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, 1996
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. 0-14147
QUESTAR PIPELINE COMPANY
(Exact name of registrant as specified in its charter)
STATE OF UTAH 87-0307414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 11450, 79 South State Street, Salt Lake City, Utah 84147
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 530-2400
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, 1996
Common Stock, $1.00 par value 6,550,843 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.
QUESTAR PIPELINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
1996 1995 1996 1995 1996 1995
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $30,340 $29,835 $62,108 $59,400 $120,063 $117,839
OPERATING EXPENSES
Operating and maintenance 12,232 11,628 25,388 22,992 47,030 43,921
Depreciation 4,294 4,148 8,576 8,262 16,928 16,313
Other taxes 1,059 1,176 2,318 2,410 4,078 4,538
TOTAL OPERATING EXPENSES 17,585 16,952 36,282 33,664 68,036 64,772
OPERATING INCOME 12,755 12,883 25,826 25,736 52,027 53,067
OTHER EXPENSE (139) (295) (39) (339) (1,586) (1,941)
INCOME FROM UNCONSOLIDATED
AFFILIATES 307 11 739 96 2,177 196
DEBT EXPENSE (3,452) (3,361) (6,846) (6,767) (13,551) (13,398)
INCOME BEFORE INCOME TAXES 9,471 9,238 19,680 18,726 39,067 37,924
INCOME TAXES 3,580 3,427 7,399 6,641 14,223 12,387
NET INCOME $5,891 $5,811 $12,281 $12,085 $24,844 $25,537
</TABLE>
<PAGE>
QUESTAR PIPELINE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995 1995
(In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short-term investments $1,385 $1,677
Notes receivable from
Notes receivable from 1,900
Accounts receivable 7,611 $14,858 13,845
Inventories 2,734 2,984 2,858
Other current assets 1,999 2,392 2,552
Total current assets 15,629 20,234 20,932
Property, plant and equipment 637,953 622,427 632,393
Less allowances for depreciation 220,458 211,009 212,898
Net property, plant and equipment 417,495 411,418 419,495
Investment in unconsolidated affiliates 11,536 7,759 11,010
Other assets 10,967 11,159 11,913
$455,627 $450,570 $463,350
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $643
Notes payable to Questar Corporation $700 7,700 $15,200
Accounts payable and accrued expenses 12,576 12,356 13,025
Customer refund 7,413
Dividends payable to Questar Corporation 43,931
Total current liabilities 64,620 20,699 28,225
Long-term debt 134,535 134,516 134,525
Deferred credits 4,944 4,611 5,346
Deferred income taxes 68,573 69,202 70,649
Common shareholder's equity
Common stock 6,551 6,551 6,551
Additional paid-in capital 82,034 82,034 82,034
Retained earnings 94,370 132,957 136,020
Total common shareholder's equity 182,955 221,542 224,605
$455,627 $450,570 $463,350
</TABLE>
<PAGE>
QUESTAR PIPELINE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
6 Months Ended
June 30,
1996 1995
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $12,281 $12,085
Depreciation 9,434 9,059
Deferred income taxes (2,076) 388
Income from unconsolidated affiliates (739) (96)
18,900 21,436
Change in operating assets
and liabilities 14,642 870
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 33,542 22,306
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (7,381) (9,209)
Other investments (326)
Total capital expenditures (7,381) (9,535)
Proceeds from (costs of) deposition of
property, plant and equipment (53) 1,538
CASH USED IN INVESTING
ACTIVITIES (7,434) (7,997)
FINANCING ACTIVITIES
Increase in notes receivable
from Questar Corporation (1,900)
Decrease in notes payable
to Questar Corporation (14,500) (6,900)
Checks outstanding in excess of
cash balances 643
Dividends paid (10,000) (9,500)
NET CASH USED IN FINANCING
ACTIVITIES (26,400) (15,757)
DECREASE IN CASH AND SHORT-TERM
INVESTMENTS ($292) ($1,448)
</TABLE>
<PAGE>
QUESTAR PIPELINE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
Note A - Basis of Presentation
The interim financial statements furnished 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. The results of
operations for the three-and six-month periods ended June 30, 1996,
are not necessarily indicative of the results that may be expected
for the year ending December 31, 1996. 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, 1995.
