10-Q 1 0001.txt 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. 1-8796 QUESTAR CORPORATION (Exact name of registrant as specified in its charter) STATE OF UTAH 87-0407509 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 45433, 180 East 100 South, Salt Lake City, Utah 84145-0433 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (801) 324-5000 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, without par value 80,113,584 shares PART 1. FINANCIAL INFORMATION Item 1. Financial Statements QUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
3 Months Ended 6 Months Ended 12 Months Ended June 30, June 30, June 30, 2000 1999 2000 1999 2000 1999 (In Thousands, Except Per Share Amounts) REVENUES $ 232,542 $ 177,858 $ 569,244 $ 455,672 $1,037,791 $ 882,688 OPERATING EXPENSES Natural gas and other product purchases 74,999 55,030 219,501 171,035 390,595 333,911 Cost of goods sold 6,434 1,035 11,299 1,781 19,943 4,029 Operating and maintenance 58,549 50,042 115,585 101,701 235,163 207,380 Depreciation and amortization 35,960 33,570 71,842 67,202 142,384 133,950 Write-down of oil and gas properties 34,000 Other taxes 11,551 7,632 23,828 16,042 40,510 30,866 TOTAL OPERATING EXPENSES 187,493 147,309 442,055 357,761 828,595 744,136 OPERATING INCOME 45,049 30,549 127,189 97,911 209,196 138,552 INTEREST AND OTHER INCOME 10,831 16,428 23,043 28,496 69,247 32,921 OPERATIONS OF UNCONSOLIDATED AFFILIATES Income (loss) 482 (1,586) 1,701 (126) (2,529) 2,151 Write-down of investment in partnership (49,700) 482 (1,586) 1,701 (126) (52,229) 2,151 DEBT EXPENSE (16,282) (12,428) (31,842) (25,399) (60,387) (50,910) INCOME BEFORE INCOME TAXES 40,080 32,963 120,091 100,882 165,827 122,714 INCOME TAXES 13,875 9,893 43,656 34,448 56,996 36,459 NET INCOME $ 26,205 $ 23,070 $ 76,435 $ 66,434 $ 108,831 $ 86,255 EARNINGS PER COMMON SHARE Basic and diluted $ 0.33 $ 0.28 $ 0.95 $ 0.80 $ 1.35 $ 1.04 Average common shares outstanding Basic 80,078 82,678 80,414 82,660 80,971 82,665 Diluted 80,352 82,870 80,551 82,814 81,091 82,890 Dividends per common share $ 0.17 $ 0.165 $ 0.34 $ 0.33 $ 0.68 $ 0.66
See notes to consolidated financial statements QUESTAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 1999 1999 (Unaudited) (In Thousands) ASSETS Current assets Cash and short-term investments $ 19,559 $ 8,291 Accounts receivable 172,198 $ 109,479 181,274 Inventories 26,616 23,262 37,614 Purchased-gas adjustments 432 Other current assets 10,515 8,962 11,249 Total current assets 228,888 141,703 238,860 Property, plant and equipment 3,413,170 3,178,668 3,258,773 Less allowances for depreciation and amortization 1,542,561 1,424,361 1,471,859 Net property, plant and equipment 1,870,609 1,754,307 1,786,914 Securities available for sale 89,470 80,032 94,945 Investment in unconsolidated affiliat 33,601 70,877 25,269 Other assets 74,218 50,158 92,009 $2,296,786 $2,097,077 $2,237,997 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Checks outstanding in excess of cash balances $ 1,629 Short-term loans $ 146,309 112,100 $ 144,115 Accounts payable and accrued expense 158,879 139,711 179,673 Purchased-gas adjustments 3,301 1,453 Current portion of long-term debt 7 6,006 7 Total current liabilities 308,496 260,899 323,795 Long-term debt, less current portion 764,704 656,189 735,043 Other liabilities 43,504 27,275 36,554 Deferred income taxes and investment tax credits 224,846 216,069 216,760 Common shareholders' equity Common stock 257,361 300,283 278,437 Retained earnings 657,585 604,159 608,498 Other comprehensive income 40,290 36,158 38,910 Note receivable from ESOP (3,955) Total common shareholders' equity 955,236 936,645 925,845 $2,296,786 $2,097,077 $2,237,997
