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. 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 July 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. PART I FINANCIAL INFORMATION Item 1. Financial Statements QUESTAR PIPELINE COMPANY 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) REVENUES $ 29,407 $ 27,036 $ 59,265 $ 54,202 $ 117,223 $ 108,911 OPERATING EXPENSES Operating and maintenance 9,768 8,331 19,733 17,720 40,547 37,059 Depreciation 4,271 4,098 8,451 8,074 17,120 15,686 Other taxes 684 699 1,362 1,436 2,414 2,848 TOTAL OPERATING EXPENSES 14,723 13,128 29,546 27,230 60,081 55,593 OPERATING INCOME 14,684 13,908 29,719 26,972 57,142 53,318 INTEREST AND OTHER INCOME 705 2,441 1,585 3,250 2,564 3,404 OPERATIONS OF UNCONSOLIDATED AFFILIATES Income (loss) 176 (1,555) 396 (64) (4,649) 2,797 Write-down of investment in partnership (49,700) 176 (1,555) 396 (64) (54,349) 2,797 DEBT EXPENSE (4,392) (4,038) (9,091) (8,215) (18,342) (15,737) INCOME (LOSS) BEFORE INCOME TAXES 11,173 10,756 22,609 21,943 (12,985) 43,782 INCOME TAXES 4,097 3,724 8,409 7,949 (4,800) 15,511 NET INCOME (LOSS) $ 7,076 $ 7,032 $ 14,200 $ 13,994 $ (8,185) $ 28,271
See notes to financial statements QUESTAR PIPELINE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 1999 1999 (Unaudited) (In Thousands) ASSETS Current assets Cash and short-term investments $ 1,662 $ 2,387 Notes receivable from Questar 1,100 Corporation Accounts receivable 9,428 $ 10,740 21,704 Inventories - materials and 2,451 3,245 2,443 supplies Other current assets 1,491 1,431 1,782 Total current assets 15,032 15,416 29,416 Property, plant and equipment 715,523 682,157 698,236 Less allowances for depreciation 236,247 224,039 228,784 Net property, plant and equipment 479,276 458,118 469,452 Investment in unconsolidated affiliates 19,144 58,013 11,724 Other assets 14,788 11,954 12,435 $528,240 $543,501 $ 523,027 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balances $ 893 Notes payable to Questar Corporation $ 14,600 53,400 $ 42,500 Accounts payable and accrued expenses 11,308 18,334 15,206 Total current liabilities 25,908 72,627 57,706 Long-term debt 245,011 202,992 245,001 Other liabilities 5,098 1,610 3,118 Deferred income taxes 51,462 65,826 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 82,176 111,861 78,726 Total common shareholder's equity 200,761 200,446 167,311 $528,240 $543,501 $ 523,027
See notes to consolidated financial statements QUESTAR PIPELINE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
6 Months Ended June 30, 2000 1999 (In Thousands) OPERATING ACTIVITIES Net income $ 14,200 $ 13,994 Depreciation 9,002 8,472 Deferred income taxes 1,571 2,316 (Income) loss from unconsolidated affiliates, net of cash distributions (396) 713 24,377 25,495 Change in operating assets and liabilities 8,298 (25,291) NET CASH PROVIDED FROM OPERATING ACTIVITIES 32,675 204 INVESTING ACTIVITIES Capital expenditures Purchase of property, plant and equipment (18,210) (12,647) Investment in unconsolidated affiliates (7,024) (4,014) Total capital expenditures (25,234) (16,661) Proceeds from (costs of) disposition of property, plant and equipment (616) 924 NET CASH USED IN INVESTING ACTIVITIES (25,850) (15,737) FINANCING ACTIVITIES Checks outstanding in excess of cash balances 893 Decrease in notes receivable from Questar Corporation 1,100 Increase (decrease) in notes payable to Questar Corporation (27,900) 15,400 Capital contribution 30,000 Payment of dividends (10,750) (10,750) NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (7,550) 5,543 DECREASE IN CASH AND SHORT- TERM INVESTMENTS $ (725) $ (9,990)
See notes to consolidated financial statements QUESTAR PIPELINE COMPANY 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. 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 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 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). 6 Months Ended June 30, 2000 1999 (In Thousands) Revenues $ 5,006 $ 4,757 Operating loss (4,570) (634) Loss before income taxes (10,840) (1,066) 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. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations QUESTAR PIPELINE COMPANY AND SUBSIDIARIES June 30, 2000 (Unaudited) Operating Results Following is a summary of financial and operating information for the Company:
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 decat $ 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. 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 and the inclusion of gas-processing operations in mid-1999. 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. O & M expenses related to gas processing amounted to $.6 million in the second quarter and $1.1 million in the first half of 2000. 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 in the 2000 periods compared with the year ago periods mainly from lower property tax rates in 2000. Interest and other income in the first half of 1999 includes 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 one other construction project and increased other income. 