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, 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 April 30, 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 12 Months Ended
March 31, March 31,
2000 1999 2000 1999
(In Thousands)
<S> <C> <C> <C> <C>
REVENUES $ 29,858 $ 27,166 $ 114,852 $ 108,474
OPERATING EXPENSES
Operating and maintenance 9,965 9,389 39,110 38,294
Depreciation 4,180 3,976 16,947 14,060
Other taxes 678 737 2,429 2,664
TOTAL OPERATING EXPENSES 14,823 14,102 58,486 55,018
OPERATING INCOME 15,035 13,064 56,366 53,456
INTEREST AND OTHER
INCOME 880 809 4,300 973
OPERATIONS OF UNCONSOLIDATED
AFFILIATES
Income (loss) 220 1,491 (6,380) 5,095
Write-down of investment
in partnership (49,700)
220 1,491 (56,080) 5,095
DEBT EXPENSE (4,699) (4,177) (17,988) (15,199)
INCOME (LOSS) BEFORE
INCOME TAXES 11,436 11,187 (13,402) 44,325
INCOME TAXES (CREDITS) 4,312 4,225 (5,173) 16,026
NET INCOME (LOSS) $ 7,124 $ 6,962 $ (8,229) $ 28,299
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999 1999
(Unaudited)
(In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short-term
investments $ 1,363 $ 2,387
Notes receivable from
Questar Corporation 2,300 1,100
Accounts receivable 8,300 $ 4,893 21,704
Inventories - materials
and supplies 2,538 2,890 2,443
Other current assets 1,550 1,572 1,782
Total current assets 16,051 9,355 29,416
Property, plant and equipment 708,002 671,908 698,236
Less allowances for
depreciation 231,699 219,630 228,784
Net property, plant
and equipment 476,303 452,278 469,452
Investment in unconsolidated
affiliates 18,968 58,054 11,724
Other assets 12,356 9,683 12,435
$ 523,678 $ 529,370 $ 523,027
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess
of cash balances $ 820
Notes payable to Questar
Corporation $ 8,400 20,500 $ 42,500
Accounts payable and accrued
expenses 17,125 40,506 15,206
Total current liabilities 25,525 61,826 57,706
Long-term debt 245,006 203,007 245,001
Other liabilities 3,319 1,562 3,118
Deferred income taxes 50,768 64,185 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 80,475 110,205 78,726
Total common shareholder's equity 199,060 198,790 167,311
$ 523,678 $ 529,370 $ 523,027
</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,
2000 1999
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,124 $ 6,962
Depreciation 4,454 4,063
Deferred income taxes 877 675
Earnings from unconsolidated
affiliates, net of cash
distributions (220) (642)
12,235 11,058
Change in operating assets and
liabilities 15,745 5,181
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 27,980 16,239
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (10,592) (2,180)
Investment in unconsolidated
affiliates (7,024) (2,700)
Total capital expenditures (17,616) (4,880)
Proceeds from (costs of)
disposition of property,
plant and equipment (713) 706
NET CASH USED IN INVESTING
ACTIVITIES (18,329) (4,174)
FINANCING ACTIVITIES
Checks outstanding in excess
of cash balances 820
Increase in notes receivable from
Questar Corporation (1,200)
Decrease in notes payable to
Questar Corporation (34,100) (17,500)
Capital contribution 30,000
Payment of dividends (5,375) (5,375)
NET CASH USED IN
FINANCING ACTIVITIES (10,675) (22,055)
DECREASE IN CASH AND SHORT-
TERM INVESTMENTS $ (1,024) $ (9,990)
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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-month period ended March 31, 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 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).
3 Months Ended
March 31,
2000 1999
(In Thousands)
Revenues $ 2,478 $ 1,055
Operating income (loss) (2,644) 282
Income (loss) before
income taxes (5,490) 2,665
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
March 31, 2000
(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,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 9,596 $ 9,021 $ 37,497 $ 37,112
From affiliates 20,262 18,145 77,355 71,362
Total revenues $ 29,858 $ 27,166 $ 114,852 $ 108,474
Operating income $ 15,035 $ 13,064 $ 56,366 $ 53,456
Net income (loss) 7,124 6,962 (8,229) 28,299
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 29,095 25,946 139,035 113,915
For Questar Gas
36,315 35,635 106,179 104,805
For other affiliated customers 1,325 3,380 10,098 25,400
Total transportation 66,735 64,961 255,312 244,120
Transportation revenue
(per decatherm) $ 0.27 $ 0.27 $ 0.28 $ 0.29
</TABLE>
<PAGE>
Revenues were higher in the 3-and 12-month periods of 2000 compared
with the 1999 periods due primarily to the addition of
gas-processing operations. A subsidiary of Questar Pipeline,
Questar Transportation Services, began operations at mid-year 1999
to remove carbon dioxide from certain gas supplies to make them
suitable for Questar Gas' system. Revenues for firm-transportation
increased 4% in the 2000 quarter compared to 1999 from the addition
of several firm-transportation contracts. Transportation revenues
were flat in the twelve month periods.
Operating and maintenance expenses were higher in the 2000 periods
when compared with the 1999 periods due primarily from the
inclusion of gas-processing operations in mid-1999. 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 8% in the 2000
quarter compared with the year ago quarter mainly from lower
property tax rates in 2000.
