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STR > SEC Filings for STR > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for QUESTAR CORP

Form 10-K for QUESTAR CORP


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

Following are comparisons of net income (loss) by line of business:

                                     Year Ended December 31,                          Change
                                2013           2012           2011        2013 vs. 2012     2012 vs. 2011
                                               (in millions, except per-share amounts)
Questar Gas                 $     52.8     $     47.1     $     46.1     $         5.7     $         1.0
Wexpro                           110.6          103.9           95.2               6.7               8.7
Questar Pipeline(1)                8.2           64.7           67.9             (56.5 )            (3.2 )
Corporate and other              (10.4 )         (3.7 )         (1.3 )            (6.7 )            (2.4 )
Net income                  $    161.2     $    212.0     $    207.9     $       (50.8 )   $         4.1
Add: after-tax asset
impairment charge(1)              52.4              -              -              52.4                 -
Adjusted earnings           $    213.6     $    212.0     $    207.9     $         1.6     $         4.1

Earnings per share -
diluted                     $     0.92     $     1.19     $     1.16     $       (0.27 )   $        0.03
Add: diluted loss per share
attributable to asset
impairment charge(1)              0.29              -              -              0.29                 -
Adjusted earnings per share
- diluted                   $     1.21     $     1.19     $     1.16     $        0.02     $        0.03

Weighted-average diluted
shares                           176.0          177.5          178.8              (1.5 )            (1.3 )

(1) Impairment of the eastern segment of Questar Pipeline's Southern Trails Pipeline.

Management believes that the above non-GAAP financial measures, indicated by the word "Adjusted" in their captions, provide an indication of the Company's ongoing results of operations because of the impairment charge's infrequent and nonrecurring nature. Refer to Note 16 to the financial statements included in Item 8 of Part II of this Annual Report for additional information on the impairment.

Questar 2013 Form 10-K 27


QUESTAR GAS
Questar Gas reported net income of $52.8 million in 2013 compared to $47.1
million in 2012 and $46.1 million in 2011. The increases were primarily due to
additional revenues from infrastructure-replacement cost recovery and increased
customers. Following is a summary of Questar Gas financial and operating
results:
                                       Year Ended December 31,                        Change
                                  2013          2012          2011        2013 vs. 2012     2012 vs. 2011
                                                              (in millions)
Net Income
REVENUES
Residential and commercial
sales                          $   910.3     $   788.4     $   893.0     $       121.9     $      (104.6 )
Industrial sales                    28.1          27.4          29.7               0.7              (2.3 )
Transportation for industrial
customers                           14.4          11.9          11.3               2.5               0.6
Service                              4.8           4.5           5.1               0.3              (0.6 )
Other                               28.2          30.0          29.7              (1.8 )             0.3
Total Revenues                     985.8         862.2         968.8             123.6            (106.6 )
Cost of natural gas sold
From unaffiliated parties          279.7         185.6         318.4              94.1            (132.8 )
From affiliated companies          370.9         347.7         327.3              23.2              20.4
Total cost of natural gas sold     650.6         533.3         645.7             117.3            (112.4 )
Margin                             335.2         328.9         323.1               6.3               5.8
OTHER OPERATING EXPENSES
Operating and maintenance          113.1         119.0         118.5              (5.9 )             0.5
General and administrative          52.5          51.2          51.0               1.3               0.2
Retirement incentive                   -           2.4             -              (2.4 )             2.4
Depreciation and amortization       49.7          47.2          44.5               2.5               2.7
Other taxes                         18.0          16.2          15.0               1.8               1.2
Total Other Operating Expenses     233.3         236.0         229.0              (2.7 )             7.0
OPERATING INCOME                   101.9          92.9          94.1               9.0              (1.2 )
Interest and other income            5.1           5.5           5.4              (0.4 )             0.1
Interest expense                   (22.3 )       (24.1 )       (25.9 )             1.8               1.8
Income taxes                       (31.9 )       (27.2 )       (27.5 )            (4.7 )             0.3
NET INCOME                     $    52.8     $    47.1     $    46.1     $         5.7     $         1.0
Operating Statistics
Natural gas volumes (MMdth)
Residential and commercial
sales                              114.9          96.2         113.3              18.7             (17.1 )
Industrial sales                     4.4           4.7           5.0              (0.3 )            (0.3 )
Transportation for industrial
customers                           64.5          62.0          52.5               2.5               9.5
Total industrial                    68.9          66.7          57.5               2.2               9.2
Total deliveries                   183.8         162.9         170.8              20.9              (7.9 )
Natural gas revenue (per dth)
Residential and commercial     $    7.92     $    8.19     $    7.88     $       (0.27 )   $        0.31
Industrial sales                    6.47          5.79          6.03              0.68             (0.24 )
Transportation for industrial
customers                           0.22          0.19          0.21              0.03             (0.02 )
System natural gas cost (per
dth)                           $    5.00     $    4.77     $    5.05     $        0.23     $       (0.28 )
Colder (warmer) than normal
temperatures                          8%         (16%)            7%               24%             (23%)
Temperature-adjusted usage per
customer (dth)                     108.0         108.4         111.1              (0.4 )            (2.7 )
Customers at December 31, (in
thousands)                           946           931           919                15                12