Note B - Gathering Division Spin Down and Transfer
Questar Pipeline transferred approximately $55 million of
gas-gathering assets to Questar Gas Management Company, a wholly
owned subsidiary. The transfer was approved by the Federal Energy
Regulatory Commission February 28, 1996 and was effective March 1,
1996. The financial statements of Questar Pipeline and Questar Gas
Management have been consolidated for reporting purposes. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Questar Gas Management was transferred to the Market Resources
group of Questar Corporation on July 1, 1996. The transaction was
in the form of a dividend payable to Questar Corporation. Questar
Pipeline had declared a $43.9 million dividend which included the
$27.9 million of net assets of Questar Gas Management and a $16
million repayment of debt by Questar Gas Management. On July 1,
1996, Questar Gas Management repaid $16 million of debt owned to
Questar Pipeline.
Beginning in the third quarter of 1996, prior-period financial statements
will be restated to report earnings of Questar Pipeline without
gas-gathering operations.
QUESTAR PIPELINE COMPANY
MANAGEMENT'S ANALYSIS
June 30, 1996
Operating Results --
Following is a summary of financial and operating information for
the Company:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
1996 1995 1996 1995 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS
Revenues
From unaffiliated customers $12,859 $11,285 $22,532 $22,144 $43,704 $44,355
From affiliates 17,481 18,550 39,576 37,256 76,359 73,484
Total revenues $30,340 $29,835 $62,108 $59,400 $120,063 $117,839
Operating income $12,755 $12,883 $25,826 $25,736 $52,027 $53,067
Net income 5,891 5,811 12,281 12,085 24,844 25,537
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Transportation
For unaffiliated customers 36,158 38,978 73,031 77,547 147,427 149,129
For Mountain Fuel 16,426 15,553 53,582 44,752 88,702 77,481
For other affiliated customers 10,271 10,133 14,869 16,359 37,349 40,336
Total transportation 62,855 64,664 141,482 138,658 273,478 266,946
Gathering
For unaffiliated customers 9,725 10,126 20,559 19,747 39,840 39,461
For Mountain Fuel 4,555 7,470 14,373 16,860 29,204 30,756
For other affiliated customers 2,485 1,815 4,401 3,095 7,255 8,359
Total gathering 16,765 19,411 39,333 39,702 76,299 78,576
Natural gas revenues (per decatherm)
Transportation $0.28 $0.25 $0.24 $0.23 $0.24 $0.24
Gathering 0.29 0.28 0.26 0.28 0.27 0.28
</TABLE>
Revenues were higher in the 1996 periods presented partially as a
result of a rate increase for transportation and storage
activities. Questar Pipeline filed for a rate increase with the
Federal Energy Regulatory Commission (FERC) on July 31, 1995. The
Company began collecting revenues under the new rate structure,
subject to refund, February 1, 1996. The FERC approved a rate
settlement July 1, 1996. The settlement included a stated return
on equity of 11.75% and is expected to add approximately $5.9
million to annual revenues or $3 million in after-tax income. The
Company had fully reserved for the differences between the filed
rates and the settlement rates and as a result there was no
significant impact on net income. In addition to the rate
increase, the Company reported higher revenues from its expanded
firm gas-storage activities.
Revenues for gas-gathering activities were lower for the 1996
periods presented as a result of decreased volumes gathered and a
decrease in the rate charged on gas volumes gathered for Mountain
Fuel. Reservation charges on Mountain Fuel's firm-gathering
contract were reduced beginning in the Fall of 1995.
Operating and maintenance expenses were higher in all of the 1996
periods presented primarily because of higher labor and equipment
costs, and some one-time costs associated with the spin down of
Questar Gas Management and settlement issues in the rate case.
Depreciation expenses were higher in the 1996 periods as a result
of increased investment in property, plant and equipment.
The increase in earnings from unconsolidated affiliated companies
in the 3- and 6-month periods ended June 30, 1996 resulted
primarily from activities of Blacks Fork Processing Company, which
began operations in June of 1995. The Company's 50% interest in
the Blacks Fork Processing Company will be transferred to the
Market Resources group as an affiliate of Questar Gas Management.
