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, 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 October 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.
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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,
2000 1999 2000 1999 2000 1999
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 28,187 $ 28,344 $ 87,452 $ 82,546 $117,066 $110,022
OPERATING EXPENSES
Operating and maintenance 10,783 9,439 30,516 27,159 41,891 36,007
Depreciation 2,949 4,774 11,400 12,848 15,295 16,666
Other taxes 716 703 2,078 2,139 2,427 2,854
TOTAL OPERATING EXPENSES 14,448 14,916 43,994 42,146 59,613 55,527
OPERATING INCOME 13,739 13,428 43,458 40,400 57,453 54,495
INTEREST AND OTHER INCOME 688 416 2,273 3,666 2,836 3,833
OPERATIONS OF UNCONSOLIDATED
AFFILIATES
Income (loss) 324 (2,304) 720 (2,368) (2,021) (451)
Write-down of investment in
partnership (49,700)
324 (2,304) 720 (2,368) (51,721) (451)
DEBT EXPENSE (4,295) (4,387) (13,386) (12,602) (18,250) (16,518)
INCOME (LOSS) BEFORE
INCOME TAXES 10,456 7,153 33,065 29,096 (9,682) 41,359
INCOME TAXES 3,890 2,685 12,299 10,634 (3,595) 14,591
NET INCOME (LOSS) $ 6,566 $ 4,468 $ 20,766 $ 18,462 $ (6,087) $ 26,768
</TABLE>
See notes to consolidated financial statements
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QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999 1999
(Unaudited)
(In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 854 $ 2,387
Notes receivable from Questar Corp 8,400 1,100
Accounts receivable 7,687 $ 24,860 21,704
Inventories - materials and
supplies, at lower of average
cost or market 2,520 2,916 2,443
Prepaid expenses and other 1,568 1,750 1,782
Total current assets 21,029 29,526 29,416
Property, plant and equipment 721,314 692,616 698,236
Less allowances for depreciation 239,446 228,207 228,784
Net property, plant and
equipment 481,868 464,409 469,452
Investment in unconsolidated
affiliates 20,029 54,737 11,724
Other assets 17,611 11,887 12,435
$540,537 $560,559 $ 523,027
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balance $ 107
Notes payable to Questar Corp. $ 9,500 72,300 $ 42,500
Accounts payable and accrued
expenses 22,587 17,185 15,206
Total current liabilities 32,087 89,592 57,706
Long-term debt 245,015 202,996 245,001
Other liabilities 8,717 1,602 3,118
Deferred income taxes 52,766 66,830 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 83,367 110,954 78,726
Total common shareholder'
equity 201,952 199,539 167,311
$540,537 $560,559 $ 523,027
</TABLE>
See notes to consolidated financial statements
3
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QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
9 Months Ended
September 30,
2000 1999
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 20,766 $ 18,462
Depreciation 12,233 13,445
Deferred income taxes 2,875 3,320
(Income) loss from unconsolidated
affiliates, net of cash distributions 720 3,988
36,594 39,215
Change in operating assets and
liabilities 21,971 (40,486)
NET CASH PROVIDED FROM (USED IN)
OPERATING ACTIVITIES 58,565 (1,271)
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (23,261) (23,443)
Investment in unconsolidated affiliates (9,024) (4,014)
Total capital expenditures (32,285) (27,457)
Proceeds from (costs of) disposition of
property, plant and equipment (1,388) 456
NET CASH USED IN INVESTING
ACTIVITIES (33,673) (27,001)
FINANCING ACTIVITIES
Checks outstanding in excess of
cash balance 107
Increase in notes receivable from
Questar Corp. (7,300)
Increase (decrease) in notes payable to
Questar Corp. (33,000) 34,300
Equity investment 30,000
Payment of dividends (16,125) (16,125)
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (26,425) 18,282
DECREASE IN CASH AND CASH
EQUIVALENTS $ (1,533) $ (9,990)
</TABLE>
See notes to consolidated financial statements
4
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QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine-month periods ended September 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 of natural gas is
the primary business activity of these partnerships.
Summarized operating results of the partnerships are
listed below. In 1999, income before income taxes
includes capitalized financing charges called allowance
for funds used during construction (AFUDC).
9 Months Ended
September 30,
2000 1999
(In Thousands)
Revenues $ 9,113 $ 7,268
Operating loss (4,978) (2,362)
Loss before income taxes (14,532) (5,839)
Note 3 - Receipt of Equity
On March 1, 2000, Questar Pipeline received a $30 million
equity investment from its parent company that was used
to repay short-term debt.
