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
MARCH 31, 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 April 30, 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 12 Months Ended
March 31, March 31,
1999 1998 1999 1998
(In Thousands)
<S> <C> <C> <C> <C>
REVENUES $27,166 $27,249 $108,474 $105,965
OPERATING EXPENSES
Operating and maintenance 9,389 9,927 38,294 38,353
Depreciation 3,976 3,843 14,060 15,043
Other taxes 737 673 2,664 2,738
TOTAL OPERATING EXPENSES 14,102 14,443 55,018 56,134
OPERATING INCOME 13,064 12,806 53,456 49,831
INTEREST AND OTHER
INCOME (EXPENSE) 809 (86) 973 1,232
EARNINGS FROM UNCONSOLIDATED
AFFILIATES 1,491 407 5,095 5,104
DEBT EXPENSE (4,177) (3,434) (15,199) (13,619)
INCOME BEFORE INCOME TAXES 11,187 9,693 44,325 42,548
INCOME TAXES 4,225 3,139 16,026 15,748
NET INCOME $6,962 $6,554 $28,299 $26,800
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1998
(In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short-term investments $9,990
Accounts receivable $4,893 $10,406 21,304
Inventories 2,890 2,092 2,203
Other current assets 1,572 1,877 1,714
Total current assets 9,355 14,375 35,211
Property, plant and equipment 671,908 581,877 670,456
Less allowances for depreciation 219,630 207,154 215,589
Net property, plant and equipment 452,278 374,723 454,867
Investment in unconsolidated
affiliates 58,054 29,884 54,712
Other assets 9,683 11,039 12,506
$529,370 $430,021 $557,296
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $820 $879
Notes payable to Questar
Corporation 20,500 19,100 $38,000
Accounts payable and accrued
expenses 40,506 18,581 51,047
Total current liabilities 61,826 38,560 89,047
Long-term debt 203,007 134,568 202,991
Other liabilities 1,562 3,359 4,546
Deferred income taxes 64,185 61,919 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 110,205 103,030 108,617
Total common shareholder's equity 198,790 191,615 197,202
$529,370 $430,021 $557,296
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended
March 31,
1999 1998
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $6,962 $6,554
Depreciation 4,063 4,502
Deferred income taxes 675 (379)
Earnings from unconsolidated
affiliates, net of cash distributions (642) (407)
11,058 10,270
Change in operating assets and
liabilities 5,181 (2,725)
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 16,239 7,545
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (2,180) (2,584)
Investment in unconsolidated affiliates (2,700) (2,500)
Total capital expenditures (4,880) (5,084)
Proceeds from disposition of property,
plant and equipment 706 1,535
NET CASH USED IN INVESTING
ACTIVITIES (4,174) (3,549)
FINANCING ACTIVITIES
Checks outstanding in excess of
cash balances 820 879
Decrease in notes payable
to Questar Corporation (17,500) (6,700)
Payment of dividends (5,375) (5,250)
NET CASH USED IN FINANCING
ACTIVITIES (22,055) (11,071)
DECREASE IN CASH AND SHORT-
TERM INVESTMENTS ($9,990) ($7,075)
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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-month period ended March 31, 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 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 or AFUDC.
3 Months Ended
March 31,
1999 1998
(In Thousands)
Revenues $1,055 $1,055
Operating income 282 190
Income before income taxes 2,665 876
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
March 31, 1999
(Unaudited)
Operating Results
Following is a summary of financial and operating information for the
Company:
<TABLE>
<CAPTION>
3 Months Ended 12 Months Ended
March 31, March 31,
1999 1998 1999 1998
(Dollars In Thousands)
<S> <C> <C> <C> <C>
FINANCIAL RESULTS
Revenues
From unaffiliated customers $9,021 $9,065 $37,112 $36,277
From affiliates 18,145 18,184 71,362 69,688
Total revenues $27,166 $27,249 $108,474 $105,965
Operating income $13,064 $12,806 $53,456 $49,831
Net income 6,962 6,554 28,299 26,800
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 25,946 32,778 113,915 115,690
For Questar Gas 35,635 38,331 104,805 106,378
For other affiliated customers 3,380 4,858 25,400 35,839
Total transportation 64,961 75,967 244,120 257,907
Transportation revenue (per
decatherm) $0.27 $0.24 $0.29 $0.27
Net income increased 6% in 1999 compared with the first quarter and
12-month period of 1998. The Company benefited from higher storage
revenues, lower operating expenses and higher earnings from
unconsolidated affiliates.
