second quarter of 1999. The
lower margin was due primarily to a timing difference
caused by a change in procedure for recording gathering
costs. Gathering costs are recognized on a straight-line
basis where before the costs were seasonal. The
regulatory procedure did not increase gathering costs from
year to year. The margin was slightly higher in the first
half of 2000 compared with 1999. The higher margin was
the result of interim rate relief which more than offset
higher costs including costs of carbon dioxide removal.
The PSCU granted Questar Gas' request for $7.1 million of
interim rate relief, subject to refund, effective January
1, 2000. On August 11, 2000, the PSCU issued a final
order which granted $13.5 million in general rate relief
and authorized a return on equity of 11 percent. The $13.5
million increase includes the $7.1 million of interim rate
relief and allows the collection of $5 million annually
for carbon dioxide processing costs. The Company will be
allowed to collect the full amount of the increase in its
rates immediately upon the filing of tariff provisions.
The number of customers served by Questar Gas grew by
21,602 or 3.2% from a year ago to 688,179. 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 11% lower in the second quarter and
1% lower for the first half of 2000 when compared with the
same periods in 1999. The decrease was due to warmer
weather in 2000 when compared with 1999. Temperatures were
warmer than normal for all periods presented in 2000. The
effects of warmer weather were mitigated by the weather
normalization adjustment.
Questar Gas' natural gas purchase costs increased in the
six-and twelve-month periods of 2000 when compared with
the 1999 periods due to higher commodity costs. Commodity
rates for the first half were $2.23 per Dth in 2000 and
$1.72 per Dth in 1999. Gas purchases were lower in the
second quarter because of lower gas sales volumes. The
Company files for adjustment of purchased-gas costs with
the Utah and Wyoming Public Service Commissions on a
semiannual basis.
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 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2000 1999 2000 1999 2000 1999
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 10,305 $ 9,754 $ 19,901 $ 18,775 $ 38,048 $ 37,778
From affiliates 19,102 17,282 39,364 35,427 79,175 71,133
Total revenues $ 29,407 $ 27,036 $ 59,265 $ 54,202 $117,223 $108,911
Operating income $ 14,684 $ 13,908 $ 29,719 $ 26,972 $ 57,142 $ 53,318
Net income (loss) 7,076 7,032 14,200 13,994 (8,185) 28,271
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 35,803 34,765 64,898 60,711 140,073 117,391
For Questar Gas
24,046 26,084 60,361 61,719 104,141 103,838
For other affiliated customers 1,676 5,078 3,001 8,458 6,696 22,929
Total transportation 61,525 65,927 128,260 130,888 250,910 244,158
Transportation revenue (per
decatherm) $ 0.29 $ 0.26 $ 0.28 $ 0.27 $ 0.29 $ 0.29
</TABLE>
Revenues were higher in the 2000 periods compared with the
1999 periods due to gas-processing operations added
mid-year 1999 and increased transportation demand.
Gas-processing revenues amounted to $1.7 million in the
second quarter and $3.5 million in the first half of 2000.
The gas-processing operations remove carbon dioxide from
certain gas supplies to make them suitable for Questar
Gas' system. Transportation revenues increased 2% in the
second quarter and 3% in the first half of 2000 compared
to the same periods of 1999 as a result of the addition of
several short-term firm-transportation contracts. Storage
revenues were 3% lower in the second quarter and 1% lower
in the first half of 2000.
Earnings from unconsolidated affiliates in the second
quarter and first half of 1999 included operating losses
from the TransColorado Pipeline that were not repeated in
the same periods of 2000. In the fourth quarter of 1999,
the Company wrote down its subsidiary's investment in the
TransColorado Pipeline.
On June 15, 2000, a lawsuit was filed against Questar
Pipeline Company and several of its affiliates by the
partner in the TransColorado Pipeline. The Company filed
a counterclaim July 27, 2000.