5
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Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
September 30, 2000
(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,
2000 1999 2000 1999 2000 1999
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 10,454 $ 8,863 $ 30,355 $ 27,638 $ 39,639 $ 37,063
From affiliates 17,733 19,481 57,097 54,908 77,427 72,959
Total revenues $ 28,187 $ 28,344 $ 87,452 $ 82,546 $117,066 $110,022
Operating income $ 13,739 $ 13,428 $ 43,458 $ 40,400 $ 57,453 $ 54,495
Net income (loss) 6,566 4,468 20,766 18,462 (6,087) 26,768
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 44,228 38,314 109,126 99,025 145,987 122,653
For Questar Gas 13,357 14,236 73,718 75,955 103,262 103,073
For other affiliated customers 2,436 1,006 5,437 9,464 8,126 16,708
Total transportation 60,021 53,556 188,281 184,444 257,375 242,434
Transportation revenue
(per decatherm) $ 0.28 $ 0.32 $ 0.28 $ 0.28 $ 0.28 $ 0.29
</TABLE>
Revenues were higher in the nine months and twelve months
ended September 30, 2000 when compared with the same
periods of 1999 due to gas-processing operations added
mid-year 1999 and increased transportation demand. A
$1.3 million reduction in and subsequent refund of
processing fees in September 2000 caused third quarter
2000 revenues to fall below third quarter 1999 levels.
Processing fees are determined on the basis of cost of
service. The refund was the result of lower depreciation
costs. Even considering the refund, gas-processing
revenues for the first nine months of 2000 were $2.7
million higher than was reported for the same period of
1999. The gas-processing operations remove carbon
dioxide from certain gas supplies to make them suitable
for Questar Gas' system. Transportation revenues
increased 3% in the third quarter and the first nine
months of 2000 as a result of the addition of several
short-term firm-transportation contracts. Storage
revenues were 1% lower in the third quarter and the first
nine months 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, the inclusion
of gas-processing operations beginning in mid-1999 and
$.5 million of additional legal expenses. 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. Gas processing
costs were responsible for roughly $2 million of the
increase in O & M expenses in the first nine months of
2000.
6
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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. The Company has been
incurring expenses in the defense of its position in the
case.
Depreciation expense was reduced by $1.3 million in the
third quarter of 2000 reflecting a change from 10 years
to 20 years in the estimated useful life of the gas
processing plant. Depreciation on the plant is
calculated on the straight line method.
Interest and other income in the first nine months of
1999 was increased by 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 another construction project.
Earnings from unconsolidated affiliates in 1999 included
the Company's share of losses reported by TransColorado
of $2.6 million for the third quarter and $3.2 million
for the first nine months 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.
Debt expense was higher in the nine-and twelve-month
periods of 2000 when 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 capitalized
interest costs associated with construction projects has
increased by $.4 million in the first nine months of 2000
when compared with the prior year period.
The effective income tax rate was 37.2% in the first nine
months of 2000 compared with 36.5% in the 1999 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of
$57,125,000 in the first nine months of 2000 was
$58,396,000 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 $30,845,000 in the first nine
months of 2000 compared with $27,457,000 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 $4.2 million in 2000 and $3.2
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
credit arrangement. Borrowings from Questar as of
September 30, amounted to $9.5 million in 2000 and $72.3
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 investment from the Company's
parent company.
7
<PAGE>
Early Retirement Offered
On August 28, 2000, Questar's Regulated Services unit
announced an early retirement window program to be
effective October 31, 2000. A total of 281 employees and
14 disability recipients from Questar Gas, Questar
Pipeline and Questar Regulated Services were eligible for
the enhanced benefit. The offer was accepted by 262 of
Regulated Services' employees and all 14 long-term
disability recipients. The window program is projected
to result in pretax labor cost savings for Regulated
Services of over $1 million in 2000 and $6-8 million
yearly.
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. Under the terms of the certificate, the
Company has two years in which to convert the line to
carry natural gas. Questar Pipeline is actively working
on right-of-way issues and exploring marketing
opportunities to subscribe Southern Trails' 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 SEC expects companies
that make conditional sales to postpone fully recognizing
revenues until the earnings process is completed. The
Company records revenues when services are provided or
products are delivered. Periodically revenues are
collected subject to refunds pending final orders from
regulatory agencies. In those situations, revenues are
reported net of estimated refunds. The pronouncement is
effective for Questar Pipeline beginning with the fourth
quarter of 2000 and is not expected to cause a change in
the method used to record revenues.
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.
8
<PAGE>
Part II
Other Information
Item 1. Legal Proceedings.
On October 31, 2000, KN TransColorado, Inc. ("KNTC"), a
subsidiary of Kinder-Morgan, Inc. ("Kinder-Morgan") filed a motion
to dissolve the TransColorado Gas Transmission Company ("TC
Partnership") and appoint a receiver to operate the TransColorado
pipeline project. KNTC and Questar TransColorado, Inc. ("QTC"),
which is a wholly owned subsidiary of Questar Pipeline Company
("Questar Pipeline" or the "Company"), are 50 percent owners in the
TC Partnership. The motion was filed as part of the complex
litigation that is pending in a Colorado state district court in
which the Company and Questar Corporation are named defendants in
addition to QTC. The litigation involves claims and counterclaims
concerning QTC's contractual right to put its 50 percent ownership
interest in the TC Partnership to KNTC during the 12-month period
commencing March 31, 2001. See the Company's Form 10-Q for the
quarter ended June 30, 2000, Item 1. Legal Proceedings, for
additional information concerning the case.