Questar 2013 Form 10-K 28


Margin Analysis
Questar Gas's margin (revenues less gas costs) increased $6.3 million in 2013
compared to 2012 and increased $5.8 million in 2012 compared to 2011. Following
is a summary of major changes in Questar Gas's margin for 2013 compared to 2012
and 2012 compared to 2011:
                                                                         Change
                                                            2013 vs. 2012      2012 vs. 2011
                                                                      (in millions)
Customer growth                                            $        4.2       $        3.1
Customers switching from sales to transportation service            2.0                0.3
Change in rates                                                     0.4                0.2
Infrastructure-replacement cost recovery                            8.0                5.9
DSM cost recovery                                                  (6.9 )             (3.3 )
Recovery of gas-cost portion of bad debt costs                     (0.5 )             (0.9 )
Other                                                              (0.9 )              0.5
Increase                                                   $        6.3       $        5.8

At December 31, 2013, Questar Gas served 945,971 customers, up from 930,760 at December 31, 2012, and 919,236 at December 31, 2011. Customer growth increased the margin by $4.2 million in 2013 and $3.1 million in 2012.

Temperature-adjusted usage per customer was essentially flat in 2013 compared to 2012 and decreased 2% in 2012 compared to 2011. The impact on the company margin from changes in usage per customer has been mitigated by the CET. The CET adjustment decreased revenues by $1.1 million in 2013, decreased revenues by $2.9 million in 2012 and decreased revenues by $3.6 million in 2011, which offset changes in customer usage.

Weather, as measured in degree days, was 8% colder than normal in 2013, 16% warmer than normal in 2012 and 7% colder than normal in 2011. A weather-normalization adjustment on customer bills generally offsets financial impacts of temperature variations.

Questar Gas has an infrastructure cost-tracking mechanism that allows the company to place into rate base and earn on capital expenditures associated with a multi-year natural gas infrastructure-replacement program, and do it upon the completion of each project. Questar Gas realized an increase in margin of $8.0 million in 2013 and $5.9 million in 2012 under this mechanism.

Lower recovery of DSM costs decreased Questar Gas margin in 2013 and 2012. DSM costs are incurred to promote energy conservation by customers. Changes in the margin contribution from DSM recovery revenues are offset by equivalent changes in program expenses.

Questar Gas has an allowed return on equity of 10.35% in Utah. Questar Gas filed a general rate case in Utah in July 2013, requesting a $19 million increase in revenues and a continuation of its 10.35% authorized return on equity. Hearings were held in January 2014 and a decision in the case was received on February 21, 2014, which authorized an allowed return on equity of 9.85% and an annual increase in revenues of $7.6 million effective March 1, 2014. Questar Gas filed a general rate case in Wyoming in December 2011 and received an order in 2012, which increased rates by $0.6 million per year and authorized a return on equity of 9.16%.

Cost of Natural Gas Sold
Cost of natural gas sold increased 22% in 2013 compared to 2012 and decreased 17% in 2012 compared to 2011. The 2013 increase was due to an 18% increase in volumes sold and a 5% increase in the purchase cost of natural gas. The 2012 decrease was due to a 15% decrease in volumes sold and a 6% decrease in the purchase cost of natural gas. Cost of natural gas from affiliates includes cost-of-service gas supplies from Wexpro and transportation and storage from Questar Pipeline. These costs increased 7% in 2013 and 6% in 2012 due to Wexpro's higher investment in gas development properties resulting in higher volumes of cost-of-service gas. Wexpro provided 59% of Questar Gas's natural gas supply in 2013, 68% in 2012 and 52% in 2011. Questar Gas accounts for purchased-gas costs in accordance with procedures authorized by the PSCU and the PSCW. Purchased-gas costs that are different from those provided for in present rates are accumulated and recovered or credited through future rate changes. As of December 31, 2013, Questar Gas had a $7.4 million over-collected balance in the purchased-gas adjustment account representing costs recovered from customers in excess of costs incurred. Refer to Note 1 to the

Questar 2013 Form 10-K 29


financial statements included in Item 8 of Part II of this Annual Report for additional information regarding cost of natural gas sold.

Other Expenses
Operating and maintenance expenses decreased 5% in 2013 compared to 2012. The decrease was primarily driven by a $6.9 million decrease in DSM costs recovered from customers, a $1.3 million decrease in labor and pension costs, and a $0.9 million decrease in bad debt costs. These reductions were partially offset by higher expenses for communication and other services. Operating and maintenance expenses were essentially flat in 2012 compared to 2011. General and administrative costs increased 3% in 2013 compared to 2012 and were flat in 2012 compared to 2011. The 2013 increase was primarily due to higher allocated corporate expenses. The sum of operating, maintenance, general and administrative expenses not including DSM costs per customer was $144 in 2013 compared to $143 in 2012 and $141 in 2011.

Other taxes increased 11% in 2013 compared to 2012 and increased 8% in 2012 compared to 2011 due to increased property tax valuations and rates.

Depreciation and amortization expense was 5% higher in 2013 compared to 2012 and increased 6% in 2012 compared to 2011 due to higher depreciation expense from plant additions driven by customer growth and feeder-line replacements.

Questar 2013 Form 10-K 30


WEXPRO
Wexpro reported net income of $110.6 million in 2013 compared to $103.9 million
in 2012 and $95.2 million in 2011. The growth in net income resulted from
increased investment in cost-of-service gas development wells and the September
2013 Trail acquisition. Following is a summary of Wexpro financial and operating
results:
                                     Year Ended December 31,                          Change
                                2013           2012           2011        2013 vs. 2012     2012 vs. 2011
                                                            (in millions)
Net Income
REVENUES
Operator service fee        $    294.0     $    273.0     $    253.5     $        21.0     $        19.5
Oil and NGL sales                 40.9           37.0           31.3               3.9               5.7
Natural gas sales and other        5.0            0.2            0.3               4.8              (0.1 )
Total Revenues                   339.9          310.2          285.1              29.7              25.1
OPERATING EXPENSES
Operating and maintenance         27.8           26.8           22.3               1.0               4.5
Gathering and other
handling                           0.8              -              -               0.8                 -
General and administrative        28.7           26.8           24.2               1.9               2.6
Retirement incentive                 -            0.2              -              (0.2 )             0.2
Production and other taxes        28.3           20.8           25.6               7.5              (4.8 )
Depreciation, depletion and
amortization                      85.8           77.4           63.9               8.4              13.5
Oil and NGL income sharing         0.6            2.5            3.3              (1.9 )            (0.8 )
Total Operating Expenses         172.0          154.5          139.3              17.5              15.2
Net gain (loss) from asset
sales                             (0.2 )          2.4           (0.1 )            (2.6 )             2.5
OPERATING INCOME                 167.7          158.1          145.7               9.6              12.4
Interest and other income          5.0            2.8            4.2               2.2              (1.4 )
Interest expense                  (0.1 )            -              -              (0.1 )               -
Income taxes                     (62.0 )        (57.0 )        (54.7 )            (5.0 )            (2.3 )
NET INCOME                  $    110.6     $    103.9     $     95.2     $         6.7     $         8.7

Operating Statistics
Production volumes
Natural gas -
cost-of-service deliveries
(Bcf)                             59.2           57.5           50.5               1.7               7.0
Natural gas - sales (Bcf)          1.4              -              -               1.4                 -
Oil and NGL (Mbbl)                 617            665            467               (48 )             198
Natural gas average sales
price (per Mcf)             $     3.74     $        -     $        -     $        3.74     $           -
Oil and NGL average sales
price (per bbl)             $    85.20     $    80.61     $    82.11     $        4.59     $       (1.50 )
Investment base at Dec. 31,
(in millions)               $    589.7     $    531.1     $    474.4     $        58.6     $        56.7

Revenues
Wexpro earned a 19.7% after-tax return on average investment base in 2013 compared to 19.9% in 2012 and 20.0% in 2011. Pursuant to the Wexpro Agreement, Wexpro recovers its costs and receives an after-tax return on its investment base. Wexpro's investment base includes its costs of commercial wells and related facilities adjusted for working capital and reduced for deferred income taxes and accumulated depreciation, depletion and amortization. Wexpro's return on investment base is determined based on authorized returns from a group of rate-regulated companies plus an 8% risk premium for natural gas development drilling. The authorized returns for this group of companies have declined in recent years, resulting in lower returns on investment base for Wexpro.

Questar 2013 Form 10-K 31


--------------------------------------------------------------------------------


Following is a summary of changes in the Wexpro investment base:
                                                          Year Ended December 31,
                                                       2013        2012        2011
                                                               (in millions)
Investment base at beginning of year                 $ 531.1     $ 474.4     $ 456.6
Successful development wells and related equipment     158.5       149.3       118.0
Depreciation, depletion and amortization               (79.2 )     (73.9 )     (60.2 )
Change in deferred taxes                               (20.7 )     (18.7 )     (40.0 )
Investment base at end of year                       $ 589.7     $ 531.1     $ 474.4

This investment base does not yet include the cost of the Trail acquisition. The PSCU and PSCW authorized the inclusion of this acquisition in Wexpro II in January 2014.

Wexpro produced 59.2 Bcf of cost-of-service natural gas for Questar Gas during 2013, compared to 57.5 Bcf in 2012 and 50.5 Bcf in 2011. The higher production levels are due to increased investment in gas-development wells. Cost-of-service natural gas production provided approximately 59% of Questar Gas's supply requirements in 2013 compared to 68% in 2012 and 52% in 2011. The higher percentages in 2013 and 2012 were primarily due to higher production from increased development drilling activities. The 2012 percentage was also higher due to significantly warmer than normal weather.

Revenues from oil and NGL sales increased 11% in 2013 compared to 2012 after increasing 18% in 2012 compared to 2011. The 2013 increase was driven by a 6% increase in average selling price for oil and NGL and higher volumes of oil and NGL for which revenue is shared with Questar Gas customers pursuant to the Wexpro Agreement. Volumes of oil and NGL increased 42% in 2012 from increased liquid production related to the Vermillion drilling program. The average selling price for oil and NGL decreased 2% in 2012 compared to 2011. Revenues from natural gas sales in 2013 were primarily attributable to the Trail acquisition, which closed in September 2013. See below and Note 17 to the financial statements included in Item 8 of Part II of this Annual Report for additional information regarding this acquisition.

Expenses
Operating and maintenance expenses were up 4% in 2013 compared to 2012 and were up 20% in 2012 compared to 2011. The 2013 increase was due to higher workover and water-disposal costs. The 2012 increase was due to increased water-disposal costs and higher costs of outside operated properties. Lease operating expense was $0.43 per Mcfe in 2013, $0.44 per Mcfe in 2012 and $0.42 per Mcfe in 2011. General and administrative expenses were 7% higher in 2013 compared to 2012 and 11% higher in 2012 compared to 2011. The increases were due to higher compensation, employee benefits and allocated corporate expenses.

Production and other taxes were 36% higher in 2013 compared to 2012 and 19% lower in 2012 compared to 2011. These taxes were $0.44 per Mcfe in 2013, $0.33 per Mcfe in 2012 and $0.48 per Mcfe in 2011. The variability in production and other taxes is due to changes in the production volumes and the prices of natural gas, oil and NGL. The average price of natural gas used to calculate production taxes was $3.85 per Mcf in 2013, $2.87 per Mcf in 2012 and $4.22 per Mcf in 2011.

Depreciation, depletion and amortization expense was $1.56 per Mcfe in 2013 and $1.49 per Mcfe in 2012 and 2011. The depreciation, depletion and amortization rate in 2013 increased compared to 2012 and 2011 because of higher development costs and the depletion of older lower-cost natural gas reserves.

Under the terms of the Wexpro Agreement, Wexpro shares 54% of its operating income from oil and NGL production with Questar Gas after recovery of expenses and a return on Wexpro's investment in successful wells. Questar Gas received oil and NGL income sharing amounting to $0.6 million in 2013, $2.5 million in 2012 and $3.3 million in 2011, which was credited to customers.

Wexpro II
Wexpro and Questar Gas received approval of the Commissions for a Wexpro II Agreement to add properties under the cost-of-service pricing methodology for the benefit of Questar Gas customers. The agreement is modeled after the terms of the original Wexpro Agreement. Under the Wexpro II Agreement, Wexpro may acquire gas development properties and Questar Gas may submit an application to the Commissions to treat these properties similar to the original Wexpro properties. If the Commissions approve the applications, the gas will be developed for the benefit of Questar Gas customers. Wexpro will be

Questar 2013 Form 10-K 32


entitled to a return on the acquisition costs based on Questar Gas's approved cost of capital. Future development costs will earn returns consistent with the original Wexpro Agreement.

