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. 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 45360, 180 East 100 South, Salt Lake City, Utah 84145-0360
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 324-2400
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 October 31, 1999
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 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)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 28,344 $ 27,233 $ 82,546 $ 81,081 $ 110,022 $108,001
OPERATING EXPENSES
Operating and maintenance 9,439 10,491 27,159 29,984 36,007 39,792
Depreciation 4,774 3,794 12,848 10,109 16,666 13,937
Other taxes 703 697 2,139 1,885 2,854 2,581
TOTAL OPERATING EXPENSES 14,916 14,982 42,146 41,978 55,527 56,310
OPERATING INCOME 13,428 12,251 40,400 39,103 54,495 51,691
INTEREST AND OTHER
INCOME (EXPENSE) 416 (13) 3,666 (89) 3,833 215
EARNINGS (LOSS) FROM
UNCONSOLIDATED AFFILIATES (2,304) 944 (2,368) 2,094 (451) 2,705
DEBT EXPENSE (4,387) (3,606) (12,602) (10,540) (16,518) (14,062)
INCOME BEFORE INCOME TAXES 7,153 9,576 29,096 30,568 41,359 40,549
INCOME TAXES 2,685 3,605 10,634 10,983 14,591 14,740
NET INCOME $ 4,468 $ 5,971 $ 18,462 $ 19,585 $ 26,768 $ 25,809
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR PIPELINE COMPANY 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 $ 2,922 $ 9,990
Accounts receivable $ 24,860 10,995 21,304
Inventories 2,916 2,217 2,203
Other current assets 1,750 1,590 1,714
Total current assets 29,526 17,724 35,211
Property, plant and equipment 692,616 603,262 670,456
Less allowances for depreciation 228,207 211,643 215,589
Net property, plant and equipment 464,409 391,619 454,867
Investment in unconsolidated affiliates 54,737 66,564 54,712
Other assets 11,887 12,957 12,506
$560,559 $ 488,864 $557,296
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $ 107
Notes payable to Questar Corporation 72,300 $ 92,900 $ 38,000
Accounts payable and accrued
expenses 17,185 19,803 51,047
Total current liabilities 89,592 112,703 89,047
Long-term debt 202,996 114,577 202,991
Other liabilities 1,602 4,267 4,546
Deferred income taxes 66,830 63,171 63,510
Common shareholder's equity
Common stock 6,551 6,551 6,551
Additional paid-in capital 82,034 82,034 82,034
Retained earnings 110,954 105,561 108,617
Total common shareholder's equity 199,539 194,146 197,202
$560,559 $ 488,864 $557,296
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR PIPELINE COMPANY 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 $ 18,462 $ 19,585
Depreciation 13,445 11,063
Deferred income taxes 3,320 873
(Earnings) losses from unconsolidated
affiliates, net of cash distributions 3,988 (2,094)
39,215 29,427
Change in operating assets and
liabilities (40,486) (2,931)
NET CASH PROVIDED FROM (USED IN)
OPERATING ACTIVITIES (1,271) 26,496
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (23,443) (22,319)
Investment in unconsolidated affiliates (4,014) (37,493)
Total capital expenditures (27,457) (59,812)
Proceeds from (costs of) disposition of
property, plant and equipment 456 (2,187)
NET CASH USED IN INVESTING
ACTIVITIES (27,001) (61,999)
FINANCING ACTIVITIES
Checks outstanding in excess of
cash balances 107
Increase in notes payable to
Questar Corporation 34,300 67,100
Decrease in long-term debt (20,000)
Payment of dividends (16,125) (15,750)
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 18,282 31,350
DECREASE IN CASH AND SHORT-
TERM INVESTMENTS $ (9,990) $ (4,153)
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR PIPELINE COMPANY 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. 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
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 - Investment in Unconsolidated Affiliates
Questar Pipeline has interests in partnerships accounted for on an
equity basis. Transportation and processing of natural gas is the
primary business activity of these partnerships. Summarized operating
results of the partnerships are listed below. Income before income
taxes includes capitalized financing charges called allowance for
funds used during construction (AFUDC).