See notes to consolidated financial statements QUESTAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
6 Months Ended June 30, 2000 1999 (In Thousands) OPERATING ACTIVITIES Net income $ 76,435 $ 66,434 Depreciation and amortization 74,622 70,525 Deferred income taxes and investment tax credits 1,573 1,426 (Income) loss from unconsolidated affiliates, net of cash distributions (1,537) 1,337 Gain from sales of securities (16,609) (19,780) 134,484 119,942 Changes in operating assets and liabilities (3,557) 21,281 NET CASH PROVIDED FROM OPERATING ACTIVITIES 130,927 141,223 INVESTING ACTIVITIES Capital expenditures Property, plant and equipment (155,263) (79,884) Other investments (7,324) (16,332) Total capital expenditures (162,587) (96,216) Proceeds from the disposition of property, plant and equipment 1,764 4,900 Proceeds from the sales of securities 24,931 27,466 NET CASH USED IN INVESTING ACTIVITIES (135,892) (63,850) FINANCING ACTIVITIES Issuance of common stock 2,141 3,629 Common stock repurchased (23,217) (2,235) Issuance of long-term debt 37,476 174,327 Repayment of long-term debt (6,342) (136,002) Change in short-term loans 1,751 (109,000) Cash released from escrow account 32,414 Checks outstanding in excess of cash balances 1,629 Payment of dividends (27,348) (27,271) Other 38 NET CASH USED IN FINANCING ACTIVITIES 16,875 (94,885) Foreign currency translation adjustment (642) 23 INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS $ 11,268 $ (17,489)
See notes to consolidated financial statements QUESTAR CORPORATION 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. Due to the seasonal nature of the business, 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 consolidated 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 - Purchase of Companies On January 26, 2000, a subsidiary of Questar Market Resources (QMR or the Company) acquired 100% of the outstanding shares of Canor Energy Ltd from NI Canada ULC, a subsidiary of Northwest Natural Gas Co for cash of $US 61 million plus the assumption of $5.4 million of short-term debt. The transaction was accounted for as a purchase. Canor owns and/or operates more than 800 wells located in Alberta, British Columbia and Saskatchewan provinces of Canada. Canor's proven gas and oil reserves are estimated at 61.1 billion cubic feet equivalent. On June 1, 2000, Questar MetroNet, a subsidiary of Questar InfoComm, purchased 100% of the outstanding shares of Consonus of Portland, in exchange for shares of Questar MetroNet, cash and an assumption of debt. On the same day, Consonus was merged with Questar MetroNet and the Consonus name was retained. Consonus is a provider of e-business consulting, application development and managed hosting services. The transaction was accounted for as a purchase. Note 3 - Comprehensive Income Comprehensive income is defined as any nonowner change in common equity. Generally, comprehensive income includes earnings reported on the income statement plus changes in common equity formerly reported on the balance sheet only. Questar's other comprehensive income, which are noncash transactions, includes changes in the market value of the investments in securities available for sale and foreign currency translation adjustments.
3 Months Ended 6 Months Ended June 30, June 30, 2000 1999 2000 1999 (In thousands) Comprehensive Income: Net income $ 26,205 $ 23,070 $ 76,435 $ 66,434 Other comprehensive income (loss) Unrealized gain (loss) on securities available for sale (15,586) 8,150 2,576 29,786 Foreign currency translation adjustment (1,040) (272) (1,560) (491) Other comprehensive income (loss) before income taxes (16,626) 7,878 1,016 29,295 Income taxes on other comprehensive income (loss) (6,485) 3,014 (364) 11,204 Net other comprehensive income (loss) (10,141) 4,864 1,380 18,091 Total comprehensive income $ 16,064 $ 27,934 $ 77,815 $ 84,525
Note 4 - Operations by Line of Business
3 Months Ended 6 Months Ended 12 Months Ended June 30, June 30, June 30, 2000 1999 2000 1999 2000 1999 (In Thousands) REVENUES FROM UNAFFILIATED CUSTOMERS Questar Market Resources $144,089 $95,848 $263,560 $190,491 $491,672 $380,942 Questar Regulated Services Natural gas distribution 66,957 69,952 266,484 242,045 472,045 451,742 Natural gas transmission 10,305 9,754 19,901 18,775 38,048 37,778 Other 1,324 563 1,949 1,112 3,097 2,443 Total Regulated Services 78,586 80,269 288,334 261,932 513,190 491,963 Corporate and other operations 9,867 1,741 17,350 3,249 32,929 9,783 $232,542 $177,858 $569,244 $455,672 $1,037,791 $882,688 REVENUES FROM AFFILIATES Questar Market Resources $ 21,112 $ 18,374 $ 43,402 $ 39,577 $ 83,533 $ 80,288 Questar Regulated Services Natural gas distribution 1,217 222 2,210 431 4,110 1,381 Natural gas transmission 19,102 17,282 39,364 35,427 79,175 71,133 Other 68 52 136 80 252 138 Corporate and other operations 7,743 10,480 17,047 22,915 32,983 42,356 $ 49,242 $ 46,410 $ 102,159 $ 98,430 $ 200,053 $195,296 OPERATING INCOME (LOSS) Questar Market Resources $ 30,455 $ 16,911 $ 56,130 $ 31,254 $ 101,654 $ 23,842 Questar Regulated Services Natural gas distribution (1,965) (2,470) 36,784 35,337 46,760 56,117 Natural gas transmission 14,684 13,908 29,719 26,972 57,142 53,318 Other 130 (149) 84 (217) 245 (683) Total Regulated Services 12,849 11,289 66,587 62,092 104,147 108,752 Corporate and other operations 1,745 2,349 4,472 4,565 3,395 5,958 OPERATING INCOME $ 45,049 $ 30,549 $ 127,189 $ 97,911 $ 209,196 $138,552 NET INCOME (LOSS) Questar Market Resources $ 17,182 $ 10,432 $ 32,231 $ 18,685 $ 59,412 $ 12,935 Questar Regulated Services Natural gas distribution (3,330) (2,836) 17,385 17,422 19,182 26,497 Natural gas transmission 7,076 7,032 14,200 13,994 (8,185) 28,271 Other 173 (10) 232 (10) 493 (179) Total Regulated Services 3,919 4,186 31,817 31,406 11,490 54,589 Corporate and other operations 5,104 8,452 12,387 16,343 37,929 18,731 NET INCOME $ 26,205 $ 23,070 $ 76,435 $ 66,434 $ 108,831 $ 86,255
Note 5 - Debt Offering On April 12, 2000, Questar Market Resources filed a registration statement with the Securities and Exchange Commission for a public debt offering. Following effectiveness of such registration statement, Questar Market Resources intends to issue $150 million of notes and use the proceeds to repay a portion of the outstanding debt of Questar Market Resources. Note 6 - Reclassifications Certain reclassifications were made to the 1999 financial statements to conform with the 2000 presentation. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations QUESTAR CORPORATION AND SUBSIDIARIES June 30, 2000 (Unaudited) Results of Operations Questar Market Resources Questar Exploration and Production, Wexpro, Questar Gas Management and Questar Energy Trading, collectively, (Market Resources) conduct the Company's exploration and production, gas gathering and processing, and energy marketing operations. Following is a summary of Market Resources' financial results and operating information.
