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, 1997
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) 324-2400
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 September 30, 1997
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.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR PIPELINE COMPANY
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
1997 1996 1997 1996 1997 1996
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $25,889 $26,186 $78,517 $77,988 $104,707 $101,835
OPERATING EXPENSES
Operating and maintenance 8,981 9,577 27,526 29,152 38,333 37,664
Depreciation 3,758 3,637 10,969 10,449 14,726 13,745
Other taxes 705 549 2,120 2,493 2,146 2,957
TOTAL OPERATING EXPENSES 13,444 13,763 40,615 42,094 55,205 54,366
OPERATING INCOME 12,445 12,423 37,902 35,894 49,502 47,469
INTEREST AND OTHER INCOME 923 365 1,019 1,169 1,648 493
INCOME FROM UNCONSOLIDATED
AFFILIATES 4,092 140 4,018 212 3,988 1,157
DEBT EXPENSE (3,349) (3,189) (10,014) (10,035) (13,395) (13,392)
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES 14,111 9,739 32,925 27,240 41,743 35,727
INCOME TAXES 5,549 3,619 12,581 10,334 15,662 13,123
INCOME FROM CONTINUING
OPERATIONS 8,562 6,120 20,344 16,906 26,081 22,604
DISCONTINUED OPERATIONS -
QUESTAR GAS MANAGEMENT
COMPANY 1,495 2,471
NET INCOME $8,562 $6,120 $20,344 $18,401 $26,081 $25,075
</TABLE>
See notes to financial statements
<PAGE>
QUESTAR PIPELINE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1996
(In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short-term investments $288 $904 $2,550
Accounts receivable 5,118 8,579 8,229
Inventories 2,273 2,183 2,301
Other current assets 1,805 1,663 1,938
Total current assets 9,484 13,329 15,018
Property, plant and equipment 574,613 557,630 562,711
Less allowances for depreciation 205,007 193,030 194,396
Net property, plant and equipment 369,606 364,600 368,315
Investment in unconsolidated
affiliates 25,217 12,146 14,347
Other assets 13,404 11,276 11,070
$417,711 $401,351 $408,750
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Notes payable to Questar
Corporation $10,600 $9,200 $11,800
Accounts payable and accrued
expenses 16,922 13,341 14,823
Total current liabilities 27,522 22,541 26,623
Long-term debt 134,558 134,539 134,544
Other liabilities 5,817 4,898 4,322
Deferred income taxes 60,727 56,117 58,768
Common shareholder's equity
Common stock 6,551 6,551 6,551
Additional paid-in capital 82,034 82,034 82,034
Retained earnings 100,502 94,671 95,908
Total common shareholder's equity 189,087 183,256 184,493
$417,711 $401,351 $408,750
</TABLE>
See notes to financial statements
<PAGE>
QUESTAR PIPELINE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
9 Months Ended
September 30,
1997 1996
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $20,344 $18,401
Depreciation 11,781 12,214
Deferred income taxes (45) (32)
Income from discontinued operations (1,495)
Income from unconsolidated
affiliates (4,018) (212)
28,062 28,876
Change in operating assets and
liabilities 4,762 6,496
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 32,824 35,372
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (11,533) (11,478)
Other investments (5,064) (2,850)
Total capital expenditures (16,597) (14,328)
Costs of disposition of property,
plant and equipment (1,539) (1,345)
NET CASH USED IN INVESTING
ACTIVITIES (18,136) (15,673)
FINANCING ACTIVITIES
Decrease in notes receivable from
Questar Gas Management 16,692
Decrease in notes payable
to Questar Corporation (1,200) (6,000)
Payment of dividends (15,750) (30,500)
NET CASH USED IN FINANCING
ACTIVITIES (16,950) (19,808)
DECREASE IN CASH AND
SHORT-TERM INVESTMENTS ($2,262) ($109)
</TABLE>
A $29,250,000 special dividend declaration in 1996 of Questar Gas
Management shares payable to Questar Corporation was a non-cash
transaction and excluded from the Statement of Cash Flows.
See notes to financial statements
<PAGE>
QUESTAR PIPELINE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(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. The results of operations for the three-and
nine-month periods ended September 30, 1997, are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1997. 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, 1996.