Consolidated Results of Operations
Much improved prices for natural gas, oil and natural gas
liquids (NGL) and an increase in natural gas production
were the primary reasons of higher consolidated revenues
in the 3-, 6- and 12-month periods of 2000 when compared
with the same periods in 1999. In addition, higher
natural gas prices translated into an increase in
gas-distribution revenues in the 2000 periods presented,
since the cost of natural gas is recovered from customers.
Natural gas and other product purchases increased in the
2000 periods presented because of higher prices paid for
natural gas, reflected in distribution operations and
energy-trading activities.
Cost of goods sold primarily includes the costs of
computer equipment and services for resale by Consonus.
The gross margin associated amounted to $4.2 million in
the first half of 2000 compared with $1 million in the
first half of 1999. Consonus is a new operation that
began in the last half of 1999. The activities include
providing secure data processing centers, and configuring
and selling hardware and software for networking.
Operating and maintenance (O & M) expenses were higher in
the 2000 periods presented when compared with the same
periods in 1999 primarily due to adding gas and oil
properties, including a purchase of a Canadian gas and oil
company, and an increasing number of gas-distribution
customers. The higher cost of serving distribution
customers is a continuing concern that Questar Gas is
attempting to resolve in a general rate case. Also,
higher gas prices have increased the cost of replacing gas
in extraction plant operations.
The full-cost amortization rate for U.S. operations
dropped $.03 to $.79 per thousand cubic feet equivalent of
production (Mcfe) compared with the second quarter of
1999. The U.S. rate is expected to be about $.77 in the
third quarter of 2000. The declining U.S. rate has driven
the combined U.S. and Canadian full-cost amortization rate
to $.80 per energy-equivalent Mcf (Mcfe) for the first
half of 2000 compared with $.82 for the comparable 1999
period. The lower rate was due to successfully adding
reserves through drilling and purchases, while selling
nonstrategic properties at favorable prices. Depreciation
and amortization expenses were higher in the 2000 periods
presented when compared with the 1999 periods. Increased
production volumes from full-cost properties more than
offset the lower amortization rates. Increased investment
in other properties also resulted in higher depreciation
expense in the 2000 periods.
Higher commodity prices and increased production volumes
resulted in an increase in production-related taxes
reported in other taxes on the income statement. Debt
expense was higher in the 2000 periods presented because
of increased borrowings and higher short-term interest
rates.
Pretax gains from selling securities available for sale
were lower in the first half of 2000 when compared with
the first half of 1999. The Company sold 510,000 shares
of Nextel in the 2000 period compared with 1.4 million in
the 1999 period. Sales of securities resulted in after
tax gains of $10.2 million in the first half of 2000 and
$11.8 million in 1999.
Earnings from unconsolidated affiliates in the second
quarter and first half of 1999 included operating losses
from the TransColorado Pipeline that were not repeated in
the same periods of 2000. In the fourth quarter of 1999,
the Company wrote down its subsidiary's investment in the
TransColorado Pipeline.
The effective income tax rate for the first half was
36.4% in 2000 and 34.1% in 1999. The effective income tax
rate increased largely because of a reduction in
production-related tax credits and a higher portion of
earnings coming from Canada, where income tax rates are
higher. The Company recognized $3,175,000 of
production-related tax credits in the 2000 period and
$3,547,000 in the 1999 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities for the first
half of 2000 was 7% lower than the amount generated in the
same period of 1999. The 2000 period includes
approximately $36.4 million of interest-bearing hedge
account deposits related with energy-trading activities
with no comparable amounts in the prior year period.
Investing Activities
A comparison of capital expenditures for the first half of
2000 and 1999 plus an estimate for calendar year 2000 is
presented below. The Company acquired a Canadian
company, Canor Energy LTD, in 2000 for a cash payment of
$US 61 million and assumed $5.4 million of debt.
