10-Q 1 a2079898z10-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, 2002. 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, 2002 ----------------------------- -------------------------------- 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 12 Months Ended March 31, March 31, 2002 2001 2002 2001 --------- --------- --------- --------- (In Thousands) REVENUES $ 33,487 $ 31,035 $ 127,345 $ 120,253 OPERATING EXPENSES Operating and maintenance 12,051 11,137 48,158 44,933 Depreciation 4,845 4,066 16,186 15,277 Other taxes 850 796 2,974 3,189 --------- --------- --------- --------- TOTAL OPERATING EXPENSES 17,746 15,999 67,318 63,399 --------- --------- --------- --------- OPERATING INCOME 15,741 15,036 60,027 56,854 INTEREST AND OTHER INCOME 1,081 1,270 5,761 3,415 INCOME (LOSS) FROM OPERATIONS OF UNCONSOLIDATED AFFILIATES 222 65 (949) 1,065 DEBT EXPENSE (5,677) (4,269) (18,316) (17,154) --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 11,367 12,102 46,523 44,180 INCOME TAXES 3,950 4,445 17,022 13,822 --------- --------- --------- --------- NET INCOME $ 7,417 $ 7,657 $ 29,501 $ 30,358 ========= ========= ========= =========
See notes to consolidated financial statements 2 QUESTAR PIPELINE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2002 2001 2001 (Unaudited) -------- -------- ---------- (In Thousands) ASSETS Current assets Cash and cash equivalents $ -- $ 509 $ 520 Accounts receivable 8,691 10,702 10,105 Inventories - materials and supplies, at lower of average cost or market 1,993 2,422 2,328 Prepaid expenses and other 639 339 643 -------- -------- -------- Total current assets 11,323 13,972 13,596 Property, plant and equipment 903,687 734,873 881,248 Less accumulated depreciation 261,724 245,810 256,755 -------- -------- -------- Net property, plant and equipment 641,963 489,063 624,493 Investment in unconsolidated affiliates 124,853 21,153 121,099 Regulatory and other assets 16,339 14,687 19,109 -------- -------- -------- $794,478 $538,875 $778,297 ======== ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balances $ 522 $ -- $ -- Short-term loans 100,000 100,000 Notes payable to Questar Corp. 40,300 800 18,300 Accounts payable and accrued expenses 20,841 16,421 29,399 -------- -------- -------- Total current liabilities 161,663 17,221 147,699 Long-term debt 310,034 215,025 310,065 Other liabilities 3,234 4,918 4,434 Deferred income taxes 75,128 64,043 73,222 Common shareholder's equity Common stock 6,551 6,551 6,551 Additional paid-in capital 142,034 142,034 142,034 Retained earnings 95,834 89,083 94,292 -------- -------- -------- Total common shareholder's equity 244,419 237,668 242,877 -------- -------- -------- $794,478 $538,875 $778,297 ======== ======== ========
See notes to consolidated financial statements 3 QUESTAR PIPELINE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
3 Months Ended March 31, 2002 2001 -------- -------- (In Thousands) OPERATING ACTIVITIES Net income $ 7,417 $ 7,657 Depreciation 5,108 4,360 Deferred income taxes 1,906 1,302 Income from unconsolidated affiliates, net of cash distributions (106) (65) Gain from sales of properties (4) (138) -------- -------- 14,321 13,116 Change in operating assets and liabilities (5,266) 6,708 -------- -------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 9,055 19,824 INVESTING ACTIVITIES Capital expenditures Purchase of property, plant and equipment (23,194) (6,658) Investment in unconsolidated affiliates (3,648) (2,000) -------- -------- Total capital expenditures (26,842) (8,658) Proceeds from disposition of property, plant and equipment 620 1,613 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (26,222) (7,045) FINANCING ACTIVITIES Checks outstanding in excess of cash balances 522 Decrease in notes receivable from Questar Corp. 20,700 Increase in notes payable to Questar Corp. 22,000 800 Repayment of long-term debt (30,000) Payment of dividends (5,875) (5,625) -------- -------- NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES 16,647 (35,625) -------- -------- Decrease in cash and cash equivalents (520) (22,846) Beginning cash and cash equivalents 520 1,855 -------- -------- Ending cash and cash equivalents $ -- $(20,991) ======== ========
See notes to consolidated financial statements 4 QUESTAR PIPELINE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (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 of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three- and twelve-month periods ended March 31, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. 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, 2001. 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.