The increase in earnings from unconsolidated affiliates for the
12-month period ended June 30, 1996 includes Questar Pipeline's
share of the proceeds received by Overthrust Pipeline Company from
a buy-out of a shipper's transportation contract.
The effective income tax rate for the second quarter was 37.6% in
1996 compared with 35.5% in 1995.
Questar Pipeline and affiliated company, Mountain Fuel, have
consolidated various financial, technical, administrative and other
support functions in an ongoing effort to improve efficiency and
coordination. Questar Pipeline and Mountain Fuel comprise the
Regulated Services group within Questar Corporation.
Liquidity and Capital Resources --
Operating Activities:
Net cash provided from operating activities was $33,542,000 for the
first six months of 1996 compared with $22,306,000 for the same
period of 1995. The increase in cash flow, primarily from changes
in operating assets and liabilities, was due largely to the
collections of rates subject to refund and receivables for
transportation and storage services provided to affiliated
companies.
Investing Activities:
Capital expenditures were $7,381,000 in the first half of 1996,
compared with $9,535,000 in the corresponding 1995 period. Capital
expenditures for calendar year 1996 are estimated at $37,100,000.
Financing Activities:
The Company has a short-term line-of-credit arrangement with a bank
totaling $200,000. In addition, Questar Corporation, its parent
company, loans funds to the Company under a short-term arrangement.
As of June 30, amounts borrowed from Questar Corporation were
$700,000 in 1996 and $7,700,000 in 1995. Questar Pipeline
subsidiary, Questar Gas Management, had loaned excess funds of
$1,900,000 to Questar Corporation at June 30, 1996. No amounts were
borrowed under the line-of-credit arrangement at either June 30,
1996 or June 30, 1995. Questar Pipeline's net cash provided from
operating activities for the first six months of 1996 and 1995
funded capital expenditures, cash dividends and repayment of debt.
Funding for 1996 capital expenditures is expected to be supplied
from net cash flow provided from operations and borrowings from
Questar Corporation.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
a. On July 1, 1996, the Federal Energy Regulatory Commission (the
FERC) approved a proposed settlement agreement filed by Questar Pipeline
Company (Questar Pipeline or the Company) on March 8, 1996. Under the
agreement, the Company's new rates became effective February 1, 1996.
The settlement agreement provides for a return on equity of 11.75
percent, an annualized revenue increase of approximately $5.9 million,
and new sharing arrangements for interruptible transportation and
storage revenues. Questar Pipeline filed its general rate case
application with the FERC on July 31, 1995.
b. Questar Pipeline and 69 other domestic companies have been
named as defendants in a federal "false claims" lawsuit brought by Jack
J. Grynberg on behalf of the federal government. The suit, which was
filed in a federal district court in Washington, D.C., claims that
pipelines and other companies have systematically reported less than the
actual heating content of natural gas entering their systems, ultimately
resulting in an underpayment of royalties to the federal government.
The complaint does not allege any specific undermeasurements for
individual defendants or for the group of defendants. The Company
believes that the lawsuit, which the Department of Justice determined
not to prosecute, has no merit.
c. On August 9, 1996, the Utah Supreme Court upheld the Utah
State Tax Commission's approval of a property-tax settlement involving
Questar Pipeline. The Tax Commission approved an overall five percent
reduction in the Company's property taxes for the five-year period 1988
through 1992 and rejected the claims filed by several Utah counties that
certain gas inventories should not have been treated as tax-exempt
inventory. The counties' claims involved an additional $2.0 in
additional taxes, plus accrued interest. The Utah Supreme Court, in
response to an appeal filed by the counties, ruled that the counties had
not raised the issue of taxation of stored gas in a timely manner. The
approved settlement provides for nearly $500,000 in property tax refunds
to Questar Pipeline.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting was held on May 21, 1996. As of such
date, D. N. Rose and G. L. Nordloh were elected as new directors. Other
directors elected include R. D. Cash, U. Edwin Garrison, A. J.
