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. 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 April 30, 2001
------------------------------- --------------------------------
Common Stock, without par value 80,820,432 shares
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
3 Months Ended 12 Months Ended
March 31, March 31,
2001 2000 2001 2000
---------------------------------------------------------
(In Thousands, Except Per Share Amounts)
REVENUES $ 562,638 $ 336,702 $ 1,492,089 $ 983,107
OPERATING EXPENSES
Cost of natural gas and
other products sold 331,158 149,367 744,020 385,170
Operating and maintenance 62,824 57,036 257,207 226,656
Depreciation and amortization 34,930 35,882 140,989 139,994
Other taxes 20,812 12,277 59,189 36,591
---------------------------------------------------------
TOTAL OPERATING EXPENSES 449,724 254,562 1,201,405 788,411
---------------------------------------------------------
OPERATING INCOME 112,914 82,140 290,684 194,696
INTEREST AND OTHER INCOME 6,241 12,212 35,711 74,844
OPERATIONS OF UNCONSOLIDATED
AFFILIATES
Income (loss) 114 1,219 2,891 (4,597)
Write-down of investment in partnership (49,700)
---------------------------------------------------------
114 1,219 2,891 (54,297)
DEBT EXPENSE (15,592) (15,560) (63,542) (56,533)
---------------------------------------------------------
INCOME BEFORE INCOME TAXES 103,677 80,011 265,744 158,710
INCOME TAXES 38,827 29,781 94,413 53,014
---------------------------------------------------------
NET INCOME $ 64,850 $ 50,230 $ 171,331 $ 105,696
=========================================================
EARNINGS PER COMMON SHARE
Basic $ 0.80 $ 0.62 $ 2.13 $ 1.30
Diluted $ 0.80 $ 0.62 $ 2.11 $ 1.29
Average common shares outstanding
Basic 80,732 80,782 80,424 81,655
Diluted 81,519 80,782 81,124 81,755
Dividends per common share $ 0.175 $ 0.17 $ 0.69 $ 0.675
See notes accompanying consolidated financial statements
2
QUESTAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000 2000
(Unaudited)
-------------------------------------------
(In Thousands)
ASSETS
Current assets
Cash and cash equivalents $ 3,857 $ 9,416
Accounts receivable $ 280,215 192,638 332,318
Inventories, at lower of average cost or market
Gas and oil storage 24,625 10,149 30,062
Materials and supplies 14,669 10,674 10,472
Purchased-gas adjustments 48,178 35,565
Prepaid expenses and other 10,742 11,727 9,189
-------------------------------------------
Total current assets 378,429 229,045 427,022
-------------------------------------------
Property, plant and equipment 3,546,027 3,367,394 3,544,266
Less accumulated depreciation and
amortization 1,615,538 1,507,540 1,590,273
-------------------------------------------
Net property, plant and equipment 1,930,489 1,859,854 1,953,993
-------------------------------------------
Securities available for sale 20,067 111,808 33,019
Investment in unconsolidated affiliates 36,408 33,437 34,505
Goodwill, net 19,958 7,550 20,514
Cash held in escrow 26,518 37,310 5,387
Other assets 61,244 47,180 64,605
-------------------------------------------
$ 2,473,113 $2,326,184 $2,539,045
===========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Checks outstanding in excess of cash balances $ 1,390
Short-term loans 207,974 $ 137,000 $ 209,139
Accounts payable and accrued expenses 257,273 192,590 311,910
Deferred income taxes - current 18,308 13,515
Purchased-gas adjustments 15,065
Hedging liability 52,011
-------------------------------------------
Total current liabilities 536,956 344,655 534,564
-------------------------------------------
Long-term debt 669,578 763,226 714,537
Other liabilities 26,030 27,981 33,680
Deferred income taxes and investment
tax credits 227,696 229,058 246,982
Minority interest 17,674 6,982 18,216
Common shareholders' equity
Common stock 263,866 258,862 268,630
Retained earnings 760,848 644,989 710,125
Other comprehensive income (loss) (29,535) 50,431 12,311
-------------------------------------------
Total common shareholders' equity 995,179 954,282 991,066
-------------------------------------------