<TABLE>
<CAPTION>
Forecast
Actual 12 Months
6 Months Ended Ended
June 30, Dec. 31,
2000 1999 2000
(In Thousands)
<S> <C> <C> <C>
Questar Market Resources $101,455 $ 53,791 $175,700
Questar Regulated Services
Natural gas distribution 28,580 19,960 63,300
Natural gas transmission 25,234 16,661 57,900
Other 88 655 5,500
Total Questar Regulated
Services 53,902 37,276 126,700
Corporate and other operations 7,230 5,149 34,300
$162,587 $ 96,216 $336,700
</TABLE>
Financing Activities
The Company used cash flow generated from operations, from
the sale of investments, from a net increase in long-term
debt and cash released from an escrow account to fund
capital expenditures, reduce short-term borrowings,
repurchase shares of its common stock and pay dividends to
holders of common stock. The Company intends to finance
2000 capital expenditures through net cash provided from
operating activities, bank borrowings and issuing
long-term debt.
The Company announced that it had reached its goal of
repurchasing up to $50 million worth of its shares and
would seek to purchase another $25 million worth over the
next 12 months. In the first half of 2000, Questar
repurchased approximately 1.5 million of its shares for
$23 million. Since its inception in April of 1999, the
Company has repurchased 3.1 million shares of its common
stock for $51.2 million. The Company has used proceeds
from the sales of Nextel shares to fund a portion of these
repurchases.
Short-term borrowings amounted to $146.3 million,
principally commercial paper, at June 30, 2000 compared
with $112.1 million of commercial paper a year earlier.
The Company has bank lines of credit, which serve as
backup to borrowings made under the commercial paper
program. Market Resources filed a registration statement
with the Securities and Exchange Commission on April 12,
2000 for a public debt offering. Following effectiveness
of such registration statement, Market Resources intends
to borrow $150 million of notes and use the proceeds to
repay a portion of its existing debt.
Regulatory Matters
Questar Gas filed a general rate case December 17, 1999
requesting approximately $22 million of general rate
relief. Higher costs of serving customers, inclusion of
charges for the removal of carbon dioxide from part of the
gas supply and lower gas usage per customer were among the
reasons for requesting rate relief. The PSCU issued a
final order on August 11, 2000 which granted $3.5 million
of annualized rate relief and approved an 11 percent return
on equity. The $13.5 million includes the $7.1 million
interim rate relief and $5 million of annual carbon
dioxide processing costs.
Public Utilities and the Committee of Consumer Services.
Through those discussions the Company has reached
agreement on all revenue requirements with the exception
of return on equity, affiliate postage cost and the costs
associated with carbon dioxide processing. The Company
and the Division reached a settlement on the carbon
dioxide processing issue. The PSCU has held hearings on
these settlements and the contested issues. The PSCU has
until August 14, 2000 to issue a final order concerning
the case.
The Federal Energy Regulatory Commission (FERC) issued a
final order granting a certificate of convenience and
necessity to Questar's Southern Trails Pipeline. The
FERC's July 28 ruling came after the agency became
satisfied that the pipeline was in the public convenience
and necessity and could be completed in an environmentally
sound manner. Southern Trails must receive final
environmental approvals from state and federal agencies
before conversion to carry natural gas can begin. Questar
Pipeline is actively working on right-of-way issues and
exploring marketing opportunities to subscribe Southern
Trail's pipeline capacity.
Revenue Recognition Guideline Issued by the Securities and
Exchange Commission
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 effect of adopting this accounting
guideline is not known at this time because the Company
has not completed its evaluation. The SEC has postponed
the effective date of this ruling from the second quarter
of 2000 to the fourth quarter.
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, 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 1. Legal Proceedings.
a. On June 15, 2000, a lawsuit was filed against Questar
Pipeline Company ("Questar Pipeline") and several of its affiliates
including Questar Corporation ("Questar" or the "Company"). The
lawsuit, which was filed in a Colorado state district court, was
brought by KN TransColorado Inc. ("KNTC"), a subsidiary of Kinder
Morgan, Inc. Questar TransColorado, Inc. ("QTC"), a wholly owned
subsidiary of Questar Pipeline, and KNTC are 50 percent partners in
the TransColorado Gas Transmission Company ("TC Partnership"), the
partnership that constructed, owns, and currently operates the
TransColorado pipeline project. QTC has a contractual right to put
its 50 percent interest in the TC Partnership to KNTC during a
12-month period commencing March 31, 2001, for $121,000,000 (subject
to adjustments specified in the agreement).