Marushack, and Mary Mead. Mr. Neal A. Maxwell had previously indicated
his intention to retire as of May 21, 1996, and was not nominated for
reelection. Mr. W. F. Edwards, who had formerly served as the Company's
Vice President and Chief Financial Officer, was not nominated for
reelection. The Company is a wholly owned subsidiary of Questar
Corporation (Questar), and all of the directors received 100 percent of
the outstanding shares cast in favor of their election.
Item 5. Other Information.
a. Several management changes were announced effective May 21,
1996. Mr. Rose was appointed to serve as Vice Chairman of the Board.
Mr. Rose, age 51, also serves as Executive Vice President of Questar
with responsibility for regulated services and as President and Chief
Executive Officer of Mountain Fuel Supply Company (Mountain Fuel), an
affiliated local distribution company. Mr. Marushack, the Company's
President and Chief Executive Officer, reports to Mr. Rose.
As of June 1, 1996, the Company and Mountain Fuel have several
common officers. Mr. Michael E. Benefield, age 57, was appointed to
serve as Vice President, Planning and Business Development. Mr. Gary W.
DeBernardi, age 53, was appointed to serve as Vice President, Technical
Support. (Mr. DeBernardi has been serving as the Company's Vice
President, Engineering and Transmission Services.) Ms. Susan Glasmann,
age 48, was appointed to serve as Vice President, Business Support. Mr.
Glenn H. Robinson, age 46, was appointed to serve as Vice President of
the Company, in addition to his responsibilities as Vice President and
Controller of Mountain Fuel. As of September 1, 1996, Mr. Robinson will
also serve as Controller for the Questar Pipeline. Messrs. Benefield
and Robinson and Ms. Glasmann previously served as officers of Mountain
Fuel only.
Mr. Lowell F. Gill, age 53, was appointed to serve as Vice
President and General Manager for Questar Pipeline effective June 1,
1996. He previously served the Company as Vice President, Regulatory
Affairs (March 1985 to March 1996) and as Vice President, Marketing and
Regulatory Affairs (March 27, 1996 to June 1, 1996).
b. On June 21, 1996, Mary Mead, a director of the Company, was
killed in a horseback riding accident. Mrs. Mead, who turned 61 on the
date of her death, had served as a director of the Company since
February of 1990. The Company's Board of Directors has not named anyone
to replace her as a director.
c. Effective July 1, 1996, ownership of Questar Gas Management
Company was transferred from the Company to Entrada Industries, Inc.
(Entrada is a wholly owned subsidiary of Questar that owns Questar's
affiliates engaged in nonregulated activities.) The Company's gathering
assets and activities had been transferred to Questar Gas Management as
of March 1, 1996.
d. Mr. R. Paul Ord, the Company's Controller, has announced his
retirement effective August 31, 1996. Mr. Ord, age 60, has served as
Controller of the Company since April of 1982. As noted earlier, Mr.
Robinson, the Company's Vice President, will assume the additional title
of Controller as of September 1, 1996.
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 PIPELINE COMPANY
(Registrant)
August 13, 1996 /s/ A. J. Marushack
(Date) A. J. Marushack
President and Chief
Executive Officer
August 13, 1996 /s/ S. E. Parks
(Date) S. E. Parks
Vice President, Treasurer
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summarized information extracted from the Questar
Pipeline Company Statements of Income and Balance Sheets for the period
ended June 30, 1996, and is qualified in its entirety by reference to
such unaudited financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,385
<SECURITIES> 0
<RECEIVABLES> 9,511
<ALLOWANCES> 0
<INVENTORY> 2,734
<CURRENT-ASSETS> 15,629
<PP&E> 637,953
<DEPRECIATION> 220,458
<TOTAL-ASSETS> 455,627
<CURRENT-LIABILITIES> 64,620
<BONDS> 134,535
0
0
<COMMON> 6,551
<OTHER-SE> 176,404
<TOTAL-LIABILITY-AND-EQUITY> 455,627
<SALES> 0
<TOTAL-REVENUES> 62,108
<CGS> 0
<TOTAL-COSTS> 25,388
<OTHER-EXPENSES> 10,894
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,846
<INCOME-PRETAX> 19,680
<INCOME-TAX> 7,399
<INCOME-CONTINUING> 12,281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,281
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