Acquisition of Producing Properties and Inclusion in Wexpro II In September 2013, Wexpro completed a transaction to acquire an additional interest in natural gas-producing properties in the Trail Unit of southwestern Wyoming's Vermillion Basin for $104.3 million, after post-closing adjustments. In January 2014, the Commissions approved a stipulation for inclusion of these properties in the Wexpro II Agreement. As part of this stipulation, Wexpro agreed to a provision to manage the combined production from the original Wexpro properties and the Trail acquisition to 65% of Questar Gas's annual forecasted demand. Beginning in June 2015 through May 2016 and for each subsequent 12-month period, if the combined annual production exceeds 65% of the forecasted demand and the cost-of-service price is greater than the Questar Gas purchased-gas price, an amount equal to the excess production times the excess price will be credited back to Questar Gas customers. Wexpro may also sell production to manage the 65% level and credit back to Questar Gas customers the higher of market price or the cost-of-service price times the sales volumes.

Questar 2013 Form 10-K 33


QUESTAR PIPELINE
Questar Pipeline reported 2013 net income of $8.2 million compared to $64.7
million in 2012 and $67.9 million in 2011. The primary driver of the significant
decrease in 2013 earnings was a $52.4 million after-tax write-down of the
eastern segment of Southern Trails Pipeline in the third quarter of 2013. The
$3.2 million decrease in 2012 was due to lower NGL revenues and increased
operating costs, depreciation and interest expense, partially offset by a gain
on sale of assets and lower property taxes. Following is a summary of Questar
Pipeline financial and operating results:
                                     Year Ended December 31,                          Change
                                2013           2012           2011        2013 vs. 2012     2012 vs. 2011
                                                            (in millions)
Net Income
REVENUES
Transportation              $    194.6     $    194.5     $    195.2     $         0.1     $        (0.7 )
Storage                           37.3           38.3           38.3              (1.0 )               -
NGL sales - transportation         7.7            7.1            8.9               0.6              (1.8 )
NGL sales - field services         1.9            8.4            8.3              (6.5 )             0.1
Energy services                   12.7           15.3           16.2              (2.6 )            (0.9 )
Gas processing                     1.6            2.7            2.5              (1.1 )             0.2
Natural gas sales                  3.8            4.4              -              (0.6 )             4.4
Other                              6.6            6.8            2.4              (0.2 )             4.4
Total Revenues                   266.2          277.5          271.8             (11.3 )             5.7
OPERATING EXPENSES
Operating and maintenance         32.5           35.2           35.3              (2.7 )            (0.1 )
General and administrative
                                  46.7           50.0           46.5              (3.3 )             3.5
Retirement incentive                 -            0.9              -              (0.9 )             0.9
Depreciation and
amortization                      55.5           54.3           51.2               1.2               3.1
Asset impairment                  80.6              -              -              80.6                 -
Other taxes                        9.3            9.1           10.1               0.2              (1.0 )
Cost of sales                      6.1            6.7            3.1              (0.6 )             3.6
Total Operating Expenses         230.7          156.2          146.2              74.5              10.0
Net gain from asset sales            -            2.7            0.3              (2.7 )             2.4
OPERATING INCOME                  35.5          124.0          125.9             (88.5 )            (1.9 )
Interest and other income          1.8            0.6            0.9               1.2              (0.3 )
Income from unconsolidated
affiliate                          3.7            3.7            3.8                 -              (0.1 )
Interest expense                 (25.8 )        (26.3 )        (24.5 )             0.5              (1.8 )
Income taxes                      (7.0 )        (37.3 )        (38.2 )            30.3               0.9
NET INCOME                  $      8.2     $     64.7     $     67.9     $       (56.5 )   $        (3.2 )
Operating Statistics
Natural gas transportation volumes
(MMdth)
For unaffiliated customers       753.4          785.4          665.8             (32.0 )           119.6
For Questar Gas                  119.5          107.2          116.9              12.3              (9.7 )
Total transportation             872.9          892.6          782.7             (19.7 )           109.9
Transportation revenue (per
dth)                        $     0.22     $     0.22     $     0.25     $           -     $       (0.03 )
Net firm-daily
transportation demand at
December 31, (including
White River Hub of 1,020
Mdth in 2013, 2012 and
2011)                            5,121          5,039          4,973                82                66
Natural gas processing
NGL sales (Mbbl)                   163            253            233               (90 )              20
NGL average sales price
(per bbl)                   $    59.00     $    61.16     $    73.77     $       (2.16 )   $      (12.61 )
. . .
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