$ 2,473,113 $2,326,184 $2,539,045
===========================================
See notes accompanying consolidated financial statements
3
QUESTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
3 Months Ended
March 31,
2001 2000
----------------------------
(In Thousands)
OPERATING ACTIVITIES
Net income $ 64,850 $ 50,230
Depreciation and amortization 36,373 37,249
Deferred income taxes and
investment tax credits 11,571 (5,733)
Income from unconsolidated affiliates,
net of cash distributions (286) (1,124)
Gain from sales of securities (9,044)
----------------------------
112,508 71,578
Changes in operating assets and liabilities (19,933) 36,749
----------------------------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 92,575 108,327
INVESTING ACTIVITIES
Capital expenditures
Property, plant and equipment (46,758) (103,985)
Other investments (2,000) (7,024)
----------------------------
Total capital expenditures (48,758) (111,009)
Proceeds from (cost of) the disposition
of property, plant and equipment 29,304 (371)
Proceeds from the sales of securities and other 183 11,573
----------------------------
NET CASH USED IN INVESTING
ACTIVITIES (19,271) (99,807)
FINANCING ACTIVITIES
Issuance of common stock 6,615 589
Common stock repurchased (11,379) (20,164)
Issuance of long-term debt 185,000 33,402
Repayment of long-term debt (227,565) (4,997)
Change in short-term loans (1,165) (7,115)
Cash in escrow account (21,131) (583)
Checks outstanding in excess of cash balances 1,390
Payment of dividends (14,127) (13,739)
Other (159)
----------------------------
NET CASH USED IN FINANCING
ACTIVITIES (82,521) (12,607)
Foreign currency translation adjustment (199) (347)
----------------------------
Change in cash and cash equivalents (9,416) (4,434)
Beginning cash and cash equivalents 9,416 8,291
----------------------------
Ending cash and cash equivalents $ - $ 3,857
============================
See notes accompanying consolidated financial statements
4
QUESTAR CORPORATION
NOTES ACCOMPANYING 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. Due to the seasonal nature of the business, the results of operations
for the three-month period ended March 31, is not necessarily indicative of the
results that may be expected for the year ending December 31, 2001. 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, 2000.
Note 2 - Comprehensive Income
Comprehensive income is the sum of net income as reported in the Consolidated
Statement of Income and other comprehensive income transactions reported in
Shareholders' Equity. Other comprehensive income transactions that currently
apply result from changes in the market value of securities held for sale,
changes in the market value of energy-hedging contracts and changes in holding
value resulting from foreign currency translation adjustments. These
transactions are not the culmination of the earnings process, but result from
periodically adjusting historical balances to market value. Income or loss is
realized when the securities available for sale are sold or the gas or oil
underlying the hedging contracts is sold.
3 Months Ended
March 31,
2001 2000
----------------------------
(In thousands)
Comprehensive Income:
Net income $ 64,850 $ 50,230
Other comprehensive income (loss)
Unrealized loss on hedging
transactions (52,100)
Unrealized gain (loss) on securities
available for sale (12,953) 18,162
Foreign currency translation adjustment (2,645) (520)
----------------------------
Other comprehensive income (loss) before
income taxes (67,698) 17,642
Income taxes on other comprehensive
income (loss) (25,852) 6,121
----------------------------
Net other comprehensive income (loss) (41,846) 11,521
----------------------------
Total comprehensive income $ 23,004 $ 61,751
============================
5
Note 3 - Financing
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.
On March 6, 2001, Market Resources in a public offering issued $150 million of
7.5% notes due 2011. Market Resources applied the proceeds of the debt offering
to repay a portion of its outstanding floating-rate bank debt.