Note 2 - Discontinued Operations - 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
(FERC) February 28, 1996 and was effective March 1, 1996. Questar Gas
Management was subsequently transferred to the nonregulated Market
Resources group of Questar on July 1, 1996 and now is a wholly owned
subsidiary of Entrada Industries. The transaction was in the form of a
stock dividend payable to Questar with no gain or loss recorded.
Questar Pipeline's financial statements for prior periods were restated
reflecting gas-gathering operations as a discontinued business segment.
Questar Pipeline has submitted an application to the FERC to transfer
approximately $1.5 million of additional facilities to Questar Gas
Management. The facilities consist of several miles of non-mainline
laterals, a portion of a mainline pipeline and a compressor station.
The application requested that the transfer be effective May 31, 1997.
However, a group of producers protested part of the transfer, and the
FERC has not yet ruled on the Company's application.
Note 3 - Investment in Overthrust Pipeline Company
The Company purchased an additional 18% ownership in Overthrust Pipeline
Company in the third quarter of 1997, effective April 1, 1997, bringing
its share to 54%. Overthrust functions as a joint venture and the
approval of all partners is required for all substantive policy matters.
The Company will continue to account for its investment in Overthrust by
the equity method.
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
QUESTAR PIPELINE COMPANY
September 30, 1997
(Unaudited)
Operating Results
Following is a summary of financial and operating information for the
Company:
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
1997 1996 1997 1996 1997 1996
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS
Revenues
From unaffiliated customers $9,238 $9,539 $27,101 $28,986 $36,952 $38,714
From affiliates 16,651 16,647 51,416 49,002 67,755 63,121
Total revenues $25,889 $26,186 $78,517 $77,988 $104,707 $101,835
Operating income $12,445 $12,423 $37,902 $35,894 $49,502 $47,469
Income from continuing operations $8,562 $6,120 $20,344 $16,906 $26,081 $22,604
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 30,912 30,502 91,848 103,533 120,210 141,349
For Mountain Fuel 13,217 14,035 81,492 67,617 114,036 91,849
For other affiliated customers 9,753 13,498 27,562 28,367 43,522 39,906
Total transportation 53,882 58,035 200,902 199,517 277,768 273,104
Transportation revenue
(per decatherm) $0.32 $0.29 $0.25 $0.25 $0.24 $0.24
</TABLE>
Revenues were higher in the 9- and 12-month periods of 1997 due
primarily to a rate increase, which became effective on February 1,
1996.
Operating and maintenance expenses were 6% lower in the third quarter
and first nine months of 1997 when compared to the same periods of 1996
due primarily to reduced labor and related costs and some operating
efficiencies. In addition, the 1996 periods included some one-time
costs associated with the spin-down of certain assets to Questar Gas
Management Company and issues in Questar Pipeline's 1996 rate
settlement. The number of employees has decreased and operating
efficiencies have been experienced as a result of a consolidation of
certain administrative, marketing, financial, technical and related
services under Questar Regulated Services Co., which wholly owns Questar
Pipeline. These services were previously staffed and performed
separately by Questar Pipeline and its affiliated company, Mountain
Fuel.
Depreciation expense was higher in the 1997 periods as a result of
increased investment in property, plant and equipment. A successful
third quarter 1996 settlement of issues related to state property tax
assessments spanning from 1988 through 1992 resulted in a $410,000
reduction of expense reported in other taxes. Other taxes were lower in
the 9- and 12-month periods of 1997 when compared with the same periods
of 1996 primarily due to reduced payroll taxes from a year ago.
An adjustment of a regulatory liability increased other income by
$642,000 and net income by approximately $400,000. The Federal Energy
Regulatory Commission (FERC) approved an adjustment related to deferred
taxes recorded for gathering activities, which had been transferred to
Questar Gas Management. Interest and other income were lower in the
nine-month period of 1997 when compared with the same period of 1996 due
primarily to less interest earned in 1997. A loan to Questar Gas
Management was repaid to the Company in July 1996 and the proceeds were
dividended to Questar. The effective income tax rate for the first nine
months was 38.2% in 1997 compared with 37.9% in 1996.
