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. 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 July 31, 2000
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.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR PIPELINE COMPANY 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)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 29,407 $ 27,036 $ 59,265 $ 54,202 $ 117,223 $ 108,911
OPERATING EXPENSES
Operating and maintenance 9,768 8,331 19,733 17,720 40,547 37,059
Depreciation 4,271 4,098 8,451 8,074 17,120 15,686
Other taxes 684 699 1,362 1,436 2,414 2,848
TOTAL OPERATING EXPENSES 14,723 13,128 29,546 27,230 60,081 55,593
OPERATING INCOME 14,684 13,908 29,719 26,972 57,142 53,318
INTEREST AND OTHER
INCOME 705 2,441 1,585 3,250 2,564 3,404
OPERATIONS OF UNCONSOLIDATED
AFFILIATES
Income (loss) 176 (1,555) 396 (64) (4,649) 2,797
Write-down of investment in partnership (49,700)
176 (1,555) 396 (64) (54,349) 2,797
DEBT EXPENSE (4,392) (4,038) (9,091) (8,215) (18,342) (15,737)
INCOME (LOSS) BEFORE
INCOME TAXES 11,173 10,756 22,609 21,943 (12,985) 43,782
INCOME TAXES 4,097 3,724 8,409 7,949 (4,800) 15,511
NET INCOME (LOSS) $ 7,076 $ 7,032 $ 14,200 $ 13,994 $ (8,185) $ 28,271
</TABLE>
See notes to financial statements
<PAGE>
QUESTAR PIPELINE COMPANY 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 $ 1,662 $ 2,387
Notes receivable from Questar 1,100
Corporation
Accounts receivable 9,428 $ 10,740 21,704
Inventories - materials and 2,451 3,245 2,443
supplies
Other current assets 1,491 1,431 1,782
Total current assets 15,032 15,416 29,416
Property, plant and equipment 715,523 682,157 698,236
Less allowances for depreciation 236,247 224,039 228,784
Net property, plant and
equipment 479,276 458,118 469,452
Investment in unconsolidated
affiliates 19,144 58,013 11,724
Other assets 14,788 11,954 12,435
$528,240 $543,501 $ 523,027
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $ 893
Notes payable to Questar
Corporation $ 14,600 53,400 $ 42,500
Accounts payable and accrued
expenses 11,308 18,334 15,206
Total current liabilities 25,908 72,627 57,706
Long-term debt 245,011 202,992 245,001
Other liabilities 5,098 1,610 3,118
Deferred income taxes 51,462 65,826 49,891
Common shareholder's equity
Common stock 6,551 6,551 6,551
Additional paid-in capital 112,034 82,034 82,034
Retained earnings 82,176 111,861 78,726
Total common shareholder's
equity 200,761 200,446 167,311
$528,240 $543,501 $ 523,027
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR PIPELINE COMPANY 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 $ 14,200 $ 13,994
Depreciation 9,002 8,472
Deferred income taxes 1,571 2,316
(Income) loss from unconsolidated
affiliates, net of cash distributions (396) 713
24,377 25,495
Change in operating assets and
liabilities 8,298 (25,291)
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 32,675 204
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (18,210) (12,647)
Investment in unconsolidated affiliates (7,024) (4,014)
Total capital expenditures (25,234) (16,661)
Proceeds from (costs of) disposition of
property, plant and equipment (616) 924
NET CASH USED IN INVESTING
ACTIVITIES (25,850) (15,737)
FINANCING ACTIVITIES
Checks outstanding in excess of
cash balances 893
Decrease in notes receivable from
Questar Corporation 1,100
Increase (decrease) in notes payable to
Questar Corporation (27,900) 15,400
Capital contribution 30,000
Payment of dividends (10,750) (10,750)
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (7,550) 5,543
DECREASE IN CASH AND SHORT-
TERM INVESTMENTS $ (725) $ (9,990)
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR PIPELINE COMPANY 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. 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 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 - Investment in Unconsolidated Affiliates
Questar Pipeline, directly or indirectly through
subsidiaries, 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).
6 Months Ended
June 30,
2000 1999
(In Thousands)
Revenues $ 5,006 $ 4,757
Operating loss (4,570) (634)
Loss before income taxes (10,840) (1,066)
Note 3 - Receipt of Capital Contribution
On March 1, 2000, Questar Pipeline received a $30 million
contribution of capital from its parent company that was
used to repay short-term debt owed to Questar
Corporation.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
June 30, 2000
(Unaudited)
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,
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 decat $ 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.
Operating and maintenance (O & M) expenses were higher in
the 2000 periods when compared with the 1999 periods due
to the combined effect of one-time adjustments recorded
last year that were not repeated in 2000 and the
inclusion of gas-processing operations in mid-1999. The
one-time adjustments, mostly to capitalize costs incurred
in constructing plant assets, reduced O & M expenses by
$1.8 million in the second quarter of 1999. O & M
expenses related to gas processing amounted to $.6
million in the second quarter and $1.1 million in the
first half of 2000.
Increased investments in capital projects, mainly the gas
processing plant, resulted in higher depreciation charges
in the 2000 periods compared with the 1999 periods.