3 Months Ended 6 Months Ended 12 Months Ended June 30, June 30, June 30, 2000 1999 2000 1999 2000 1999 FINANCIAL RESULTS - (dollars in thousands) Revenues From unaffiliated customers $144,089 $ 95,848 $263,560 $190,491 $491,672 $380,942 From affiliates 21,112 18,374 43,402 39,577 83,533 80,288 Total revenues $165,201 $114,222 $306,962 $230,068 $575,205 $461,230 Operating income $ 30,455 $ 16,911 $ 56,130 $ 31,254 $101,654 $ 27,942 Net income 17,182 10,432 32,231 18,685 59,412 12,935 OPERATING STATISTICS Production volumes Natural gas (in million cubic feet) 17,674 15,341 34,624 30,389 66,947 57,609 Oil and natural gas liquids (in thousands of barrels) Questar Exploration & Production 563 588 1,117 1,194 2,234 2,415 Wexpro 140 127 268 268 555 570 Total oil and NGL production 703 715 1,385 1,462 2,789 2,985 Production revenue Natural gas (per thousand cubic feet) $ 2.48 $ 1.93 $ 2.33 $ 1.90 $ 2.21 $ 1.89 Oil and natural gas liquids (per barrel) $ 20.98 $ 13.99 $ 21.62 $ 12.28 $ 19.18 $ 12.05 Marketing volumes in energy equivalent decatherms (in thousands of decatherms) 25,180 26,158 52,205 60,317 104,870 118,474 Natural gas gathering volumes (in thousands of decatherms) For unaffiliated customers 23,261 21,835 45,039 42,126 87,874 78,731 For Questar Gas 9,235 8,682 19,088 16,919 34,219 31,213 For other affiliated customers 6,514 4,560 11,678 9,119 22,218 18,055 Total gathering 39,010 35,077 75,805 68,164 144,311 127,999 Gathering revenue (per decatherm) $ 0.13 $ 0.15 $ 0.14 $ 0.15 $ 0.14 $ 0.15
Revenues reported for the 2000 periods presented were substantially higher than the revenues for the comparable 1999 periods as a result of higher prices for gas and oil and increased gas production. The average natural gas price per thousand cubic feet (Mcf) rose 28% in the second quarter and 23% in the first half of 2000 when compared with the same periods of 1999. The increase in gas prices reflected a strong demand caused largely by the use of natural gas in the generation of electricity. Oil and natural gas liquids (NGL) prices increased 45% in the second quarter and 71% per barrel in the first half of 2000 (excluding Wexpro oil production). Oil and NGL prices have increased steadily over the past year as production generally declined and demand rose. Of the current 6 Bcf per month gas production, approximately 42% is covered by hedge contracts at an average price of $2.20 per Mcf, net back to the wellhead. About one-third of the contracts are collars and the remainder are fixed price contracts. The floor price of collar arrangements is used in calculating the average hedged price. Approximately 76% of oil, excluding Wexpro production, is hedged at an average price of $17.14 per barrel, net back to the wellhead through the end of 2001. The second quarter of 2000 includes record production levels with an average monthly production of 7 billion cubic feet equivalent, excluding Wexpro. Production benefited from a successful development drilling program and the first quarter acquisition of Canadian producing properties. Canadian gas production grew 165% to 1.9 billion cubic feet (Bcf). U.S. gas production was 8% above year-ago levels at 15.8 Bcf as increased drilling activity offset a property sale in the fourth quarter of 1999. However, the increased drilling did not fully replace the oil and NGL production as a result of selling nonstrategic properties in the fourth-quarter of 1999. Wexpro's net income increased $1.9 million to $11.7 million in the first half of 2000. Wexpro expanded its investment in development-drilling projects in response to higher regional demand. Wexpro develops gas reserves on behalf of affiliated company, Questar Gas, which is a rate-regulated distributor of natural gas. At year-end 1999, Wexpro earned an average 18.9% after-tax return on investment in those properties. In addition, increased oil and NGL prices resulted in higher earnings for Wexpro and an increase in shared oil profits for Questar Gas. Gas-management and energy-trading operations reported $2.5 million in combined earnings for the first half of 2000 versus $1.5 million a year ago. Volumes of gas gathered increased 11% in the first half of 2000 reflecting more production in the areas served. Higher prices benefited the operations of liquids-extraction plants that experienced improved results for the second quarter and first half of 2000. The plants extract and sell liquids from the natural gas stream. Increased commodity prices caused revenues from energy-marketing activities to be higher in the 2000 periods but were offset by the low value of transportation contracts and settlement of gas imbalances. Questar Regulated Services Questar Gas and Questar Pipeline conduct the Company's regulated services of natural gas distribution, transmission and storage. Natural Gas Distribution Questar Gas conducts the Company's natural gas distribution operations. Following is a summary of financial results and operating information.
3 Months Ended 6 Months Ended 12 Months Ended June 30, June 30, June 30, 2000 1999 2000 1999 2000 1999 FINANCIAL RESULTS - (dollars in thousands) Revenues From unaffiliated customers $ 66,957 $ 69,952 $266,484 $242,045 $472,045 $451,742 From affiliates 1,217 222 2,210 431 4,110 1,381 Total revenues 68,174 70,174 268,694 242,476 476,155 453,123 Natural gas purchases 35,779 36,741 158,209 135,463 280,011 256,404 Margin $ 32,395 $ 33,433 $110,485 $107,013 $196,144 $196,719 Operating income (loss) $ (1,965) $ (2,470) $ 36,784 $ 35,337 $ 46,760 $ 56,117 Net income (loss) (3,330) (2,836) 17,385 17,422 19,182 26,497 Natural gas volumes (in thousands of decatherms) Residential and commercial sales 33,908 32,425 83,684 81,342 83,684 81,342 Industrial sales 3,204 2,940 10,087 9,791 10,087 9,791 Transportation for industrial customers 14,017 13,351 52,309 53,980 52,309 53,980 Total deliveries 51,129 48,716 146,080 145,113 146,080 145,113 OPERATING STATISTICS Natural gas volumes (in thousands of decatherms) Residential and commercial sales 9,197 14,145 43,105 46,570 78,736 82,309 Industrial sales 2,047 2,282 5,251 5,222 9,852 9,806 Transportation for industrial customers 13,865 11,800 27,882 25,151 54,374 52,665 Total deliveries 25,109 28,227 76,238 76,943 142,962 144,780 Natural gas revenue (per decatherm) Residential and commercial $ 5.93 $ 4.15 $ 5.52 $ 4.65 $ 5.31 $ 4.88 Industrial sales 2.99 2.83 3.16 2.93 3.07 3.01 Transportation for industrial customers $ 0.11 $ 0.13 $ 0.12 $ 0.13 $ 0.12 $ 0.13 Heating degree days Actual 492 946 2,845 3,242 4,920 5,413 Normal 741 741 3,484 3,484 5,801 5,801 Colder (Warmer) than normal (34%) 28% (18%) (7%) (15%) (7%) Number of customers at June 30, Residential and commercial 686,827 665,221 Industrial 1,352 1,356 Total 688,179 666,577
Questar Gas experienced a seasonal loss of $3.3 million in the 2000 period. In the comparable year-earlier quarter, the utility recorded a $2.8 million loss. The Company continued to see the impact of costs associated with strong customer growth and lower usage per customer. Questar Gas addressed these issues in a general rate case order received August 11, 2000 and discussed below. Questar Gas' margin decreased 3% in the second quarter of 2000 when compared with the second quarter of 1999. The lower margin was due primarily to a timing difference caused by a change in procedure for recording gathering costs. Gathering costs are recognized on a straight-line basis where before the costs were seasonal. The regulatory procedure did not increase gathering costs from year to year. The margin was slightly higher in the first half of 2000 compared with 1999. The higher margin was the result of interim rate relief which more than offset higher costs including costs of carbon dioxide removal. The PSCU granted Questar Gas' request for $7.1 million of interim rate relief, subject to refund, effective January 1, 2000. On August 11, 2000, the PSCU issued a final order which granted $13.5 million in general rate relief and authorized a return on equity of 11 percent. The $13.5 million increase includes the $7.1 million of interim rate relief and allows the collection of $5 million annually for carbon dioxide processing costs. The Company will be allowed to collect the full amount of the increase in its rates immediately upon the filing of tariff provisions. The number of customers served by Questar Gas grew by 21,602 or 3.2% from a year ago to 688,179. The number of customer additions for the year ending December 31, 2000 is expected to be between 20,000 to 21,000. Volumes delivered were 11% lower in the second quarter and 1% lower for the first half of 2000 when compared with the same periods in 1999. The decrease was due to warmer weather in 2000 when compared with 1999. Temperatures were warmer than normal for all periods presented in 2000. The effects of warmer weather were mitigated by the weather normalization adjustment. Questar Gas' natural gas purchase costs increased in the six-and twelve-month periods of 2000 when compared with the 1999 periods due to higher commodity costs. Commodity rates for the first half were $2.23 per Dth in 2000 and $1.72 per Dth in 1999. Gas purchases were lower in the second quarter because of lower gas sales volumes. The Company files for adjustment of purchased-gas costs with the Utah and Wyoming Public Service Commissions on a semiannual basis. Natural Gas Transmission Questar Pipeline conducts the Company's natural gas transmission and storage operations. Following is a summary of financial results and operating information.
3 Months Ended 6 Months Ended 12 Months Ended June 30, June 30, June 30, 2000 1999 2000 1999 2000 1999 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 decatherm) $ 0.29 $ 0.26 $ 0.28 $ 0.27 $ 0.29 $ 0.29
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. 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. Consolidated Results of Operations Much improved prices for natural gas, oil and natural gas liquids (NGL) and an increase in natural gas production were the primary reasons of higher consolidated revenues in the 3-, 6- and 12-month periods of 2000 when compared with the same periods in 1999. In addition, higher natural gas prices translated into an increase in gas-distribution revenues in the 2000 periods presented, since the cost of natural gas is recovered from customers. Natural gas and other product purchases increased in the 2000 periods presented because of higher prices paid for natural gas, reflected in distribution operations and energy-trading activities. Cost of goods sold primarily includes the costs of computer equipment and services for resale by Consonus. The gross margin associated amounted to $4.2 million in the first half of 2000 compared with $1 million in the first half of 1999. Consonus is a new operation that began in the last half of 1999. The activities include providing secure data processing centers, and configuring and selling hardware and software for networking. Operating and maintenance (O & M) expenses were higher in the 2000 periods presented when compared with the same periods in 1999 primarily due to adding gas and oil properties, including a purchase of a Canadian gas and oil company, and an increasing number of gas-distribution customers. The higher cost of serving distribution customers is a continuing concern that Questar Gas is attempting to resolve in a general rate case. Also, higher gas prices have increased the cost of replacing gas in extraction plant operations. The full-cost amortization rate for U.S. operations dropped $.03 to $.79 per thousand cubic feet equivalent of production (Mcfe) compared with the second quarter of 1999. The U.S. rate is expected to be about $.77 in the third quarter of 2000. The declining U.S. rate has driven the combined U.S. and Canadian full-cost amortization rate to $.80 per energy-equivalent Mcf (Mcfe) for the first half of 2000 compared with $.82 for the comparable 1999 period. The lower rate was due to successfully adding reserves through drilling and purchases, while selling nonstrategic properties at favorable prices. Depreciation and amortization expenses were higher in the 2000 periods presented when compared with the 1999 periods. Increased production volumes from full-cost properties more than offset the lower amortization rates. Increased investment in other properties also resulted in higher depreciation expense in the 2000 periods. Higher commodity prices and increased production volumes resulted in an increase in production-related taxes reported in other taxes on the income statement. Debt expense was higher in the 2000 periods presented because of increased borrowings and higher short-term interest rates. Pretax gains from selling securities available for sale were lower in the first half of 2000 when compared with the first half of 1999. The Company sold 510,000 shares of Nextel in the 2000 period compared with 1.4 million in the 1999 period. Sales of securities resulted in after tax gains of $10.2 million in the first half of 2000 and $11.8 million in 1999. 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. The effective income tax rate for the first half was 36.4% in 2000 and 34.1% in 1999. The effective income tax rate increased largely because of a reduction in production-related tax credits and a higher portion of earnings coming from Canada, where income tax rates are higher. The Company recognized $3,175,000 of production-related tax credits in the 2000 period and $3,547,000 in the 1999 period. Liquidity and Capital Resources Operating Activities Net cash provided from operating activities for the first half of 2000 was 7% lower than the amount generated in the same period of 1999. The 2000 period includes approximately $36.4 million of interest-bearing hedge account deposits related with energy-trading activities with no comparable amounts in the prior year period. Investing Activities A comparison of capital expenditures for the first half of 2000 and 1999 plus an estimate for calendar year 2000 is presented below. The Company acquired a Canadian company, Canor Energy LTD, in 2000 for a cash payment of $US 61 million and assumed $5.4 million of debt.
Forecast Actual 12 Months 6 Months Ended Ended June 30, Dec. 31, 2000 1999 2000 (In Thousands) Questar Market Resources $101,455 $ 53,791 $175,700 Questar Regulated Services Natural gas distribution 28,580 19,960 63,300 Natural gas transmission 25,234 16,661 57,900 Other 88 655 5,500 Total Questar Regulated Services 53,902 37,276 126,700 Corporate and other operations 7,230 5,149 34,300 $162,587 $ 96,216 $336,700
Financing Activities The Company used cash flow generated from operations, from the sale of investments, from a net increase in long-term debt and cash released from an escrow account to fund capital expenditures, reduce short-term borrowings, repurchase shares of its common stock and pay dividends to holders of common stock. The Company intends to finance 2000 capital expenditures through net cash provided from operating activities, bank borrowings and issuing long-term debt. The Company announced that it had reached its goal of repurchasing up to $50 million worth of its shares and would seek to purchase another $25 million worth over the next 12 months. In the first half of 2000, Questar repurchased approximately 1.5 million of its shares for $23 million. Since its inception in April of 1999, the Company has repurchased 3.1 million shares of its common stock for $51.2 million. The Company has used proceeds from the sales of Nextel shares to fund a portion of these repurchases. Short-term borrowings amounted to $146.3 million, principally commercial paper, at June 30, 2000 compared with $112.1 million of commercial paper a year earlier. The Company has bank lines of credit, which serve as backup to borrowings made under the commercial paper program. Market Resources filed a registration statement with the Securities and Exchange Commission on April 12, 2000 for a public debt offering. Following effectiveness of such registration statement, Market Resources intends to borrow $150 million of notes and use the proceeds to repay a portion of its existing debt. Regulatory Matters Questar Gas filed a general rate case December 17, 1999 requesting approximately $22 million of general rate relief. Higher costs of serving customers, inclusion of charges for the removal of carbon dioxide from part of the gas supply and lower gas usage per customer were among the reasons for requesting rate relief. The PSCU issued a final order on August 11, 2000 which granted $3.5 million of annualized rate relief and approved an 11 percent return on equity. The $13.5 million includes the $7.1 million interim rate relief and $5 million of annual carbon dioxide processing costs. Public Utilities and the Committee of Consumer Services. Through those discussions the Company has reached agreement on all revenue requirements with the exception of return on equity, affiliate postage cost and the costs associated with carbon dioxide processing. The Company and the Division reached a settlement on the carbon dioxide processing issue. The PSCU has held hearings on these settlements and the contested issues. The PSCU has until August 14, 2000 to issue a final order concerning the case. 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 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. 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 and oil prices and supplies, competition, regulatory issues, weather conditions, availability of gas and oil properties for sale and other factors beyond the control of the Company. These other factors include the rate of inflation, quoted price of securities available for sale 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 June 15, 2000, a lawsuit was filed against Questar Pipeline Company ("Questar Pipeline") and several of its affiliates including Questar Corporation ("Questar" or the "Company"). The lawsuit, which was filed in a Colorado state district court, was brought by KN TransColorado Inc. ("KNTC"), a subsidiary of Kinder Morgan, Inc. Questar TransColorado, Inc. ("QTC"), a wholly owned subsidiary of Questar Pipeline, and KNTC are 50 percent partners in the TransColorado Gas Transmission Company ("TC Partnership"), the partnership that constructed, owns, and currently operates the TransColorado pipeline project. 