Note 4 - Operations by Line of Business
3 Months Ended 12 Months Ended
March 31, March 31,
2001 2000 2001 2000
---------------------------------------------------------
(In Thousands)
REVENUES FROM UNAFFILIATED CUSTOMERS
Questar Market Resources $ 230,865 $ 119,471 $ 760,594 $ 443,431
Questar Regulated Services
Natural gas distribution 308,939 199,527 641,400 475,040
Natural gas transmission 10,842 9,596 43,746 37,497
Other 1,216 625 4,233 2,336
---------------------------------------------------------
Total Regulated Services 320,997 209,748 689,379 514,873
Corporate and other operations 10,776 7,483 42,116 24,803
---------------------------------------------------------
Total $ 562,638 $ 336,702 $1,492,089 $ 983,107
=========================================================
REVENUES FROM AFFILIATES
Questar Market Resources $ 27,981 $ 22,290 $ 98,544 $ 80,795
Questar Regulated Services
Natural gas distribution 1,190 993 4,971 3,115
Natural gas transmission 20,193 20,262 76,507 77,355
Other 339 68 554 236
Corporate and other operations 7,047 9,304 32,329 35,720
---------------------------------------------------------
Total $ 56,750 $ 52,917 $ 212,905 $ 197,221
=========================================================
OPERATING INCOME (LOSS)
Questar Market Resources $ 55,603 $ 25,675 $ 170,031 $ 88,110
Questar Regulated Services
Natural gas distribution 43,327 38,749 60,998 46,255
Natural gas transmission 15,036 15,035 56,854 56,366
Other 84 (46) 64 (34)
---------------------------------------------------------
Total Regulated Services 58,447 53,738 117,916 102,587
Corporate and other operations (1,136) 2,727 2,737 3,999
---------------------------------------------------------
Total $ 112,914 $ 82,140 $ 290,684 $ 194,696
=========================================================
6
3 Months Ended 12 Months Ended
March 31, March 31,
2001 2000 2001 2000
---------------------------------------------------------
(In Thousands)
NET INCOME (LOSS)
Questar Market Resources $ 33,934 $ 15,049 $ 103,927 $ 52,662
Questar Regulated Services
Natural gas distribution 23,720 20,715 27,168 19,676
Natural gas transmission 7,657 7,124 30,358 (8,229)
Other 188 59 473 310
---------------------------------------------------------
Total Regulated Services 31,565 27,898 57,999 11,757
Corporate and other operations (649) 7,283 9,405 41,277
---------------------------------------------------------
Total $ 64,850 $ 50,230 $ 171,331 $ 105,696
=========================================================
Note 5 - New Accounting Standard - "Accounting for Derivative Instruments and
Hedging Activities"
The Company adopted the accounting provisions of SFAS 133, as amended,
"Accounting for Derivative Instruments and Hedging Activities" beginning in
January 2001. SFAS 133 addresses the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts. Under the
standard, entities are required to carry all derivative instruments in the
balance sheet at fair value. The accounting for changes in fair value, which
result in gains or losses, of a derivative instrument depends on whether such
instrument has been designated and qualifies as part of a hedging relationship
and, if so, depends on the reason for holding it. If certain conditions are met,
entities may elect to designate a derivative instrument as a hedge of exposure
to changes in fair value, cash flows or foreign currencies. If the hedged
exposure is a fair-value exposure, the gain or loss on the derivative instrument
is recognized in earnings in the period of the change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash-flow exposure, the effective portion of
the gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income in the shareholders' equity section of
the balance sheet and subsequently reclassified into earnings when the
forecasted transaction affects earnings. Any amounts excluded from the
assessment of hedge effectiveness, as well as the ineffective portion of the
gain or loss, is reported in earnings immediately.
As of January 1, 2001, the Company structured a majority of its energy
derivative instruments as cash flow hedges. As a result of adopting SFAS 133 in
January 2001, the Company recorded a $121 million hedging liability for
derivative instruments. The hedging liability fell to $52 million as of March
31, 2001. Settlement of contracts accounted for $47.3 million of the decrease,
while a decrease in prices of gas and oil on futures resulted in a $21.7 million
decline. The offset to the hedging liability, net of income taxes, was a $32.4
million unrealized loss on hedging activities recorded in other comprehensive
income in the shareholder's equity section of the balance sheet. The ineffective
portion of hedging transaction recognized in earnings was not significant. The
fair-value calculation does not consider changes in fair value of the
corresponding scheduled equity physical transactions.
The contracts at March 31, 2001 had terms extending through December 2003. About
86% of those contracts, representing approximately $49 million, settle and will
be reclassified from other comprehensive loss in the next 12 months.
Note 6 - Reclassifications
Certain reclassifications were made to the 2000 financial statements to conform
with the 2001 presentation.