Other taxes declined in the 2000 periods compared with
the year ago periods mainly from lower property tax rates
in 2000.
Interest and other income in the first half of 1999
includes the reversal of a $2.5 million contingency
reserve that was not repeated in 2000. The transaction
was related to the completion of the TransColorado
Pipeline and one other construction project and increased
other income.
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.
Debt expense was higher in the 2000 periods compared with
the 1999 periods because of additional long-term
borrowings. The Company borrowed $42 million in October
1999 through a medium-term note program. The amount of
interest costs being capitalized with construction
projects has increased in the 2000 periods presented.
The effective income tax rate was 37.2% in the first half
of 2000 compared with 36.2% in the first half of 1999.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of
$32,675,000 in the first half of 2000 was $32,471,000
more than the amount reported for the same period of 1999
due primarily to higher income and changes in operating
assets and liabilities. The changes were associated
primarily from lower payments to vendors when compared
with a year ago due to the completion of construction
projects.
Investing Activities
Capital expenditures were $25,234,000 in the first half
of 2000 compared with $16,661,000 in the corresponding
1999 period. The increase in the 2000 period is
primarily due to expenditures for the Southern Trails
pipeline and the purchase of an additional 18% interest
in the Overthrust Pipeline partnership effective January
1, 2000. Capital expenditures for calendar year 2000 are
estimated to be $57.9 million. Capital expenditures
include capitalized financing charges (AFUDC) of
approximately $2.7 million in 2000 and $2.2 million in
1999.
Financing Activities
Cash flow from operations plus an equity investment from
the Company's parent company were sufficient to fund
capital expenditures, repay a portion of debt owed to
Questar Corporation and pay common dividends. Questar
Corporation makes loans to the Company under a short-term
arrangement. As of June 30, Questar Pipeline had
borrowed from Questar $14.6 million in 2000 and $53.4
million in 1999. Remaining 2000 capital expenditures
are expected to be financed with net cash provided from
operating activities, borrowings from Questar Corporation
and a possible equity infusion from the Company's parent
company.
Regulatory Matters
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 (SEC)
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 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 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 July 27, 2000, Questar Pipeline Company ("Questar
Pipeline" or the "Company") filed an answer, counterclaim, and third
party complaint in the lawsuit filed by KN TransColorado, Inc.
("KNTC"). See the Company's Current Report on Form 8-K dated June
15, 2000, for a description of the complaint. Other Questar parties
to the proceedings include Questar Corporation ("Questar"), the
Company's indirect parent, and Questar TransColorado, Inc. ("QTC"),
the Company's subsidiary that is the partner in the TransColorado
Gas Transmission Company ("TC Partnership"). The TC Partnership
constructed, owns, and currently operates the TransColorado pipeline
project.
In the answer and complaint, the named 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. (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).) The Questar defendants
also counterclaimed against specified affiliates of KNTC, including
Kinder Morgan, Inc. and KN Interstate Gas Transmission Company
(collectively "Kinder"). The counterclaim and complaint include
multiple causes of action including breach of contract, fraudulent
misrepresentation, breach of covenant of good faith and fair
dealing, etc.
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
the project, to provide that KNTC's lawsuit seeking to dissolve the
partnership does not constitute an event of default under its terms.
b. On July 26, 2000, the Federal Energy Regulatory Commission
(the "FERC") granted a certificate of convenience and necessity for
the Southern Trails pipeline project. Under the terms of the
certificate, Questar Southern Trails Company ("Southern Trails"),
the Company's wholly owned subsidiary, has two years in which to
convert the line to natural gas. Questar Pipeline purchased the oil
line in 1998 and has pursued the necessary regulatory and
environmental approvals to convert it and has also pushed for
competition within California markets. When the 700-mile line is
converted and the necessary compression facilities are installed, up
to 90 million cubic feet of natural gas per day (MMcfd) could be
shipped on the eastern segment and up to 120 MMcfd on the western
segment into southern California. The project has not yet received
final environmental approvals, but the final draft of the
environmental impact statement has been published.
Southern Trails will continue its activities to secure the
necessary rights of way and obtain market support for the project.
Item 5. Other Information.
a. Marilyn S. Kite resigned her positions as a director of
the Company and Questar Corporation effective July 1, 2000. She
resigned after her appointment to serve as the first woman member of
the Wyoming Supreme Court. Ms. Kite had served as a director since
May of 1997. The Board of Directors has not appointed a director to
fill her term, which expires in May of 2001.
b. Effective August 1, 2000, David M. Curtis, age 45, was
appointed to serve as Controller for Questar Pipeline and other
entities within the Regulated Services unit. Mr. Curtis, as
Controller, is the Company's primary accounting officer; he has over
17 years of service with the Company and its affiliates. He
replaces Mr. Glenn H. Robinson, who was named to serve as an
executive officer of Questar effective August 1, 2000.
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 10, 2000 /s/ D. N. Rose
D. N. Rose
President and Chief Executive
Officer
August 10, 2000 /s/ S. E. Parks
S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer
