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
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
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.
3 Months Ended 12 Months Ended March 31, March 31, 2000 1999 2000 1999 (In Thousands) 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
March 31, December 31, 2000 1999 1999 (Unaudited) (In Thousands) 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
3 Months Ended March 31, 2000 1999 (In Thousands) 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)
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.
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
March 31, 2000
Following is a summary of financial and operating information for
3 Months Ended 12 Months Ended March 31, March 31, 2000 1999 2000 1999 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
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
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.
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.
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.
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.
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.
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.
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.
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.
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 Number Exhibit 12. Ratio of earnings to fixed charges.
Exhibit No. 12.
Questar Pipeline Company and Subsidiaries
Ratio of Earnings to Fixed Charges
12 months ended March 31, 2000 1999 (Dollars in Thousands) 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
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.
FISCAL YEAR END
DEC 31 2000
MAR 31 2000
TOTAL LIABILITY AND EQUITY