7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
QUESTAR CORPORATION
March 31, 2001
(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 12 Months Ended
March 31, March 31,
2001 2000 2001 2000
-----------------------------------------------------
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 230,865 $ 119,471 $ 760,594 $ 443,431
From affiliates 27,981 22,290 98,544 80,795
-----------------------------------------------------
Total revenues $ 258,846 $ 141,761 $ 859,138 $ 524,226
=====================================================
Operating income $ 55,603 $ 25,675 $ 170,031 $ 88,110
Net income $ 33,934 $ 15,049 $ 103,927 $ 52,662
OPERATING STATISTICS
Production volumes
Natural gas (in million cubic feet) 15,787 16,950 67,800 64,614
Oil and natural gas liquids (in thousands of
barrels)
Questar Exploration & Production 495 554 2,166 2,260
Wexpro 125 128 518 541
Production revenue
Natural gas (per thousand cubic feet) $ 4.17 $ 2.17 $ 3.28 $ 2.08
Oil and natural gas liquids (per barrel)
Questar Exploration & Production $ 21.48 $ 21.64 $ 20.43 $ 16.68
Wexpro $ 27.92 $ 25.07 $ 28.13 $ 20.41
Wexpro investment base at March 31, net
of deferred income taxes (in millions) $ 122.2 $ 109.7
Marketing volumes in energy equivalent
decatherms (in thousands of decatherms) 24,028 27,025 102,635 105,848
Natural gas gathering volumes (in
thousands of decatherms)
For unaffiliated customers 22,085 21,778 93,276 86,448
For Questar Gas 10,211 9,853 37,149 33,666
For other affiliated customers 6,799 5,164 26,703 20,264
-----------------------------------------------------
Total gathering 39,095 36,795 157,128 140,378
=====================================================
Gathering revenue (per decatherm) $ 0.13 $ 0.14 $ 0.13 $ 0.15
8
Strong commodity prices more than offset lower production leading to an 83%
increase in revenues in the first quarter of 2001 compared with the first
quarter of 2000. Questar E & P reported that its average realized natural gas
price rose 92% to $4.17 per thousand cubic feet (Mcf), while gas production was
7% lower and oil and natural gas liquids (NGL) production was 11% lower in the
first quarter of 2001. Production volumes decreased in 2001 as a result of sales
of reserves, weather-related operational delays and a natural decline in older
fields.
Approximately 63% of gas volumes in the first quarter of 2001 were hedged with
floors and ceilings averaging $3.28 per Mcf and $3.51 per Mcf, respectively, net
to the well. The remainder of gas production realized prices averaging about
$6.80 per Mcf, driven by cold winter temperatures and an energy shortage in the
western United States. Approximately 52% of gas production for the remaining
nine months of 2001 is hedged with floors and ceilings averaging $2.75 per Mcf
and $3 per Mcf, respectively. Hedging activities reduced revenues from gas sales
by $41.9 million in the first quarter of 2001.
For Questar E & P, the average selling price of oil and NGL was 1% lower in the
first quarter of 2001 compared with the same period in 2000. Approximately 58%
of 2001 oil production in the quarter was hedged at an average price of $17.20
per barrel, net to the well. The remainder of oil production realized prices
averaging about $28 per barrel. Demand in 2001 for NGL caused prices to increase
79% over the same period in 2000. QMR does not hedge the selling price of NGL.
Hedging activities reduced revenues from oil sales by $3.2 million in the first
quarter of 2001.
Revenues from energy marketing increased $82.3 million in the first quarter
comparison as a result of higher commodity prices. The margin from energy
marketing was $4.5 million in 2001 compared with breakeven in the 2000 period.
A lower full-cost amortization rate combined with 7% lower production, on an
energy equivalent basis, resulted in decreased depreciation and amortization
expense in 2001. The combined U.S. and Canadian full-cost amortization rate for
the first quarter of 2001 was $.79 per thousand cubic feet equivalent (Mcfe) of
production compared with $.80 for the corresponding quarter a year ago. The
combined rate for the second quarter of 2001 is expected to increase to $.83 per
Mcfe due to higher drilling costs.
QMR's first quarter net income increased $18.9 million, representing a 125%
improvement over the first quarter of 2000. The increase resulted from higher
commodity prices, increased earnings for Wexpro and a gain from selling
nonstrategic gathering properties.
Wexpro's net income increased $800,000 in the first quarter of 2001. Wexpro
increased its investment in development-drilling projects. Wexpro develops gas
reserves on behalf of affiliated company, Questar Gas, which is a rate-regulated
distributor of natural gas. In addition, higher oil and NGL prices contributed
to Wexpro's improved earnings.
Other income was substantially higher in the first quarter of 2001 as a result
of a $1.1 million pretax gain from selling nonstrategic gathering properties.
The property sale was part of a larger package that included producing
properties. QMR placed the $27 million of proceeds into an escrow account
pending a search for suitable properties in a like kind exchange for income tax
purposes.