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). KNTC's complaint basically alleges that the named Questar affiliates breached their fiduciary duties to TC Partnership and KNTC by developing and working on a plan to construct and operate a new pipeline that would compete with the TransColorado pipeline and render such pipeline economically unviable. The complaint contains claims for declaratory relief, breach of fiduciary duty, breach of contract, breach of implied covenants of good faith and fair dealing, misrepresentation, tortious concealment, rescission, estoppel, imposition of a constructive trust, an accounting, and dissolution of the TC Partnership. KNTC is seeking damages in the amount of $150,000,000 plus punitive damages and a declaratory judgment that KNTC's obligation to purchase QTC's interest in the project be declared void and unenforceable. The Questar affiliates have filed a counterclaim and third party complaint against KNTC and its affiliates, including Kinder Morgan. In it, the 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. Questar Pipeline claims that KNTC and its affiliates wrongfully induced the Questar affiliates to expend funds to build the line and breached the contracts between the parties. 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 financing the project to provide that KNTC's lawsuit seeking to dissolve the partnership does not constitute an event of default under the terms of the credit agreement. b. Questar Exploration and Production Company ("Questar E&P"), an indirect wholly owned subsidiary of the Company, is the primary defendant in a class action lawsuit--Bridenstine v. Kaiser Francis Oil Company--pending in an Oklahoma state court. Questar itself and Questar Gas Management Company, another affiliate, are also named defendants together with nonaffiliated entities. See the Company's Form 10-K Report for 1999, Item 3. Legal Proceedings . The plaintiffs recently claimed additional damages, which have increased from an estimated $54,000,000 to an estimated $80,000,000 plus punitive damages. Questar E&P disputes the claims. The trial judge delayed the jury trial from August of 2000 to January of 2001, but has not yet ruled on motions filed by the defendants for partial summary judgment. Item 5. Other Information. a. Marilyn S. Kite resigned her position as a director of the Company and Questar Pipeline effective July 1, 2000. She resigned after her appointment to serve as the first female member of the Wyoming Supreme Court. Ms. Kite had served as a director since May of 1997. The Board of Directors has not yet appointed a director to fill the remainder of her term, which expires in May of 2002. b. Effective August 1, 2000, Glenn H. Robinson, age 50, was appointed to serve as Vice President and Chief Information Officer of the Company. He was concurrently appointed to serve as President and Chief Executive Officer of Questar InfoComm, Inc., and Interstate Land Corporation, which are two wholly owned subsidiaries engaged in information technology and real estate activities, respectively. With his new positions, Mr. Robinson is a member of the Company's management committee and is classified as an executive officer. Mr. Robinson, who has over 26 years of service, had been serving as Vice President and Controller of the entities within the Company's Regulated Services unit. c. Mr. Clyde M. Heiner, age 62, resigned from his positions as Senior Vice President for the Company and President and Chief Executive Officer of Questar InfoComm and Interstate Land to devote full time to his responsibilities with Consonus, Inc., (formerly Questar MetroNet Services, Inc.) Consonus was organized in 1999 to pursue a new project that combines data centers, web enablement, and network services. Mr. Heiner will continue to be classified as an executive officer of the Company. 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 CORPORATION (Registrant) August 14, 2000 /s/S. E. Parks (Date) S. E. Parks Vice President, Treasurer and Chief Financial Officer (Duly authorized officer and principal financial officer)