-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QMufz/kUqBEMtdggLy4k70SI2lpc5Dl283bs2M3paSfAlkeiITnJdhHTVWc+1C6C OLIkJ2+LCZdYt7NpUBQlMQ== 0000068589-98-000010.txt : 19981116 0000068589-98-000010.hdr.sgml : 19981116 ACCESSION NUMBER: 0000068589-98-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUESTAR GAS CO CENTRAL INDEX KEY: 0000068589 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 870407509 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-55866 FILM NUMBER: 98746650 BUSINESS ADDRESS: STREET 1: 180 E FIRST SOUTH ST STREET 2: PO BOX 45433 CITY: SALT LAKE CITY STATE: UT ZIP: 84145-0433 BUSINESS PHONE: 8015345555 MAIL ADDRESS: STREET 1: 180 EAST FIRST SOUTH ST STREET 2: P O BOX 11150 CITY: SALT LAKE CITY STATE: UT ZIP: 84147 FORMER COMPANY: FORMER CONFORMED NAME: MOUNTAIN FUEL SUPPLY CO DATE OF NAME CHANGE: 19920703 10-Q 1 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, 1998 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. 1-935 QUESTAR GAS COMPANY (Exact name of registrant as specified in its charter) STATE OF UTAH 87-0155877 (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) 324-5555 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 September 30, 1998 Common Stock, $2.50 par value 9,189,626 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 GAS COMPANY STATEMENTS OF INCOME (Unaudited)
3 Months Ended 9 Months Ended 12 Months Ended September 30, September 30, September 30, 1998 1997 1998 1997 1998 1997 (In Thousands) REVENUES $48,619 $47,479 $314,795 $286,115 $476,903 $413,016 OPERATING EXPENSES Natural gas purchases 22,615 21,716 182,678 148,596 283,015 213,828 Operating and maintenance 24,214 23,103 73,226 76,309 98,636 101,652 Depreciation 8,288 7,189 23,816 22,491 32,485 30,412 Other taxes 2,138 2,085 7,041 7,374 7,841 8,160 TOTAL OPERATING EXPENSES 57,255 54,093 286,761 254,770 421,977 354,052 OPERATING INCOME (LOSS) (8,636) (6,614) 28,034 31,345 54,926 58,964 INTEREST AND OTHER INCOME 846 902 2,874 2,641 3,621 2,467 DEBT EXPENSE (4,762) (4,886) (14,458) (13,693) (19,884) (18,070) INCOME (LOSS) BEFORE INCOME TAXES (12,552) (10,598) 16,450 20,293 38,663 43,361 INCOME TAXES (CREDITS) (5,457) (4,824) 5,212 6,361 12,343 14,228 NET INCOME (LOSS) ($7,095) ($5,774) $11,238 $13,932 $26,320 $29,133
See note to financial statements QUESTAR GAS COMPANY CONDENSED BALANCE SHEETS (Unaudited)
September 30, December 31, 1998 1997 1997 (In Thousands) ASSETS Current assets Cash and short-term investments $6,747 Accounts receivable $12,753 $23,112 86,487 Inventories 24,854 19,253 20,347 Purchased-gas adjustments 25,257 59,487 37,251 Other current assets 3,309 3,644 4,356 Total current assets 66,173 105,496 155,188 Property, plant and equipment 914,799 858,741 882,936 Less allowances for depreciation 373,250 346,947 354,761 Net property, plant and equipment 541,549 511,794 528,175 Other assets 24,222 19,471 21,488 $631,944 $636,761 $704,851 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balances $3,288 $1,174 Notes payable to Questar Corporation 56,600 73,100 $100,000 Accounts payable and accrued expenses 40,797 37,188 64,487 Total current liabilities 100,685 111,462 164,487 Long-term debt 225,000 207,000 225,000 Other liabilities 5,488 10,756 5,989 Deferred income taxes and investment tax credits 84,142 94,859 87,109 Common shareholder's equity Common stock 22,974 22,974 22,974 Additional paid-in capital 41,875 41,875 41,875 Retained earnings 151,780 147,835 157,417 Total common shareholder's equity 216,629 212,684 222,266 $631,944 $636,761 $704,851
See note to financial statements QUESTAR GAS COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
9 Months Ended September 30, 1998 1997 (In Thousands) OPERATING ACTIVITIES Net income $11,238 $13,932 Depreciation 25,639 24,452 Deferred income taxes and investment tax credits (2,967) 13,548 33,910 51,932 Change in operating assets and liabilities 55,343 (24,617) NET CASH PROVIDED FROM OPERATING ACTIVITIES 89,253 27,315 INVESTING ACTIVITIES Capital expenditures (42,233) (39,473) Proceeds from disposition of property, plant and equipment 3,220 2,527 NET CASH USED IN INVESTING ACTIVITIES (39,013) (36,946) FINANCING ACTIVITIES Checks outstanding in excess of cash balances 3,288 1,174 Decrease in notes payable to Questar Corporation (43,400) (3,100) Redemption of preferred stock (4,876) Issuance of long-term debt 32,000 Payment of dividends (16,875) (17,442) NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES (56,987) 7,756 DECREASE IN CASH AND SHORT-TERM INVESTMENTS ($6,747) ($1,875)
See note to financial statements QUESTAR GAS COMPANY NOTE TO FINANCIAL STATEMENTS September 30, 1998 (Unaudited) Note 1 - Basis of Presentation The interim financial statements furnished 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. Due to the seasonal nature of the business, the results of operations for the three-and nine-month periods ended September 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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, 1997. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations QUESTAR GAS COMPANY September 30, 1998 (Unaudited) Operating Results Following is a summary of financial and operating information for the Company:
3 Months Ended 9 Months Ended 12 Months Ended September 30, September 30, September 30, 1998 1997 1998 1997 1998 1997 (Dollars In Thousands) FINANCIAL RESULTS Revenues From unaffiliated customers $47,941 $47,027 $313,998 $283,881 $475,801 $409,704 From affiliates 678 452 797 2,234 1,102 3,312 Total revenues 48,619 47,479 314,795 286,115 476,903 413,016 Natural gas purchases 22,615 21,716 182,678 148,596 283,015 213,828 Revenues less natural gas purchases $26,004 $25,763 $132,117 $137,519 $193,888 $199,188 Operating income (loss) ($8,636) ($6,614) $28,034 $31,345 $54,926 $58,964 Net income (loss) (7,095) (5,774) 11,238 13,932 26,320 29,133 OPERATING STATISTICS Natural gas volumes (in thousands of decatherms) Residential and commercial sales 6,312 6,799 53,804 55,361 84,190 82,222 Industrial sales 1,806 1,743 6,903 6,749 9,677 9,412 Transportation for industrial customers 13,935 12,390 41,882 36,967 56,228 49,300 Total deliveries 22,053 20,932 102,589 99,077 150,095 140,934 Natural gas revenue (per decatherm) Residential and commercial $5.91 $5.24 $5.16 $4.53 $5.06 $4.44 Industrial sales 3.05 2.69 3.02 2.43 2.99 2.35 Transportation for industrial customers 0.11 0.13 0.11 0.13 0.11 0.13 Heating degree days Actual 0 82 3,291 3,215 5,541 5,165 Normal 110 110 3,594 3,594 5,801 5,801 Warmer than normal 25% 8% 11% 4% 11% Number of customers at September 30, Residential and commercial 647,078 625,499 Industrial 1,311 1,154 Total 648,389 626,653
In the first nine months of 1998, lower usage per customer and a lower margin on certain gas sales caused a $5,402,000 or 4% decline in revenues, less gas purchases, when compared with the 1997 period. Retail usage of gas per customer fell during the first half of 1998 after reaching an unusually high mark in the first half of 1997. This reduced usage appears to be a reaction to rising gas costs included in rates during the latter part of 1997 and first part of 1998. Revenues, less natural gas purchases, were slightly higher in the third quarter of 1998 when compared with the third quarter of 1997. The improvement resulted primarily from a leveling of usage per customer. A rate surcharge, associated with constructing a distribution pipeline into southern Utah, and in effect for the past 10 years, was discontinued in September 1997. Also, some general-service customers, who met higher load factor standards, shifted to firm commercial rates in 1998, which have a lower margin. A strong growth rate in the number of customers partially offset the effect of lower usage per customer and margins on some gas sales. The number of customers served by Questar Gas grew by 3.5% from a year ago to 648,389 at September 30, 1998. Temperatures, as measured in degree days, were warmer than normal in all periods presented. Questar Gas' rates include a weather-normalization adjustment that reduces the revenue impact of weather fluctuations. Almost all of Questar Gas' residential and commercial volumes are subject to the weather-normalization adjustment in the first nine months of both 1998 and 1997. Volumes delivered to industrial customers increased 12% in the first nine months of 1998 when compared with the same period of 1997 due to additions of new customers as well as expanded operations with several ongoing customers. Margins from gas delivered to industrial customers are substantially lower than from gas delivered to residential and commercial customers. Questar Gas' natural gas purchases were higher in the 1998 periods presented when compared with the same periods of 1997. Higher gas purchase prices were paid by the Company as natural gas prices increased sharply during the 1996-1997 winter-heating season. The increase in gas costs was first recorded as an increase in the purchased-gas cost account balance, but was ultimately collected in rates. In the first half of the year, Questar Gas' rates include the recovery of gas costs which amounted to $2.27 per decatherm (dth) in 1998 compared with $1.54 per dth in 1997. Because of lower forecasted gas prices and the fact that past gas cost increases have been largely recovered, the Company received approval to reduce gas costs in rates to $2.17 per dth in the third quarter of 1998. The Company routinely files for adjustment of purchased-gas costs with the Utah and Wyoming Public Service Commissions on a semiannual basis. Operating and maintenance (O & M) expenses were lower in the 9- and 12-month periods of 1998 as a result of capitalizing labor costs associated with installing computer systems, cost reductions from sharing services with an affiliated company, and a nonrecurring 1997 write-off of obsolete inventory. Third quarter 1997 O & M expenses were reduced $1.3 million to capitalize labor costs associated with installing computer systems. Questar Gas Company and Questar Pipeline share the costs of certain administrative, accounting, legal, engineering and related services provided by Questar Regulated Services. The Regulated Services group completed a voluntary early retirement program that was effective July 31, 1998. The program reduced the regulated services work force by more than 10% or 177 employees. Questar Gas expects a $4 to $6 million per year reduction of O & M expenses as a result of this program. Depreciation expense was higher in the 1998 periods presented when compared with the 1997 periods primarily as a result of increased investment in property, plant and equipment. Other taxes, primarily property taxes, were lower in the 9- and 12-month periods of 1998 as a result of property tax refunds. Interest expense was higher in the 9- and 12-month periods of 1998 due primarily to an issuance of $50 million of medium-term notes with an average interest rate of 6.88 % in the third and fourth quarters of 1997. The effective income tax rate was 31.7% in the first nine months of 1998 and 31.3% in the first nine months of 1997. The Company recognized $1,638,000 of tight-sands gas-production credits in the 1998 period and $2,007,000 in the 1997 period. Liquidity and Capital Resources Operating Activities Net cash provided from operating activities of $89,253,000 was $61,938,000 more than was generated in the same period of 1997. The increase in cash flow was primarily due to increased collection of gas costs, which were under-collected in the first half of 1997, and collection of receivables. Investing Activities Capital expenditures were $42,233,000 in the first nine months of 1998 compared with $39,473,000 in the corresponding 1997 period. Capital expenditures for calendar year 1998 are estimated at $64,600,000. Financing Activities The Company has a short-term borrowing arrangement with its parent company, Questar Corporation. As of September 30, Questar Gas had loan balances outstanding of $56,600,000 in 1998 and $73,100,000 in 1997. Capital expenditures for 1998 are expected to be financed with net cash flow provided from operating activities and borrowings from Questar. Year 2000 Issues Introduction Questar (the Company) 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 basic approach has been to provide corporate-wide management and coordination combined with distributed compliance responsibility at the various business units. The Y2K team is responsible for fostering awareness, establishing corporate-level, corporate-wide, strategy; coordinating Questar action items and information; and providing periodic internal status reports. The composition of the team includes representation from each major Questar business unit. The effort is designed to be consistent with the prudent efforts of publicly traded companies of similar size, business, and complexity. Questar InfoComm, Inc. (an affiliate which provides information technology services to other Questar affiliates) is responsible for Y2K compatibility of all communications systems, networks (LANs and WANs), corporate-wide applications and operating systems, mainframe commercial off-the-shelf products, and for developing, implementing and coordinating testing procedures. General Questar's Y2K team developed a written plan (the Plan) addressing infrastructure, applications software (infrastructure and applications software are sometimes collectively referred to as "IT systems"), outside suppliers and customers, and process control and instrumentation containing embedded chips (non-IT systems). The Company's in-house programmers and systems analysts are primarily responsible for the conversion and testing of certain non-compliant application software code. In addition, the services of outside consultants and programmers were engaged to assist program management completion of coding for certain software programs. The general phases common to all business units are: (1) an inventory of Y2K items (both IT and non-IT systems); (2) assignment of priorities to identified items; (3) assessment of the Y2K compliance of items determined to be material to the company; (4) repair or replacement of material items that are determined not to be Y2K compliant; (5) test material items; and (6) design and implementation of contingency and business continuation plans for each organization and company location. Implementation of the Plan is generally proceeding on schedule. Status On September 30, 1998, the inventory and priority assessment phases for each business unit had been completed, but they will continue to be monitored. Material items are those the Company believes to involve a risk to the safety of individuals; or may cause damage to property or the environment; or affect the Company's ability to provide gas production, transportation, and delivery. The testing phases of the Plan are underway. The Company has developed a testing procedure and guidelines to help system users develop their own specific test procedures and to ensure consistency in testing. The Company has assembled a test facility which duplicates, in essential details, the production environment. The test facility is now in operation and the first systems are being tested. Responsible system users are now in the process of developing their test plans and scheduling testing. The infrastructure section of the Plan addresses hardware and systems software other than applications software. This effort is on schedule, and the Company estimates that approximately 50% of the activities related to the section had been completed as of September 30, 1998. The testing phase has commenced and will be ongoing as hardware or system software is remediated, upgraded or replaced. Contingency planning for this section commenced in the third quarter of 1998. All infrastructure activities are expected to be completed by mid-1999. The applications software section of the Plan addresses both the conversion of applications software that is not Y2K compliant and, where available from the supplier, the replacement of such software. The Company estimates that the software conversion and replacement