QTC has submitted KNTC 's motion to dissolve the TC Partnership
and appoint a receiver to the administrative agent for the TC
Partnership's $200,000,000 credit facility to determine if it has
any impact on the terms of such facility. After the original
complaint was filed in June of 2000, QTC and KNTC, on behalf of the
TC Partnership, and Questar Pipeline and Kinder-Morgan, as
guarantors, executed an amendment to the credit agreement that the
complaint itself did not constitute an event of default. Questar
Pipeline has provided a guaranty of $100,000,000 for the credit
facility.
QTC and its affiliates have filed a motion to dismiss KNTC's
complaint or, in the alternative, to stay the action and refer some
issues raised in the complaint to the Federal Energy Regulatory
Commission for resolution. They also filed a counterclaim and third
party complaint against KNTC and specified affiliates, including
Kinder-Morgan.
Item 5. Other Information.
Messrs. Gary W. DeBernardi, Lowell F. Gill, and Stephen C.
Yeager resigned as officers of the Company effective October 31,
2000, in conjunction with their retirements. Mr. DeBernardi, age
57, had served as Vice President, Technical Services, for Questar
Pipeline and its primary affiliates, Questar Gas Company ("Questar
Gas") and Questar Regulated Services Company ("QRS") and had over 31
years of service. Mr. Gill, age 58, had served as Vice President
and General Manager of the Company and several of its subsidiaries
including QTC, and as Vice President, Transportation Operations, for
Questar Gas and QRS; he had 38 years of service. Mr. Yeager, age
53, had served as Vice President, Business Development, for the
Company, Questar Gas, and QRS and had over 24 years of service.
The retirements of these officers, together with the
retirements of other employees in the Regulated Services unit, led
to a reorganization of responsibilities and the appointment of three
new officers effective November 1, 2000. Ms. Susan Glasmann, age
53, was named to serve as Vice President, Operations, for the
9
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Company, Questar Gas, and QRS. She had been serving as Vice
President and General Manager for Questar Gas. The operations
within the three companies were consolidated under her leadership.
Mr. Alan K. Allred, age 50, was appointed to serve as Vice
President, Business Development, for Questar Pipeline and its
affiliates in the Regulated Services group. Mr. Allred has more
than 22 years of service with the Company and its affiliates and had
been serving as Manager, Regulatory Affairs. In his new position,
Mr. Allred has responsibility for regulatory affairs, gas supply
management, capacity marketing, gas control, partnerships,
acquisitions, and new ventures.
Mr. Shahab Saeed, age 41, was named to serve as Vice President,
Support Services, for Questar Pipeline and affiliates in the
Regulated Services group. He had more than 19 years of service and
had been serving as Manager, Administrative Services. Mr. Saeed, in
his new position, has responsibility for engineering, human
resources, information services, system integrity, safety and
environmental activities, research and development, materials and
equipment, and facilities.
Messrs. R. D. Cash, D. N. Rose and S. E. Parks will continue to
serve in their executive officer positions as Chairman of the Board,
President and Chief Executive Officer, and Vice President, Treasurer
and Chief Financial Officer, respectively.
Item 6. Exhibits and Reports on Form 8-K
a. The following exhibit has been filed as part of this report.
Exhibit No. Exhibit
10.1.* Joint Annual Management Incentive Plan adopted
by Questar Pipeline Company, Questar Gas
Company, and Questar Regulated Services Company
as amended and restated effective October 26, 2000.
10.2.* Questar Pipeline Company Deferred Compensation
Plan for Directors as amended and restated
effective October 26, 2000.
10.3.* Questar Corporation Long-term Stock Incentive
Plan as amended and restated effective October
26, 2000. (Exhibit No. 10.3. to Questar
Corporation's Form 10-Q Report for Quarter Ended
September 30, 2000.)
*Exhibit so marked is a management contract or compensation
plan or arrangement.
(b) The Company did not file any Current Reports on Form
8-K during the quarter.
10
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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 13, 2000 /s/ D. N. Rose
D. N. Rose
President and Chief Executive
Officer
November 13, 2000 /s/ S. E. Parks
S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer
11
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EXHIBIT INDEX
Exhibit
Number Exhibit
10.1.* Joint Annual Management Incentive Plan adopted by
Questar Pipeline Company, Questar Gas Company, and
Questar Regulated Services Company as amended and
restated effective October 26, 2000.
10.2.* Questar Pipeline Company Deferred Compensation Plan
for Directors as amended and restated effective
October 26, 2000.
10.3.* Questar Corporation Long-term Stock Incentive Plan
as amended and restated effective October 26, 2000.
(Exhibit No. 10.3. to Questar Corporation's Form
10-Q Report for Quarter Ended September 30, 2000.)
*Exhibit so marked is a management contract or compensation plan
or arrangement.
