10-Q 1 a2048968z10-q.txt 10-Q 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 MARCH 31, 2001 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 April 30, 2001 ----------------------------- -------------------------------- 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 CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
3 Months Ended 12 Months Ended March 31, March 31, 2001 2000 2001 2000 --------- --------- ---------- ---------- (In Thousands) REVENUES $ 31,035 $ 29,858 $ 120,253 $ 114,852 OPERATING EXPENSES Operating and maintenance 11,137 9,965 44,933 39,110 Depreciation 4,066 4,180 15,277 16,947 Other taxes 796 678 3,189 2,429 --------- --------- ---------- ---------- TOTAL OPERATING EXPENSES 15,999 14,823 63,399 58,486 --------- --------- ---------- ---------- OPERATING INCOME 15,036 15,035 56,854 56,366 INTEREST AND OTHER INCOME 1,270 880 3,415 4,300 OPERATIONS OF UNCONSOLIDATED AFFILIATES Income (loss) 65 220 1,065 (6,380) Write-down of investment in partnership (49,700) --------- --------- ---------- ---------- 65 220 1,065 (56,080) DEBT EXPENSE (4,269) (4,699) (17,154) (17,988) --------- --------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 12,102 11,436 44,180 (13,402) INCOME TAXES 4,445 4,312 13,822 (5,173) --------- --------- ---------- ---------- NET INCOME (LOSS) $ 7,657 $ 7,124 $ 30,358 $ (8,229) ========= ========= ========== ==========
See notes to consolidated financial statements 2 QUESTAR PIPELINE COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2001 2000 2000 --------- --------- ------------ (Unaudited) (In Thousands) ASSETS Current assets Cash and cash equivalents $ 509 $ 1,363 $ 1,855 Notes receivable from Questar Corp. 2,300 20,700 Accounts receivable 10,702 8,300 11,667 Inventories - materials and supplies, at lower of average cost or market 2,422 2,538 2,276 Prepaid expenses and other 339 1,550 477 --------- --------- --------- Total current assets 13,972 16,051 36,975 Property, plant and equipment 734,873 708,002 731,246 Less accumulated depreciation 245,810 231,699 243,006 --------- --------- --------- Net property, plant and equipment 489,063 476,303 488,240 Investment in unconsolidated affiliates 21,153 18,968 19,088 Other assets 14,687 12,356 16,428 --------- --------- --------- $538,875 $ 523,678 $ 560,731 ========= ========= ========= LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Notes payable to Questar Corp. $ 800 $ 8,400 Accounts payable and accrued expenses 16,421 17,125 $ 10,103 --------- --------- --------- Total current liabilities 17,221 25,525 10,103 Long-term debt 215,025 245,006 245,020 Other liabilities 4,918 3,319 7,231 Deferred income taxes 64,043 50,768 62,741 Common shareholder's equity Common stock 6,551 6,551 6,551 Additional paid-in capital 142,034 112,034 142,034 Retained earnings 89,083 80,475 87,051 --------- --------- --------- Total common shareholder's equity 237,668 199,060 235,636 --------- --------- --------- $538,875 $ 523,678 $ 560,731 ========= ========= =========
See notes to consolidated financial statements 3 QUESTAR PIPELINE COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
3 Months Ended March 31, 2001 2000 ---------- ---------- (In Thousands) OPERATING ACTIVITIES Net income $ 7,657 $ 7,124 Depreciation 4,360 4,454 Deferred income taxes 1,302 877 Income from unconsolidated affiliates, net of cash distributions (65) (220) ---------- ----------- 13,254 12,235 Change in operating assets and liabilities 6,708 15,745 ---------- ----------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 19,962 27,980 INVESTING ACTIVITIES Capital expenditures Purchase of property, plant and equipment (6,658) (10,592) Investment in unconsolidated affiliates (2,000) (7,024) ---------- ----------- Total capital expenditures (8,658) (17,616) Proceeds from (costs of) disposition of property, plant and equipment 1,475 (713) ---------- ----------- NET CASH USED IN INVESTING ACTIVITIES (7,183) (18,329) FINANCING ACTIVITIES Repayment of long-term debt (30,000) Change in notes receivable from Questar Corp. 20,700 (1,200) Change in notes payable to Questar Corp. 800 (34,100) Equity investment 30,000 Payment of dividends (5,625) (5,375) ---------- ----------- NET CASH USED IN FINANCING ACTIVITIES (14,125) (10,675) ---------- ----------- Decrease in cash and cash equivalents (1,346) (1,024) Beginning cash and cash equivalents 1,855 2,387 ---------- ----------- Ending cash and cash equivalents $ 509 $ 1,363 ========== ===========
See notes to consolidated financial statements 4 QUESTAR PIPELINE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (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 month period ended March 31, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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, 2000. Note 2 - Investment in Unconsolidated Affiliates Questar Pipeline, directly or indirectly through subsidiaries, has interests in partnerships accounted for on an equity basis. Transportation of natural gas is the primary business activity of these partnerships. Summarized operating results of the partnerships are listed below. Income before income taxes MAY include capitalized financing charges called allowance for funds used during construction (AFUDC).