KNTC's complaint basically alleges that the named Questar
affiliates breached their fiduciary duties to TC Partnership and
KNTC by developing and working on a plan to construct and operate a
new pipeline that would compete with the TransColorado pipeline and
render such pipeline economically unviable. The complaint contains
claims for declaratory relief, breach of fiduciary duty, breach of
contract, breach of implied covenants of good faith and fair
dealing, misrepresentation, tortious concealment, rescission,
estoppel, imposition of a constructive trust, an accounting, and
dissolution of the TC Partnership. KNTC is seeking damages in the
amount of $150,000,000 plus punitive damages and a declaratory
judgment that KNTC's obligation to purchase QTC's interest in the
project be declared void and unenforceable.
The Questar affiliates have filed a counterclaim and third
party complaint against KNTC and its affiliates, including Kinder
Morgan. In it, the Questar defendants request a declaratory
judgment that the contractual agreements concerning the put are
binding and enforceable and seek damages of at least $185,000,000.
Questar Pipeline claims that KNTC and its affiliates wrongfully
induced the Questar affiliates to expend funds to build the line and
breached the contracts between the parties.
The Questar affiliates deny any wrongdoing of any kind, believe
that the allegations are totally without merit, and intend to
vigorously defend against the claims and pursue their counterclaims.
Pending the resolution of the lawsuit, QTC and KNTC, on behalf
of the TC Partnership, and Questar Pipeline and Kinder Morgan, as
guarantors, have executed an amendment to the credit agreement for
financing the project to provide that KNTC's lawsuit seeking to
dissolve the partnership does not constitute an event of default
under the terms of the credit agreement.
b. Questar Exploration and Production Company ("Questar
E&P"), an indirect wholly owned subsidiary of the Company, is the
primary defendant in a class action lawsuit--Bridenstine v. Kaiser
Francis Oil Company--pending in an Oklahoma state court. Questar
itself and Questar Gas Management Company, another affiliate, are
also named defendants together with nonaffiliated entities. See the
Company's Form 10-K Report for 1999, Item 3. Legal Proceedings .
The plaintiffs recently claimed additional damages, which have
increased from an estimated $54,000,000 to an estimated $80,000,000
plus punitive damages. Questar E&P disputes the claims. The trial
judge delayed the jury trial from August of 2000 to January of
2001, but has not yet ruled on motions filed by the defendants for
partial summary judgment.
Item 5. Other Information.
a. Marilyn S. Kite resigned her position as a director of the
Company and Questar Pipeline effective July 1, 2000. She resigned
after her appointment to serve as the first female member of the
Wyoming Supreme Court. Ms. Kite had served as a director since May
of 1997. The Board of Directors has not yet appointed a director to
fill the remainder of her term, which expires in May of 2002.
b. Effective August 1, 2000, Glenn H. Robinson, age 50, was
appointed to serve as Vice President and Chief Information Officer
of the Company. He was concurrently appointed to serve as President
and Chief Executive Officer of Questar InfoComm, Inc., and
Interstate Land Corporation, which are two wholly owned subsidiaries
engaged in information technology and real estate activities,
respectively. With his new positions, Mr. Robinson is a member of
the Company's management committee and is classified as an executive
officer. Mr. Robinson, who has over 26 years of service, had been
serving as Vice President and Controller of the entities within the
Company's Regulated Services unit.
c. Mr. Clyde M. Heiner, age 62, resigned from his positions
as Senior Vice President for the Company and President and Chief
Executive Officer of Questar InfoComm and Interstate Land to devote
full time to his responsibilities with Consonus, Inc., (formerly
Questar MetroNet Services, Inc.) Consonus was organized in 1999 to
pursue a new project that combines data centers, web enablement, and
network services. Mr. Heiner will continue to be classified as an
executive officer of the Company.
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)
August 14, 2000 /s/S. E. Parks
(Date) S. E. Parks
Vice President, Treasurer and
Chief Financial Officer (Duly
authorized officer and
principal financial officer)