Questar Regulated Services
Questar Gas and Questar Pipeline conduct the Company's regulated services of
natural gas distribution, transmission and storage.
9
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 12 Months Ended
March 31, March 31,
2001 2000 2001 2000
-----------------------------------------------------
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 308,939 $ 199,527 $ 641,400 $ 475,040
From affiliates 1,190 993 4,971 3,115
-----------------------------------------------------
Total revenues 310,129 200,520 646,371 478,155
Natural gas purchases 230,154 122,430 441,917 280,973
-----------------------------------------------------
Margin $ 79,975 $ 78,090 $ 204,454 $ 197,182
=====================================================
Operating income $ 43,327 $ 38,749 $ 60,998 $ 46,255
Net income $ 23,720 $ 20,715 $ 27,168 $ 19,676
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 36,704 33,908 86,169 83,684
Industrial sales 3,267 3,204 10,377 10,087
Transportation for industrial
customers 14,714 14,017 55,533 52,309
-----------------------------------------------------
Total deliveries 54,685 51,129 152,079 146,080
=====================================================
Natural gas revenue (per decatherm)
Residential and commercial $ 7.73 $ 5.41 $ 6.58 $ 5.05
Industrial sales 5.64 3.27 4.52 3.03
Transportation for industrial
customers $ 0.13 $ 0.13 $ 0.13 $ 0.13
Heating degree days
Colder (warmer) than normal 1% (14)% 1% (7)%
Number of customers at March 31,
Residential and commercial 704,424 687,985
Industrial 1,323 1,363
--------------------------
Total 705,747 689,348
==========================
The margin increased 2% in the first quarter of 2001 and 4% in the twelve months
ended March 31, 2001 compared with the same periods of 2000. The higher margin
resulted primarily from a 3.9% Utah general rate increase which went into effect
August 11, 2000 and higher volumes delivered to new customers. Usage per
customer fell by 3 decatherm (Dth) or 5.5% in the first quarter of 2001. Volumes
delivered were 7% higher in the first quarter and were 4% higher for the
twelve-month periods of 2001 compared with the same periods in 2000. Weather was
colder than normal in the 2001 periods presented.
Questar Gas' cost of natural gas sold increased 88% in the first quarter and 57%
for the twelve-month periods of 2001compared with the 2000 periods due to higher
gas costs. Gas costs in rates for the three-month period of 2001 were $4.67 per
Dth compared to $2.23 per Dth in 2000. Effective January 1, 2001, the PSCU
approved on an interim basis a $167 million pass-through filing that increased
Utah natural gas rates 29%. Also effective January 1, 2001, the Wyoming Public
Service Commission approved a $7 million pass-through filing for Wyoming natural
gas
10
rates. The Company files for adjustment of purchased-gas costs with the Utah
and Wyoming Public Service Commissions on a semiannual basis.
Operating and maintenance (O & M) expenses decreased 4% in the first quarter of
2001 compared with the prior year primarily from early retirement cost savings
of $1.3 million. The cost savings were partially offset by higher costs from
adding new customers and increased bad debt expenses. Bad debt expenses
increased by $700,000 over the first quarter of 2000 because of the effect of
higher selling prices on customer collections. O & M expenses decreased 4% for
the twelve months of 2001 compared with 2000 due to the early retirement, lower
information technology costs and decreased legal expenses. Depreciation expenses
were 5% lower in the three-month period of 2001 compared with the 2000 period as
a result of computer equipment and software being fully depreciated. Other taxes
decreased 30% in the first quarter comparisons because of an adjustment of prior
year taxes.
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 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 for 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.
The net loss reported for the 12-month period of 2000 was due mainly to a pretax
operating loss of $8.2 million from TransColorado and a writedown of investment
in the partnership that holds the TransColorado investment.
11
Consolidated Results of Operations
Higher natural gas prices were primarily responsible for a 67% increase in
revenues in the first quarter and a 52% increase in the 12-month period ended
March 31, 2001. Revenues reported by exploration and production, natural gas
distribution and energy marketing operations were directly affected by the
higher prices. The cost of natural gas and other products sold was higher in the
2001 periods presented as a result of increased natural gas prices for natural
gas distribution operations and natural gas and oil prices in energy-marketing
operations.