phase was more than 70% complete on September 30, 1998, and the remaining conversions and replacements are on schedule to be completed by July 1, 1999. The testing phase of this section, is scheduled for completion by the third quarter of 1999. The testing phase is conducted as the software is remediated or replaced. Contingency planning for this section began in the third quarter of 1998 and is scheduled to be completed by mid-1999. The outside vendors and customers section of the Plan includes the process of identifying and prioritizing critical suppliers and customers and communicating with them about their plans and progress in addressing their Y2K problems. The various business units have formed Project teams to begin the detailed evaluations of the most critical third parties and to elicit the required information. The process of evaluating these external agents commenced in the third quarter of 1998 and is scheduled for completion by mid-1999, with follow-up reviews scheduled through the remainder of 1999. This procedure will include the development of contingency plans, scheduled for the second quarter of 1999, with completion by late 1999. The Company estimates that this section was behind schedule at September 30, 1998. Inventory and assessment phases are in progress for non-IT systems. This section of the Plan addresses the hardware, software and associated embedded computer chips that are used in the operation of all facilities operated by the Company. This section presents unique problems in that it is often difficult to determine whether embedded chips have a date function that will present a Y2K problem. It is also difficult to take certain critical systems, such as compressors and pipeline valves, off-line for testing. Despite these difficulties, the Company believes the replacement, repair and testing of non-IT systems equipment is on schedule to be completed by year-end 1999. Contingency planning for this section began in the third quarter of 1998 and will be completed by year-end 1999. Costs The total cost associated with required modifications to become Y2K compliant is not expected to be material to the Company's financial position. The current expense estimate of the Year 2000 Project is approximately $4.5 million, with $2.3 million attributable to Questar Gas Company and $.8 million attributable to Questar Pipeline Company. This estimate does not include Questar's potential share of Y2K costs that may be incurred by partnerships and joint ventures in which the Company participates but is not the operator. This expense estimate is expected to change as the Project progresses. Funds for the Project are included in existing operating budgets. Risks Failure to correct a material Y2K problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Y2K problem, resulting in part from the uncertainty of the Y2K readiness of outside suppliers and customers and the embedded chip problems, the Company is unable to determine at this time whether the consequences of Y2K failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Y2K Project has reduced and is expected to continue to significantly reduce the Company's level of uncertainty about the Y2K problem and, in particular, about the Y2K compliance and readiness of its material outside vendors and customers. The Company believes that the possibility of significant interruptions of normal operations is not great. The 10-Q contains forward-looking statements about the future operations and expectations of Questar Gas. According to management, these statements are made in good faith and are reasonable representations of Questar Gas' expected performance at the time. Actual results may vary from management's stated expectations and projections due to a variety of factors. PART II OTHER INFORMATION Item 1. Legal Proceedings. The Public Service Commission of Utah (PSCU) has not issued an order in a case involving the gathering rates paid by Questar Gas Company (Questar Gas or the Company). (See the Company's Report on Form 10-Q for the Quarter Ended June 30, 1998, Item 1. Legal Proceedings.) The case, which was the subject of public hearings held on September 1, 1998, involves a claim made by the Division of Public Utilities, a state agency, that a reduction in gathering rates paid by Questar Gas to an affiliate should be extended retroactively to March of 1996. The Company's potential refund is approximately $7.6 million plus interest. Questar Gas believes that its gathering costs are reasonable and that it should not be required to retroactively adjust such rates. 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 GAS COMPANY (Registrant) November 12, 1998 /s/ D. N. Rose D. N. Rose President and Chief Executive Officer November 12, 1998 /s/ S. E. Parks S. E. Parks Vice President, Treasurer, and Chief Financial Officer EX-27 2
5 The following schedule contains summarized financial information extracted from the Questar Gas Company Statements of Income and Balance Sheet for the period ended September 30, 1998, and is qualified in its entirety by reference to such unaudited financial statements. 1,000 9-MOS DEC-31-1998 SEP-30-1998 0 0 12,753 0 24,854 66,173 914,799 373,250 631,944 100,685 225,000 0 0 22,974 193,655 631,944 0 314,795 0 255,904 30,857 0 14,458 16,450 5,212 11,238 0 0 0 11,238 0 0
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