3 Months Ended March 31 2001 2000 -------- -------- (In Thousands) Revenues $ 1,981 $ 2,478 Operating loss (2,756) (2,644) Loss before income taxes (6,004) (5,490)
Note 3 - Financing Activities On March 30, 2001, Questar Pipeline redeemed $30 million of its 9 7/8% debentures. The redemption price was equal to 104.67% of the principal amount plus interest from December 1, 2000. The Company intends to issue up to $250 million of medium-term notes with maturities from nine months to 30 years, subject to effectiveness of a Form S-3 filed with the Securities and Exchange Commission in May 2001. The net proceeds from the sale of the notes will be used to redeem $85 million of 9 3/8% Debentures due 2021, and to finance a portion of capital expenditures and partnership investments, estimated at $180.3 million in 2001. 5 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations QUESTAR PIPELINE COMPANY March 31, 2001 (Unaudited) Operating Results Following is a summary of financial and operating information for the Company:
3 Months Ended 12 Months Ended March 31 March 31 2001 2000 2001 2000 -------- -------- -------- --------- FINANCIAL RESULTS - (dollars in thousands) Revenues From unaffiliated customers $ 10,842 $ 9,596 $ 43,746 $ 37,497 From affiliates 20,193 20,262 76,507 77,355 -------- -------- --------- --------- Total revenues $ 31,035 $ 29,858 $ 120,253 $ 114,852 ======== ======== ========= ========= Operating income $ 15,036 $ 15,035 $ 56,854 $ 56,366 Net income (loss) 7,657 7,124 30,358 (8,229) OPERATING STATISTICS Natural gas transportation volumes (in thousands of decatherms) For unaffiliated customers 42,434 29,095 171,943 139,035 For Questar Gas 38,686 36,315 110,554 106,179 For other affiliated customers 1,911 1,325 8,956 10,098 -------- -------- --------- --------- Total transportation 83,031 66,735 291,453 255,312 ======== ======== ========= ========= Transportation revenue (per decatherm) $ 0.23 $ 0.27 $ 0.25 $ 0.28
Revenues were higher in the 3-and 12-month periods of 2001 compared with the 2000 periods due primarily to increased firm-transportation demand, higher gas processing revenues from removal of carbon dioxide, and increased liquids sale prices. Transportation revenues increased 3% in both the 3- and 12-month periods of 2001 compared to 2000 primarily from a 24% increase in transportation volumes. Firm-transportation volumes increased 16.2 million decatherms or 26% in the 2001 quarter compared with the 2000 quarter as a result of increased demand for gas for electricity generation. Operating and maintenance (O & M) expenses were 12% and 15% higher in the 3- and 12-month periods of 2001 respectively, when compared with the 2000 periods. The higher O & M expenses were due to increased legal costs of $500,000 in a case involving the TransColorado pipeline, higher fuel gas costs of $432,000 at the gas processing plant and lower amounts of labor capitalized for construction projects. Labor costs savings from the early retirement window program effective October 31, 2000, totaled about $650,000 pretax in the three-month period of 2001. Depreciation expense declined 3% in the 3-month period and 10% in the 12-month periods of 2001 compared to the 2000 periods. The lower depreciation was due primarily from several information systems being fully depreciated and a change from 10 years to 20 years in the estimated useful life of the gas processing plant in 2000. Other taxes were 17% higher in the 2001 periods compared with the 2000 periods primarily due to increases in use taxes. 6 Interest and other income for the 2001 period was 44% higher than the 2000 period primarily from increased AFUDC (capitalized financing costs) associated with Questar Pipeline's construction projects. Earnings from unconsolidated affiliates were lower in the 3-month period of 2001 compared with the 2000 period. The increase in earnings for the 12-month period of 2001 was due mainly to a pretax operating loss of $8.2 million from TransColorado in the twelve-month period of 2000. Debt expense was lower in the 3-and 12-month periods of 2001 when compared with the 2000 periods due to a $60 million equity investment from its parent company in 2000 where the funds were used to repay debt owed to Questar. Interest expense capitalized in connection with construction projects in the first quarter 2001 was $678,000 compared with $694,000 in the first quarter of 2000. The effective income tax rate was 36.7% in the 2001 quarter compared with 37.7% in the 2000 quarter. Liquidity and Capital Resources Operating Activities Net