3 Months Ended March 31, 2002 2001 ------- ------- (In Thousands) Revenues $ 3,824 $ 1,981 Operating income (loss) 307 (2,756) Income (loss) before income taxes 320 (6,004)
Note 3 - New Accounting Standard The Company adopted SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" as of January 1, 2002 without an impact in the balance sheet, income statement or statement of cash flows. Note 4 - Reclassifications Certain reclassifications were made to the 2001 financial statements to conform with the 2002 presentation. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations QUESTAR PIPELINE COMPANY AND SUBSIDIARIES March 31, 2002 (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, 2002 2001 2002 2001 -------- -------- -------- -------- FINANCIAL RESULTS - (in thousands) Revenues From unaffiliated customers $ 12,502 $ 10,842 $ 51,062 $ 43,746 From affiliates 20,985 20,193 76,283 76,507 -------- -------- -------- -------- Total revenues $ 33,487 $ 31,035 $127,345 $120,253 ======== ======== ======== ======== Operating income $ 15,741 $ 15,036 $ 60,027 $ 56,854 Net income $ 7,417 $ 7,657 $ 29,501 $ 30,358 OPERATING STATISTICS Natural gas transportation volumes (in thousands of decatherms) For unaffiliated customers 52,452 42,434 205,628 171,943 For Questar Gas 51,345 38,686 122,918 110,554 For other affiliated customers 553 1,911 5,534 8,956 -------- -------- -------- -------- Total transportation 104,350 83,031 334,080 291,453 ======== ======== ======== ======== Transportation revenue (per decatherm) $ 0.21 $ 0.23 $ 0.24 $ 0.25
Revenues Revenues were higher in the 3- and 12-month periods of 2002 compared with the 2001 periods due primarily to increased revenues from transportation operations. Transportation volumes increased 26% in the first quarter and 15% in the 12-month period in response to regional energy development. Main Line 104, a 77-mile extension in central Utah with a 272,000 dth per day capacity, began operations in November 2001 and is fully subscribed. Total firm daily demand was 1,410,000 decatherm in the first quarter of 2002 compared with 1,174,000 decatherm in the first quarter of 2001. Expenses Operating and maintenance expenses were higher in the 2002 periods primarily because of legal fees partially offset by lower fuel costs. In the first quarter of 2002, legal expenses were $.9 million higher than the year earlier quarter. Gas purchased and used in a processing plant was approximately $.5 million less in 2002. Depreciation expense was higher in the 2002 periods compared with the 2001 periods as a result of capital investments. Increased levels of borrowing more than offset lower interest rates resulting in higher debt expense in the 2002 periods presented. In 2001, the Company refinanced $115 million of long-term debt carrying a weighted average rate of 9.5% 6 with debt having a weighted average interest rate of 6.9%. An additional $65 million was borrowed on a long-term basis to finance capital projects. In October 2001, Questar Pipeline borrowed $100 million of floating rate debt from a bank for a 12-month period to repay through a wholly owned subsidiary, Questar TransColorado, Inc., one-half of the outstanding and currently maturing debt owed by the TransColorado Gas Transmission Company. The effective income tax rate was 34.7% and 36.7% in the first quarters of 2002 and 2001, respectively. Other income Interest and other income was lower in the first quarter of 2002 due to a decrease of the amount of excess cash loaned to Questar Corp. AFUDC (capitalized financing costs) associated with Questar Pipeline's construction projects was $.3 million higher in 2002 due primarily to Questar Southern Trails Pipeline. Earnings from unconsolidated affiliates improved in the first quarter of 2002 because of increased volumes on TransColorado and lower debt costs. Liquidity and Capital Resources Operating Activities Net cash provided from operating activities of $9.1 million in the first quarter of 2002 was $10.8 million less than the amount reported for the same period of 2001 due to changes in operating assets and liabilities. The decline resulted primarily from a timing difference caused by a reduction of accounts payable. Investing Activities Capital expenditures were $26.8 million in the first quarter of 2002 and are forecast to reach $104.4 million in calendar year 2002. The Company purchased an additional 18% interest in Overthrust Pipeline in the first quarter of 2002. Financing Activities Questar Pipeline used net cash flow provided from operating activities and borrowed $22 million in the first quarter of 2002 to