Storage revenues were higher in the 3- and 12-month periods of 1999
due primarily to increased firm-storage reservation charges because
of the expansion of the Clay Basin storage complex in the first half
of 1998. However, the full impact was offset in the first quarter of
1999 by lower firm-transportation revenues. Average daily demand in
the first quarter of 1999 was 84,000 decatherms or 7% lower as a
result of the expiration of several firm-transportation contracts.
Questar Pipeline amended its transportation agreement with Questar
Gas extending the term of the agreement for three years to June 2002.
The terms of the amended contract are identical to the former
agreement with the exception of the expiration date. Prior to the
amendment, the agreement was scheduled to expire in June 1999.
Operating and maintenance expenses were lower in the 1999 periods
presented when compared with the 1998 periods due to the effects of
an early retirement program effective August 1998. Labor costs
savings amounted to $700,000 in the first quarter of 1999. Higher
costs incurred in 1999 for telecommunications and data processing
have partially offset the effect of lower labor cost.
Increased investment in capital projects has resulted in higher
depreciation charges in the first quarter of 1999. The full impact
of increased investment was partially offset in the 12 months of 1999
by a downward adjustment of depreciation expense in the second
quarter of 1998. Other taxes were higher in the first quarter of
1999 when compared with the same period of 1998 as a result of higher
property tax. Generally, property taxes have been increasing in
conjunction with the expansion of plant assets.
Earnings from unconsolidated affiliates in the 1999 periods include
the Company's share of income reported by TransColorado Gas
Transmission Co. The noncash earnings are the result of capitalizing
interest and equity costs (AFUDC) associated with the construction of
the TransColorado Pipeline. AFUDC amounted to $1,265,000 in the first
quarter of 1999 compared with $318,000 in the corresponding 1998
period. Phase II of the TransColorado Pipeline was placed in service
March 31, 1999, with the pipeline currently flowing approximately 85
MMcf of gas per day at a discounted rate. With the completion of
construction of Phase II, Questar Pipeline will complete its
acquisition of the smaller Phase I. Phase I has been in service
since December 1996 and is fully subscribed.
Interest and other income in the first quarter of 1999 includes AFUDC
from other capital projects of Questar Pipeline. Debt expense was
higher in the first quarter 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 effective income tax rate was 37.8% in the first quarter of 1999
compared with 32.4% for the same period in 1998 due to adjustments
that reduced first quarter 1998 tax expenses.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of $16,239,000 in the
first quarter of 1999 was $8,694,000 more than the amount reported
for the same period in 1998 due primarily to changes in operating
assets and liabilities. The changes were associated with timing
differences in paying costs of construction projects.
Investing Activities
Capital expenditures were $4,880,000 in the first quarter of 1999
compared with $5,084,000 in the corresponding 1998 period. Capital
expenditures for calendar year 1999 are estimated to be $89.1
million.
Financing Activities
Questar Corporation loans funds to the Company under a short-term
arrangement. As of March 31, amounts borrowed from Questar were
$20.5 million in 1999 and $19.1 million in 1998. Capital
expenditures for 1999 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.
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
has identified 59 projects that are in varying stages of remediation
and the scope includes Questar and its affiliated companies. The
projects fit into the general classifications of application
software, infrastructure, noninformation technology equipment and
critical third-party associations. Questar Pipeline estimates that
Y2K costs will be $1.0 million and expects to be Y2K compliant before
the end of 1999. 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
adversly affect the Company's results of operations, liquidity and
financial condition.