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. Debt expense was higher in the 2000 periods 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 interest costs being capitalized with construction projects has increased in the 2000 periods presented. The effective income tax rate was 37.2% in the first half of 2000 compared with 36.2% in the first half of 1999. Liquidity and Capital Resources Operating Activities Net cash provided from operating activities of $32,675,000 in the first half of 2000 was $32,471,000 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 $25,234,000 in the first half of 2000 compared with $16,661,000 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 $2.7 million in 2000 and $2.2 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 arrangement. As of June 30, Questar Pipeline had borrowed from Questar $14.6 million in 2000 and $53.4 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 infusion from the Company's parent company. 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. 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 (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 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 Pipeline. According to management, these statements are made in good faith and are reasonable representations of the Company's expected performance at the time. Actual results may vary from management's stated expectations and projections due to a variety of factors. Important assumptions and other significant factors that could cause actual results to differ materially from those discussed in forward-looking statements include changes in general economic conditions, gas prices and availability of gas supplies, competition, regulatory issues, weather conditions and other factors beyond the control of the Company. These other factors include the rate of inflation and adverse changes in the business or financial condition of the Company. These factors are not necessarily all of the important factors that could cause actual results to differ significantly from those expressed in any forward-looking statements. Other unknown or unpredictable factors could also have a significant adverse effect on future results. The Company does not undertake an obligation to update forward-looking information contained herein or elsewhere to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information. PART II OTHER INFORMATION Item 1. Legal Proceedings. a. On July 27, 2000, Questar Pipeline Company ("Questar Pipeline" or the "Company") filed an answer, counterclaim, and third party complaint in the lawsuit filed by KN TransColorado, Inc. ("KNTC"). See the Company's Current Report on Form 8-K dated June 15, 2000, for a description of the complaint. Other Questar parties to the proceedings include Questar Corporation ("Questar"), the Company's indirect parent, and Questar TransColorado, Inc. ("QTC"), the Company's subsidiary that is the partner in the TransColorado Gas Transmission Company ("TC Partnership"). The TC Partnership constructed, owns, and currently operates the TransColorado pipeline project. In the answer and complaint, the named 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. (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).) The Questar defendants also counterclaimed against specified affiliates of KNTC, including Kinder Morgan, Inc. and KN Interstate Gas Transmission Company (collectively "Kinder"). The counterclaim and complaint include multiple causes of action including breach of contract, fraudulent misrepresentation, breach of covenant of good faith and fair dealing, etc. 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 the project, to provide that KNTC's lawsuit seeking to dissolve the partnership does not constitute an event of default under its terms. b. On July 26, 2000, the Federal Energy Regulatory Commission (the "FERC") granted a certificate of convenience and necessity for the Southern Trails pipeline project. Under the terms of the certificate, Questar Southern Trails Company ("Southern Trails"), the Company's wholly owned subsidiary, has two years in which to convert the line to natural gas. Questar Pipeline purchased the oil line in 1998 and has pursued the necessary regulatory and environmental approvals to convert it and has also pushed for competition within California markets. When the 700-mile line is converted and the necessary compression facilities are installed, up to 90 million cubic feet of natural gas per day (MMcfd) could be shipped on the eastern segment and up to 120 MMcfd on the western segment into southern California. The project has not yet received final environmental approvals, but the final draft of the environmental impact statement has been published. Southern Trails will continue its activities to secure the necessary rights of way and obtain market support for the project. Item 5. Other Information. a. Marilyn S. Kite resigned her positions as a director of the Company and Questar Corporation effective July 1, 2000. She resigned after her appointment to serve as the first woman member of the Wyoming Supreme Court. Ms. Kite had served as a director since May of 1997. The Board of Directors has not appointed a director to fill her term, which expires in May of 2001. b. Effective August 1, 2000, David M. Curtis, age 45, was appointed to serve as Controller for Questar Pipeline and other entities within the Regulated Services unit. Mr. Curtis, as Controller, is the Company's primary accounting officer; he has over 17 years of service with the Company and its affiliates. He replaces Mr. Glenn H. Robinson, who was named to serve as an executive officer of Questar effective August 1, 2000. 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) August 10, 2000 /s/ D. N. Rose D. N. Rose President and Chief Executive Officer August 10, 2000 /s/ S. E. Parks S. E. Parks Vice President, Treasurer, and Chief Financial Officer