Operating and maintenance (O & M) expenses were higher in the 2001 periods
presented when compared with the same periods in 2000 primarily due to adding
natural gas customers and gas and oil properties, incurring legal fees in a case
involving the TransColorado pipeline and an acquisition of Consonus. Consonus
was purchased mid-year 2000. Labor cost savings from an early-retirement program
offered to qualifying employees of Regulated Services partially offset the other
increases discussed.
Depreciation and amortization expense was 3% lower in the first quarter of 2001
when compared with the first quarter of 2000 due to lower full-cost amortization
and from fully depreciating several information systems in 2000. A lower
full-cost amortization rate combined with 7% lower production, on an energy
equivalent basis, resulted in decreased depreciation and amortization expense in
2001. The combined U.S. and Canadian full-cost amortization rate for the first
quarter of 2001 was $.79 per thousand cubic feet equivalent (Mcfe) of production
compared with $.80 for the corresponding quarter a year ago.
Other taxes increased because of higher gas prices and the effect on
production-related taxes. Debt expense was higher in the 2001 periods because of
higher interest rates. In the first quarter of 2000, interest and other income
included a $9 million pretax gain from selling securities. There were no
securities sales in the first quarter of 2001. A $1.1 million gain from selling
nonstrategic gathering properties was recorded in the first quarter of 2001.
The effective income tax rate for the first quarter was 37.4% in 2001 and 37.2%
in 2000. The Company recognized $1.7 million of nonconventional fuel tax credits
in the 2001 period and $1.6 million in the 2000 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities for the first quarter of 2001 was
$15.8 million lower than the amount generated in the same period of 2000. Higher
net income was more than offset by the effect of higher gas costs reflected in
higher accounts receivables, the purchased-gas adjustment account and accounts
payable.
Investing Activities
A comparison of capital expenditures for the first quarter of 2001 and 2000 plus
an estimate for calendar year 2001 is presented below. The Company acquired a
Canadian company, Canor Energy LTD, in 2000 for a cash payment of $US 61 million
and assumed $US 5.4 million of debt. Capital expenditures for calendar year 2001
are estimated to be $562.5 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 the Questar Southern Trails Pipeline. Also
included in the forecast for corporate and other operations is $100 million for
acquisitions, but no specific transaction has been identified.
12
Forecast
Actual --------
------ 12 Months
3 Months Ended Ended
March 31 Dec. 31,
2001 2000 2001
----------------------------------------
(In Thousands)
Questar Market Resources $ 24,451 $ 80,336 $ 194,100
Questar Regulated Services
Natural gas distribution 12,765 10,167 76,100
Natural gas transmission 8,658 17,616 180,300
Other 591 13 3,600
----------------------------------------
Total Questar Regulated Services 22,014 27,796 260,000
Corporate and other operations 2,293 2,877 108,400
----------------------------------------
$ 48,758 $ 111,009 $ 562,500
========================================
Financing Activities
In the first quarter of 2001, capital expenditures and a $42.6 million reduction
of long-term debt were funded from net cash provided from operating activities.
In 2001, $21 million of the proceeds from a sale of property were placed in an
escrow account. Financing for forecasted capital expenditures for 2001 is
expected to come from cash provided from operating activities, bank borrowings
and issuing long-term debt.
Short-term borrowings at March 31, 2001 were comprised of $120 million of
commercial paper and $88.9 million of short-term bank loans. A year earlier, the
Company had issued $137 million of commercial paper. On March 6, 2001, Questar
Market Resources issued $150 million of medium-term notes and used the proceeds
to repay $139 million of long-term bank loans. 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 Questar Pipeline 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.
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 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.
Effective January 1, 2001, the PSCU approved on an interim basis a $167 million
increase in its Utah natural gas rates that resulted in a 29 percent increase
for the typical residential Utah customer. The increase was based on recent
13
significant increases in natural gas prices at the wellhead and was part of
Questar Gas' gas-cost-adjustment or "pass-through" filings. Such filings enable
the company to adjust rates at least twice each year to reflect changes in
gas-supply costs. These costs are passed on to the customer on a
dollar-for-dollar basis with no markup. The impact of the gas cost increase on
customers was lessened by the fact that approximately 50% of the Company's
annual supply comes from its own wells and is priced to customers at cost of
service prices rather than market prices. Also, effective January 1, 2001, the
Wyoming Public Service Commission approved a $7 million pass-through filing for
Wyoming natural gas rates.
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.