The infrastructure section of the plan addresses hardware and systems
software other than applications software. Currently, there are 19
projects identified: 1 in start-up, 8 in assessment, 6 in
remediation, 0 in testing and 4 completed and deemed to be Y2K ready.
The applications software section addresses either the conversion or
replacement of applications software that is not Y2K compliant.
Currently, there are 39 projects in this section: 10 in start-up, 7
in assesssment, 4 in remediation, 4 in testing and 14 completed and
deemed to be Y2K compliant.
Non-information technology equipment is considered to be one project
and addresses hardware, software and associated embedded computer
chips used in the operation of all facilities operated by the
Company. Because this section has unique charateristics and is large,
the Company has employed the services of a consultant to assist in
the effort. The project is in the assessment phase and is expected
to be completed by year-end 1999.
Inquiries of critical third parties have been taking place with more
contacts scheduled. Contacting parties is scheduled to be completed
by mid-year. Contingency plans for dealing with third-party issues
will be developed by the end of 1999.
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.
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 Southern Trails Pipeline Company, a wholly-owned
subsidiary of Questar Pipeline Company (Questar Pipeline or the
Company), is seeking the necessary certification from the Federal
Energy Regulatory Commission (FERC) to convert and operate a 700-mile
crude oil line to natural gas. (See the Company's Form 10-K Annual
Report for 1998, pages 3 and 6.) The California Public Utilities
Commission and Southern California Gas Company have intervened in the
FERC proceedings and are protesting the application.
b. The Department of Justice (Department) has determined not to
intervene and assume prosecution of the case against Questar
Corporation (Questar) and some of its affiliates, including Questar
Pipeline, filed by a producer under the federal False Claims Act.
This case, which is substantially similar to 75 other cases filed
against pipelines and their affiliates, is pending in the United
States District Court for the District of Colorado. In response to
the Department's decision, the court has lifted the seal and directed
the producer to serve the complaint.
Although the Company has not been formally served with the
complaint, it received a copy from the Department in August of 1998.
The complaint alleges that the defendants mismeasured the heating
content of natural gas volumes and understated the value of gas on
which royalty payments are due the federal government. It also claims
treble damages and seeks imposition of civil penalties, but does not
include a request for any specific monetary damages.
The Company and its affiliates have been involved with the
producer in other litigation and currently plan to actively contest
the newest round of allegations and claims.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits have been filed as part of this
report:
Exhibit No. Exhibits
10.14. Firm Transportation Service Amendment with Questar
Gas Company under Rate Schedule T-1 to extend the
term of the basic agreement to June 30, 2002.
10.14. No Notice Service Agreement with Questar Gas Company
under Rate Schedule NNT to extend the term of the
basic agreement to June 30, 2002.
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)
May 13, 1999 /s/ D. N. Rose
D. N. Rose
President and Chief Executive
Officer
May 13, 1999 /s/ S. E. Parks
S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer
<PAGE>
Exhibits Index
Exhibit No. Exhibits
10.14. Firm Transportation Service Amendment with Questar
Gas Company under Rate Schedule T-1 to extend the
term of the basic agreement to June 30, 2002.
10.14. No Notice Service Agreement with Questar Gas Company
under Rate Schedule NNT to extend the term of the
basic agreement to June 30, 2002.
12. Ratio of earnings to fixed charges.
</TABLE>
Exhibit 10.14
Contract No. MT 241
Amendment No. _______
19____
FIRM TRANSPORTATION SERVICE AMENDMENT
Rate Schedule T-1
Amended Terms
1. SHIPPER'S NAME AND ADDRESS:
Questar Gas Company
180 East First South
P.O. Box 45360
Salt Lake City, UT 84145-0360
2. RATE SCHEDULE T-1 QUANTITY:
Reserved Daily Capacity
_______ Dth/day
3. TERM OF THE AGREEMENT:
November 1, 1989, to June 30, 2002
4. RENEWAL TERM:
___________ None
___________ Month
_____X_____ Other year to year
5. PRIMARY RECEIPT POINTS:
Add
Permanent Release
Receipt Pt.