Interest and other income was higher in the 2000 periods presented
compared to the 1999 periods mainly from AFUDC (capitalized
financing costs) associated with Questar Pipeline's capital
projects.
Earnings from unconsolidated affiliate were lower in the 2000
periods compared with the 1999 periods. AFUDC of $1,265,000
associated with the TransColorado pipeline was recorded in the
first quarter 1999, with no comparable amounts recorded in the 2000
quarter. The decline in earnings for the twelve months was due
mainly to lower AFUDC from TransColorado and a 1999 pretax
operating loss from a TransColorado of $8.2 million.
Debt expense was higher in the 2000 periods compared to the 1999
periods because of additional long-term borrowings. The Company
borrowed $42 million in October 1999 through a medium-term note
program. The notes have a 10-year life and a weighted-average
coupon rate of 7.48%. The Company capitalizes a portion of
interest costs associated with construction projects in 2000.
The effective income tax rate was 37.7% in the 2000 quarter
compared with 37.8% in the 1999 quarter.
Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities of $27,980,000 in the
first quarter of 2000 was $11,741,000 more than the amount reported
for the same period of 1999 due primarily to 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 $17,616,000 in the first quarter of 2000
compared with $4,880,000 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 $68.3 million.
Financing Activities
On March 1, 2000, Questar Pipeline received a $30 million
contribution of capital from its parent company. The capital
contribution plus the cash generated from operations allowed the
Company to repay $34.1 million of short-term debt borrowed from
Questar Corporation and to fund first-quarter capital expenditures.
Questar Corporation makes loans to the Company under a short-term
arrangement. As of March 31, Questar Pipeline had borrowed from
Questar $8.4 million in 2000 and $20.5 million in 1999. Remaining
2000 capital expenditures are expected to be financed with net cash
provided from operating activities, borrowings from Questar
Corporation and issuing medium-term debt.
Regulatory Matters
The Federal Energy Regulatory Commission (FERC) 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 on marketing efforts to subscribe the
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 issue is
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. For the Company, the guidelines of SAB 101are
effective in the second quarter of 2000.
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.
Questar Pipeline Company (Questar Pipeline or the Company) is
involved in two active cases filed by an independent producer, Jack
Grynberg. (See the Company's Form 10-K for 1999, Item 3. Legal
Proceedings, for a discussion of the two cases and related matters.)
One of the two cases is pending in a Utah state district court and
involves allegations of breach of contract, fraud, breach of
fiduciary responsibilities, and negligent misrepresentation. The
trial court judge ruled against the Company's initial motions to
dismiss or stay the proceedings pending the resolution of issues
involving the parties in other forums. Questar Pipeline recently
filed a new motion to dismiss, urging that Grynberg's claims are
barred by the relevant statute of limitations, are preempted by
federal law with the Federal Energy Regulatory Commission having
exclusive authority, are not plead with the necessary particularity
for fraud, etc. The Company has also requested the court to stay
discovery until ruling on the motion and has formally objected to
all of Grynberg's discovery requests.
The second case is part of Grynberg's massive attack on
pipelines and their affiliates alleging industry-wide mismeasurement
of the value of gas on which royalty payments are due the federal
government. The case against Questar Pipeline is one of 76
substantially similar complaints filed under the Federal False
Claims Act. The cases have been consolidated for discovery and
pre-trial rulings in Wyoming's federal district court. The district
judge has not ruled on the defendants' joint motion to dismiss the
lawsuit.
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)
May 12, 2000 /s/ D. N. Rose
D. N. Rose
President and Chief Executive
Officer
May 12, 2000 /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
(Unaudited)
<TABLE>
<CAPTION>
12 months ended March 31,
2000 1999
(Dollars in Thousands)
<S> <C> <C>
Earnings
Income (loss) before income taxes ($13,402) $44,325
Plus debt expense 17,988 15,199
Plus allowance for borrowed
funds used during construction 2,605 1,326
Plus interest portion of rental expense 201 342
$7,392 $61,192
Fixed Charges
Debt expense $17,988 $15,199
Plus allowance for borrowed
funds used during construction 2,605 1,326
Plus interest portion of rental expense 201 342
$20,794 $16,867
Ratio of Earnings to Fixed Charges 0.36 3.63
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following schedule contains summarized financial information extracted
from the Questasr Pipeline Consolidated Statements of Income and Balance Sheet
for the period ended March 31, 2000, 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-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,1363
<SECURITIES> 0
<RECEIVABLES> 10,600
<ALLOWANCES> 0
<INVENTORY> 2,538
<CURRENT-ASSETS> 16,051
<PP&E> 708,002
<DEPRECIATION> 231,699
<TOTAL-ASSETS> 523,678
<CURRENT-LIABILITIES> 25,525
<BONDS> 245,006
0
0
<COMMON> 6,551
<OTHER-SE> 192,509
<TOTAL-LIABILITY-AND-EQUITY> 523,678
<SALES> 0
<TOTAL-REVENUES> 29,858
<CGS> 0
<TOTAL-COSTS> 9,965
<OTHER-EXPENSES> 4,858
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,699
<INCOME-PRETAX> 11,436
<INCOME-TAX> 4,312
<INCOME-CONTINUING> 7,124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,124
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