9 Months Ended
September 30,
1999 1998
(In Thousands)
Revenues $ 7,268 $ 3,666
Operating income (loss) (2,362) 1,306
Income (loss) before income taxes (5,839) 4,668
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
September 30, 1999
(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,
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.
Operating and maintenance expenses were lower in the 1999 periods
presented when compared with the 1998 periods due primarily to the
effects of an early retirement program effective August 1998 and to
the capitalization of a larger amount of administrative and general
expenses in connection with construction projects. Labor-cost savings
amounted to $1.6 million in the first nine months of 1999. Increased
spending for information technology has partially offset the expense
reductions discussed.
Increased investments in capital projects have resulted in higher
depreciation charges in the first nine months of 1999. Property taxes
increased in conjunction with the expansion of investment in plant
assets in 1999.
Interest and other income in the first nine months of 1999 includes a
reversal of a $2.5 million contingency reserve related to completion
of the TransColorado Pipeline and $1.2 million of AFUDC (capitalized
financing costs) from Questar Pipeline's capital projects. Debt
expense was higher in the first nine months of 1999 as a result of
borrowing $88.4 million in the fourth quarter of 1998. The medium-term
notes have a weighted average coupon rate of 6.14% and a weighted
average life of 12.6 years. The Company capitalized approximately $2
million of interest costs in the first nine months of 1999 in
connection with construction of plant assets.
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 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 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 effective income tax rate was 36.5% in the first nine months of
1999 compared with 35.9% for the same period in 1998.
Liquidity and Capital Resources
Operating Activities
In the first nine months of 1999, operating activities resulted in a
$1,271,000 net use of cash due primarily to changes in operating
assets and liabilities. A $40,486,000 decrease in cash flow from
operating assets and liabilities was caused by timing differences in
paying costs of construction projects.
Investing Activities
Capital expenditures were $27,457,000 in the first nine months of 1999
compared with $59,812,000 in the corresponding 1998 period. The
TransColorado Pipeline was under constructed a year ago. Capital
expenditures for calendar year 1999 are estimated to be $64.3 million.
Financing Activities
Questar Corporation loans funds to the Company under a short-term
arrangement. As of September 30, Questar Pipeline had borrowed from
Questar $72.3 million in 1999 and $92.9 million in 1998. Remaining
1999 capital expenditures are expected to be financed with net cash
provided from operating activities and short- and long-term debt
including borrowings on an active medium-term note program and from
Questar. In October 1999, the Company borrowed $42 million with a
weighted average coupon rate of 7.48% and a 10 year life on its
medium-term note program.
Regulatory Matters
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.
Overthurst Pipeline filed a general rate case October 1, 1999
requesting a $1 million increase in its cost of service.
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.
Questar Pipeline's portion of the Y2K costs is estimated to be $1.0
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.
The complete text of Questar Pipeline's Y2K disclosure 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.questar.com.
Forward-Looking Statements
This 10-Q contains forward-looking statements about future operations,
capital spending, regulatory matters 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.
Important assumptions and other significant factors that could cause
actual results to differ materially from those discussed in
forward-looking statements include changes in: general economic
conditions, gas prices and availability of gas supplies, competition,
regulatory issues, weather conditions and other factors beyond the
control of the Company. These other factors include the rate of
inflation, the adverse effects of failure to achieve Y2K compliance
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. Questar Pipeline Company (Questar Pipeline or the Company)
and several other affiliates of Questar Corporation are named
defendants in several actions filed by Jack J. Grynberg, an
independent producer. The action that was filed under the Federal
False Claims Act has recently been consolidated with the approximately
76 actions filed by the same producer against other pipelines and
their affiliates. The cases have been consolidated in federal
district court for the district of Wyoming for pre-trial motions and
discovery. The cases involve allegations that the pipelines
mismeasured the heating content of natural gas volumes and understated
the value of gas on which royalty payments are due the federal
government.