cash provided from operating activities of $19,962,000 in the first quarter of 2001 was $8,018,000 lower than the amount reported for the same period of 2000 due primarily to changes in operating assets and liabilities. The changes were associated primarily with differences in the timing of collecting receivables and paying vendors between the quarters. Investing Activities Capital expenditures were $8,658,000 in the first quarter of 2001 compared with $17,616,000 in the corresponding 2000 period. Capital expenditures for calendar year 2001 are estimated to be $180.3 million and include projects previously considered contingent. The forecast includes $77.5 million for a 75-mile pipeline planned for central Utah and $38 million for Questar Southern Trails Pipeline. Financing Activities Net cash flow from operating activities plus the collection of notes from Questar enabled Questar Pipeline to fund capital expenditures and redeem $30 million of 9 7/8% medium term debt. Questar makes loans to the Company under a short-term credit arrangement. Borrowing from Questar as of March 31, amounted to $.8 million in 2001 and $8.4 million in 2000. Remaining 2001 capital expenditures are expected to be financed with net cash provided from operating activities, and from funds received from the medium-term debt offering. Regulatory Matters The Company has secured a long-term gas-transportation contract for the entire initial capacity on the east zone of Questar's Southern Trails Pipeline project. The east zone has the capacity to transport 80,000 decatherms (Dth) per day from multiple receipt points in the prolific San Juan Basin near the Four Corners area (where Utah, Arizona, Colorado and New Mexico meet) to multiple delivery points at or near the California state line. The Company is also currently seeking customers for Southern Trails' west zone, which runs from near the California state line to the Long Beach area. The west zone has a capacity of up to 120,000 Dth per day. However, the Company's efforts to place the west zone in service have been slowed by regulatory issues. Specifically, the Residual Load Service (RLS) tariff penalty imposed by Southern California Gas, the dominant gas-transportation company in the region, deters existing customers from using alternate natural gas suppliers if they elect to switch part of their transportation to a competing pipeline in 7 Southern California Gas' service area. Options that Southern California Gas has proposed to date, in response to the California Public Utilities Commission (CPUC) directives to eliminate the RLS, would not improve the competitive gas-transportation environment in California. The Company is supporting a cost based peaking rate option proposed by Watson Cogeneration. The CPUC has indicated that this issue will be resolved in the near future. Business Development The Company announced several growth initiatives to address the western U.S. need for expanding natural gas transportation and storage services. These growth initiatives include the following: Expand the interstate transmission system - the Company is holding an "open season" to confirm support for expanding its core pipeline system, which serves gas-producing basins in Utah, Wyoming and the western slope of Colorado. The open season will determine the optimal size of the proposed expansion, preferred in-service dates, and receipt and delivery points shippers would utilize. Depending on customer response and federal approval, significant expansion could be completed by November 1, 2002. Salt cavern storage facility - the Company is also holding an open season for its salt-cavern storage facility. The storage facility, which has been under development for several years is a high deliverability natural gas storage facility. Each of the four caverns will hold up to 3.5 billion cubic feet of gas and could be cycled up to 12 times a year. This facility is ideal for peaking power and other flexible services, which rely on immediate delivery of supplies. Major trading hub - the Company is developing a new hub services such as "parking" (temporary storage) and "balancing" (matching additions and withdrawals). Development of a hub will increase liquidity, trading and transportation on and between Questar Pipeline and other interstate pipelines. Forward-Looking Statements This report includes "forward-looking statements" within the meaning of Section 27(a) of the Securities Act of 1933, as amended, and Section 21(e) of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding the Company's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may", "will", "could", "expect", "intend", "project", "estimate", "anticipate", "believe", "forecast", or "continue" or the negative thereof or variations thereon or similar terminology. Although 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 expressed or implied in forward-looking statements include changes in general economic conditions, gas prices and supplies, competition, rate-regulatory issues and other factors beyond the control of the Company. These other factors include the rate of inflation, the effect of natural phenomena, the effect of accounting policies issued periodically by accounting standard-setting bodies, and adverse changes in the business or financial condition of the Company. 8 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. a. KN TransColorado, Inc. ("KNTC") and its affiliates have filed a motion for partial summary judgment in the complex litigation that is currently pending in a Colorado state district court that involves Questar TransColorado, Inc. ("QTC"), which is a subsidiary of Questar Pipeline Company (the "Company" or "Questar Pipeline"), Questar Pipeline, and Questar Corporation ("Questar"), the Company's ultimate parent. The basic question in the lawsuit is the validity of a contractual right claimed by QTC to sell or put its 50 percent interest in the TransColorado pipeline project to KNTC during the 12-month period beginning March 31, 2001. In its motion, KNTC requested that the court determine that the partners in TransColorado Gas Transmission Company ("TC Partnership") owed fiduciary duties to each other and that the Company's officers and directors had fiduciary obligations to disclose to KNTC and TC Partnership all information that affected the fundamental business purposes of the TC Partnership since they also served as officers and directors of QTC. KNTC alleges that Questar Pipeline and its affiliates breached their fiduciary duties to KNTC and TC Partnership by developing a plan to construct and operate a new pipeline that would compete with the TransColorado pipeline, rendering it economically unviable. The Questar defendants oppose KNTC's motion for partial summary judgment. They have also filed a motion requesting permission to join Kinder Morgan, Inc., KN Interstate Gas Transmission Company, and unnamed John Does 1 through 10 and to amend their answer and counterclaim. The court has set a new trial commencement date of April 1, 2002. Questar Pipeline will begin recording its share of operating results for the TransColorado pipeline in the second quarter of 2001. Under the terms of the agreement for the TC Partnership and the standstill agreement executed by the parties, KNTC is obligated to indemnify QTC for its share of any losses incurred as of April 1, 2001, since QTC formally placed KNTC on notice that it was exercising the put as of such date, subject to the litigation and the standstill agreement. b. On April 16, 2001, the Environmental Protection Agency ("EPA") issued a formal complaint against Questar Regulated Services Company, Questar Pipeline's parent, alleging violations of regulations promulgated to enforce the Clean Air Act, as amended, in conjunction with the installation of a gas turbine at the Company's Fidlar compressor station. (Questar Pipeline is the proper party to the administrative proceedings and will presumably be substituted for its parent.) The gas turbine was installed at the Fidlar compressor station in 1995. The station is located within the boundaries of the Uintah-Ouray Indian reservation in eastern Utah. Specifically, the EPA contends that Questar Pipeline failed to file various notices and reports within specified time periods applicable to the installation and operation of the gas turbine and failed to monitor the content of the fuel used in it, and failed to conduct a performance test for it. The EPA is also proposing that the Company pay a civil penalty of $471,568. Questar Pipeline will respond to the EPA's complaint and attempt to resolve the matter entirely and/or reduce the size of the claimed penalty. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 12. Ratio of earnings to fixed charges. b. Reports on Form 8-K None. 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) May 10, 2001 /s/ D. N. Rose ------------ ----------------------------------------- D. N. Rose President and Chief Executive Officer May 10, 2001 /s/ S. E. Parks ------------ ----------------------------------------- S. E. Parks Vice President, Treasurer, and Chief Financial Officer