Quantitative and Qualitative Disclosures about Market Risk
QMR's primary market-risk exposures arise from commodity-price changes for
natural gas, oil and other hydrocarbons, changes in long-term interest rates and
changes in the market value of securities available for sale. The Company has an
investment in a foreign operation that may subject it to exchange-rate risk. QMR
also has reserved pipeline capacity for which it is obligated to pay $3 million
annually for the next six years, regardless of whether it is able to market the
capacity to others.
HEDGING POLICY
The Company has established policies and procedures for managing market risks
through the use of commodity-based derivative arrangements. A primary objective
of these hedging transactions is to protect the Company's commodity sales from
adverse changes in energy prices. The volume of production hedged and the mix of
derivative instruments employed are regularly evaluated and adjusted by
management in response to changing market conditions and reviewed periodically
by the Board of Directors. Additionally, under the terms of the Market
Resources' revolving credit facility, not more than 75% of Market Resources'
production quantities can be committed to hedging arrangements. The Company does
not enter into derivative arrangements for speculative purposes.
ENERGY-PRICE RISK MANAGEMENT
Energy-price risk is a function of changes in commodity prices as supply and
demand fluctuate. Market Resources bears a majority of the risk associated with
changes in commodity prices. The Company uses hedge arrangements in the normal
course of business to limit the risk of adverse price movements; however, these
same arrangements usually limit future gains from favorable price movements.
14
QMR held hedge contracts covering the price exposure for about 42.6 million
dth of gas and 735,000 barrels of oil at March 31, 2001. A year earlier the
contracts covered 58.6 million dth of natural gas and 2.1 million barrels of
oil. The hedging contracts exist for a significant share of QMR-owned gas and
oil production and for a portion of gas-marketing transactions. The contracts
at March 31, 2001, had terms extending through December 2003. About 86% of
those contracts, representing approximately $49 million, settle and will be
reclassified from other comprehensive loss in the next 12 months.
The financial mark-to-market adjustment of gas and oil price-hedging contracts
at March 31, 2001 was a negative $48.4 million and represented a liability owed
to counterparties if terminated. A 10% decline in gas and oil prices would
decrease the mark-to-market adjustment by $9 million; while a 10% increase in
prices would increase the mark-to-market adjustment by $8.9 million. The
mark-to-market adjustment of gas and oil price-hedging contracts at March 31,
2000 was a negative $31.5 million. A 10% decline in gas and oil prices at that
time would have caused a positive mark-to-market adjustment of $18 million.
Conversely, a 10% increase in prices would have resulted in a $18.6 million
negative mark-to-market adjustment at that date. The calculations used energy
prices posted on the NYMEX, various "into the pipe" postings and fixed prices
for the indicated measurement dates. These sensitivity calculations do not
consider changes in the fair value of the corresponding scheduled physical
transactions (i.e., the correlation between the index price and the price to be
realized for the physical delivery of gas or oil production), which should
largely offset the change in value of the hedge contracts.
INTEREST-RATE RISK MANAGEMENT
As of March 31, 2001, the Company owed $79.4 million of variable-rate long-term
debt. The book value of variable-rate debt approximates fair value.
SECURITIES AVAILABLE FOR SALE
Securities available for sale represent equity instruments traded on national
exchanges. The value of these investments is subject to day to day market
volatility. A 10% change in prices would result in change in value of $2 million
as of March 31, 2001.
FOREIGN CURRENCY RISK MANAGEMENT
The Company does not hedge the foreign currency exposure of its foreign
operation's net assets and long-term debt. Long-term debt held by the foreign
operation, amounts to $44.4 million (U.S.), and is expected to be repaid from
future operations of the foreign company.
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 and oil prices
and supplies, competition, rate-regulatory issues, regulation of the Wexpro
settlement agreement, availability of gas and oil properties for sale or for
exploration and other factors beyond the control of the Company. These other
factors include the rate of inflation, quoted prices of securities available for
sale, the weather and other 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.
15
Part II
Other Information
Questar Corporation has nothing to disclose in this section of the
report.
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)
MAY 11, 2001 /s/ R. D. Cash
------------ -------------------------------------
(Date) R. D. Cash
Chairman of the Board and
Chief Executive Officer
MAY 11, 2001 /s/ S. E. Parks
------------ -------------------------------------
(Date) S. E. Parks
Senior Vice President, Treasurer and
Chief Financial Officer