finance capital expenditures and pay dividends. Forecasted capital expenditures for 2002 are expected to be financed with the proceeds from net cash provided from operating activities, long-term debt and common equity. Moody's Reviews Possible Downgrade of Debt Ratings On May 2, 2002, Moody's Investors Service placed Questar Pipeline Company under review for a possible rating downgrade of the Company's A1 senior unsecured debt. In the same notice, Moody's also placed Questar Pipeline's parent company, Questar Corporation and affiliated companies, Questar Gas and Questar Market Resources under review. The review was prompted by Moody's concern of Questar's leverage following the $403 million acquisition of Shenandoah Energy Inc. (SEI) in 2001 and the shift in business mix towards nonregulated businesses. Moody's review will assess Questar's plan to reduce its leverage and to manage increased business risk and commodity price exposure. TransColorado Case The trial involving the partners of TransColorado Gas Transmission Company concluded May 2, 2002. The legal issues are complex and trial preparation is costly. The Company expects to receive an order from the judge before the end of the third quarter of 2002. For more information refer to Item 1. Legal Proceedings in this Form 10-Q. 7 Regulatory Issue The Federal Energy Regulatory Commission (FERC) rejected proposed tariff sheets submitted by Questar Pipeline for its new firm "park and loan" service. The Company intends to file a new application in which it will address FERC's concerns and expects to receive FERC approval in time to begin the new service in June of 2002. 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 and 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 Item 1. Legal Proceedings There are various legal proceedings pending against Questar Pipeline Company ("Questar Pipeline" or the "Company") and its affiliates. The trial in the complex litigation involving the partners in the TransColorado Gas Transmission Company ("TransColorado") ended May 2, 2002. The five-week trial was held before a judge in Garfield County, Colorado, to determine the validity of a contractual right claimed by Questar TransColorado, Inc. ("QTC"), a direct subsidiary of Questar Pipeline Company, to put its 50 percent interest in the pipeline owned by TransColorado to KN TransColorado, Inc. ("KNTC") during the 12-month period beginning March 31, 2001. (QTC has given notice of its election to exercise its contractual right, subject to a standstill agreement pending the resolution of the litigation.) The litigation involves allegations filed by KNTC, a subsidiary of Kinder Morgan Inc. ("Kinder Morgan"), that QTC and its affiliates breached their fiduciary duties to TransColorado and KNTC by developing a plan to construct and operate a new pipeline that would compete with the TransColorado pipeline, rendering it economically unviable. KNTC requested at least $150 million in damages plus punitive damages, a declaratory judgment that KNTC's obligation to purchase QTC's interest in the project be declared void and unenforceable, and a dissolution of the partnership under Colorado law. QTC and its affiliates subsequently filed a counterclaim against KNTC and named affiliates including Kinder Morgan, seeking a declaratory judgment that the contractual right to exercise the put is binding and enforceable and damages of at least $185 million. The judge has requested the parties to file post-trial briefs and draft findings of fact and conclusions of law by June 7, 2002, and to appear at a hearing scheduled for July 26, 2002, to respond to his written questions received in advance of such date. The trial proceedings bolstered the expectation of the Questar parties that the contractual right to exercise the put will be vindicated. The Questar parties believe that the judge will issue an order prior to the end of the third quarter, but also expect that any decision rendered by the judge may be appealed. Item 6. Exhibits and Reports on Form 8-K. a. The following exhibit has been filed as part of this report.
Exhibit No. Exhibit ----------- ------- 12. Ratio of earnings to fixed charges.
b. Questar Pipeline did not file any Current Report on Form 8-K during the first quarter of 2002. 9 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 13, 2002 /s/ D. N. Rose ------------ ---------------------------------------- D. N. Rose President and Chief Executive Officer May 13, 2002 /s/ S. E. Parks ------------ ---------------------------------------- S. E. Parks Vice President, Treasurer, and Chief Financial Officer 10