Map Nos. Capacity
6. PRIMARY DELIVERY POINTS:
Add
Permanent Release
Delivery Pt.
Map No. Capacity
7. RATES:
Reservation Charge:
The maximum rate on Questar's Statement of Rates
A discounted rate of $ /Dth
Usage Charge:
The rate on Questar's Statement of Rates
Other
8. EFFECTIVE DATE OF CHANGES:
June 30, 1999
9. ADDITIONAL TERMS:
This Agreement includes all the terms and conditions of
Questar's FERC Gas Tariff, First Revised Volume No. 1 and the
terms, conditions and signatures of Shipper's access agreement
with Questar.
QUESTAR PIPELINE COMPANY QUESTAR GAS COMPANY
By: By:
L. F. Gill, Vice President and D. N. Rose, President and CEO
General Manager
Exhibit 10.14
Contract No. 987
AMENDMENT NO. 2
NO-NOTICE SERVICE AGREEMENT
Rate Schedule NNT
Amended Terms
1. SHIPPER'S NAME AND ADDRESS:
Questar Gas Company
180 East First South
P.O. Box 45360
Salt Lake City, UT 84145-0360
2. NO-NOTICE SERVICE LEVEL:
_____________________ Dth/day
3. APPLICABLE RECEIPT POINTS:
4. APPLICABLE DELIVERY POINTS:
5. RATES:
Reservation Charge:
__________The maximum rate on Questar's Statement of Rates
__________A discounted rate of $___________/dth
__________See additional terms
6. TERM OF SERVICE:
September 1, 1993, to June 30, 2002
7. RENEWAL TERM:
___________ None
___________ Month to month
_______X___ Other year to year
8. ADDITIONAL TERMS:
This Agreement includes all the terms and conditions of
Questar's FERC Gas Tariff, First Revised Volume No. 1 and the
terms, conditions and signatures of Shipper's access agreement
with Questar.
QUESTAR PIPELINE COMPANY QUESTAR GAS COMPANY
By:______________________________ By:_____________________________
L. F. Gill, Vice President and D. N. Rose, President and CEO
General Manager
Exhibit No. 12.
Questar Pipeline Company
Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year ended March 31,
1998 1999
(Dollars in Thousands)
<S> <C> <C>
Earnings
Income before income taxes $39,920 $40,614
Plus debt expense 19,903 19,771
Plus allowance for borrowed
funds used during construction 226 1,326
Plus interest portion of rental expense 263 377
$60,312 $62,088
Fixed Charges
Debt expense $19,903 $19,771
Plus allowance for borrowed
funds used during construction 226 1,326
Plus interest portion of rental expense 263 377
$20,392 $21,474
Ratio of Earnings to Fixed Charges 2.96 2.89
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following schedule contains summarized financial information extracted
from the Questar Pipeline Company Consolidated Statements of Income and
Balance Sheets for the period ended March 31, 1999, and is qualified in its
entirety by reference to such unaudited financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,893
<ALLOWANCES> 0
<INVENTORY> 2,890
<CURRENT-ASSETS> 9,355
<PP&E> 671,908
<DEPRECIATION> 219,630
<TOTAL-ASSETS> 529,370
<CURRENT-LIABILITIES> 61,826
<BONDS> 203,007
0
0
<COMMON> 6,551
<OTHER-SE> 192,239
<TOTAL-LIABILITY-AND-EQUITY> 529,370
<SALES> 0
<TOTAL-REVENUES> 27,166
<CGS> 0
<TOTAL-COSTS> 9,389
<OTHER-EXPENSES> 4,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,177
<INCOME-PRETAX> 11,187
<INCOME-TAX> 4,225
<INCOME-CONTINUING> 6,962
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,962
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