Income from unconsolidated affiliates in 1997 includes the Company's
$4,042,000 share of earnings reported by TransColorado Gas Transmission
Co. The earnings resulted from capitalizing interest and equity costs
(AFUDC) associated with the construction of the TransColorado Pipeline.
On May 9, 1997, the FERC issued an order in which it alleged that
Questar Pipeline had overcharged its affiliated company, Mountain Fuel,
for gathering services provided from November 1988 through September
1992. The FERC order states that Questar Pipeline may have violated the
Natural Gas Act by charging Mountain Fuel rates different from those
rates specified in the tariff. The FERC required Questar Pipeline to
show why the allegations are incorrect and why it should not refund the
alleged overcharge of $3.4 million plus interest to Mountain Fuel.
Questar Pipeline filed a detailed response explaining why its charges to
Mountain Fuel were fully justified and in full compliance with
applicable law and FERC orders. Management does not believe the
ultimate outcome of this proceeding will have a material impact on
results of operations, financial position or liquidity.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of $32,824,000 for the first
nine months of 1997 was 7% lower when compared with $35,372,000 for the
same period in 1996 due primarily to changes in operating assets and
liabilities.
Investing Activities
Capital expenditures were $16,597,000 in the first nine months of 1997
compared with $14,328,000 in the corresponding 1996 period.
Expenditures include additional investments in Overthrust Pipeline
Company and TransColorado Gas Transmission Co. Capital expenditures for
calendar year 1997 are estimated to be $48,500,000, which includes
$18,600,000 earmarked for the Company's share of the second phase of the
TransColorado pipeline. The second phase will cost approximately $200
million and includes 270 miles of 22- and 24-inch pipeline and two
compressor plants, under agreements currently in effect. The Company
will have a 50% share of the project after completing a purchase of 50%
of El Paso Energy Corporation's interest in Phase II and 100% of El
Paso's interest in Phase I.
Financing Activities
The Company has a short-term line-of-credit arrangement with a bank
totaling $200,000. No amounts were borrowed under this arrangement at
September 30, 1997. In addition, Questar Corporation loans funds to the
Company under a short-term arrangement. As of September 30, amounts
borrowed from Questar were $10,600,000 in 1997 and $9,200,000 in 1996.
Financing activities in the first nine months of 1997 and 1996 focused
on payment of dividends and a partial repayment of the Company's notes
payable to Questar. Capital expenditures for 1997 are expected to be
financed from net cash flow provided from operations and borrowings from
Questar.
This 10-Q contains forward-looking statements about the future
operations and expectations of Questar Pipeline. 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.
PART II
OTHER INFORMATION
Item 5. Other Information.
a. On October 23, 1997, the Board of Directors of Questar
Pipeline Company (Questar Pipeline or the Company) appointed Scott S.
Parker to serve as a director. Mr. Parker, age 62, is the President and
Chief Executive Officer of Intermountain Health Care, Inc. (IHC), a
nonprofit, integrated health care system headquartered in Salt Lake
City, Utah. He was appointed to fill a vacancy on the Board.
IHC is Utah's largest health care system that includes health
plans, 23 hospitals, affiliated physician groups, and 19,000 employees.
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)
November 12, 1997 /s/ S. E. Parks
(Date) S. E. Parks
Vice President, Treasurer
and Chief Financial Officer
(Duly authorized officer and
principal financial officer.)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following schedule contains summarized financial information extracted
from the Questar Pipeline Company Statements of Income and Balance Sheet
for the period ended September 30, 1997, 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-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 288
<SECURITIES> 0
<RECEIVABLES> 5,118
<ALLOWANCES> 0
<INVENTORY> 2,273
<CURRENT-ASSETS> 9,484
<PP&E> 574,613
<DEPRECIATION> 205,007
<TOTAL-ASSETS> 417,711
<CURRENT-LIABILITIES> 27,522
<BONDS> 134,558
0
0
<COMMON> 6,551
<OTHER-SE> 182,536
<TOTAL-LIABILITY-AND-EQUITY> 417,711
<SALES> 0
<TOTAL-REVENUES> 78,517
<CGS> 0
<TOTAL-COSTS> 27,526
<OTHER-EXPENSES> 13,089
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,014
<INCOME-PRETAX> 32,925
<INCOME-TAX> 12,581
<INCOME-CONTINUING> 20,344
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,344
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