Mr. Grynberg recently filed a complaint against the Company in a
state district court in Utah alleging that Questar Pipeline
mismeasured the heating content of natural gas volumes produced in
southwest Wyoming that were attributable to the producer's working
interest. The Company filed a motion to stay this action pending the
resolution of similar issues in other actions. Finally, Questar
Pipeline is a named defendant in another case that Mr.Grynberg filed
in Wyoming's federal district court that has been stayed pending the
resolution of an appeal to the Court of Appeals for the Tenth Circuit
in yet another case that involves the producer and an affiliate of the
Company. See the Company's Report on Form 10-Q for the quarter ended
June 30, 1999, Item 1. Legal Proceedings.
b. On October 15, 1999, the Federal Energy Regulatory
Commission (the FERC) issued a Preliminary Decision on
Non-Environmental Issues in the Company's application to convert an
oil pipeline to natural gas. The 700-mile pipeline, which has been
designated as the Southern Trails line, extends from the Four Corners
area of Utah, Colorado, New Mexico, and Arizona to Long Beach,
California. The FERC made a preliminary decision that a certificate
of public convenience and necessity should be issued to Southern
Trails under the optional certificate procedures and dismissed as
"speculative" the allegations made by an intervening local
distribution company that the line would result in idle capacity and
unrecovered costs on other systems. Final regulatory approval is
dependent on the completion of a favorable environmental review.
Questar Pipeline is actively working to complete the environmental
review and to obtain contracts with shippers to provide market support
for the conversion.
c. The Company and Colorado Interstate Gas Company (CIG) are
parties to a letter agreement effective Septemer 30, 1999, for the joint
construction and operation of a 75-mile, 24-inch diameter pipeline that
extends from the Price area of eastern Utah to a proposed interconnect
with Kern River Gas Transmission Company located near Elberta, Utah.
The new line, which parallels an existing line owned by Questar Pipeline,
is scheduled to be in service prior to the 2000-2001 heating season. It
will provide additional transportation capacity to move gas into the Wasatch
Front of Utah and into the Kern River line.
Item 6. Exhibits and Reports on Form 8-K
a. The following exhibits have been filed as part of this
report.
Exhibit No. Exhibit
12. Ratio of earnings to fixed charges.
b. The Company did not file a Current Report on Form 8-K during
the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
QUESTAR PIPELINE COMPANY
(Registrant)
November 10, 1999 /s/ D. N. Rose
D. N. Rose
President and Chief Executive
Officer
November 10, 1999 /s/ S. E. Parks
S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Exhibit
12. Ratio of earnings to fixed charges.
Exhibit No. 12.
Questar Pipeline Company and Subsidiaries
Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
12 months ended September 30,
1999 1998
(Dollars in Thousands)
<S> <C> <C>
Earnings
Income before income taxes $41,359 $40,549
Plus debt expense 16,518 14,062
Plus allowance for borrowed
funds used during construction 2,257 448
Plus interest portion of rental expense 212 312
$60,346 $55,371
Fixed Charges
Debt expense $16,518 $14,062
Plus allowance for borrowed
funds used during construction 2,257 448
Plus interest portion of rental expense 212 312
$18,987 $14,822
Ratio of Earnings to Fixed Charges 3.18 3.74
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following schedule contains summarized financial information
extracted from the Questar Pipeline Company 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> 24,860
<ALLOWANCES> 0
<INVENTORY> 2,916
<CURRENT-ASSETS> 29,526
<PP&E> 692,616
<DEPRECIATION> 228,207
<TOTAL-ASSETS> 560,559
<CURRENT-LIABILITIES> 89,592
<BONDS> 202,996
0
0
<COMMON> 6,551
<OTHER-SE> 192,988
<TOTAL-LIABILITY-AND-EQUITY> 560,559
<SALES> 0
<TOTAL-REVENUES> 82,546
<CGS> 0
<TOTAL-COSTS> 27,159
<OTHER-EXPENSES> 14,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,602
<INCOME-PRETAX> 29,096
<INCOME-TAX> 10,634
<INCOME-CONTINUING> 18,462
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,462
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
