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STR > SEC Filings for STR > Form 10-Q on 30-Apr-2014All Recent SEC Filings

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Form 10-Q for QUESTAR CORP


30-Apr-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following information updates the discussion of Questar's financial condition provided in its 2013 Form 10-K and analyzes the changes in the results of operations between the three and 12 months ended March 31, 2014 and 2013. For definitions of commonly used terms found in this Quarterly Report on Form 10-Q, please refer to the "Glossary of Commonly Used Terms" provided in Questar's 2013 Form 10-K.

RESULTS OF OPERATIONS

Following are comparisons of net income (loss) by line of business:
                                              3 Months Ended Mar. 31,             12 Months Ended Mar. 31,
                                            2014         2013      Change       2014        2013       Change
                                                        (in millions, except per-share amounts)
Questar Gas                              $   39.6      $ 37.0     $  2.6     $   55.4     $  49.2     $   6.2
Wexpro                                       31.8        26.3        5.5        116.1       105.9        10.2
Questar Pipeline(1)                          15.7        15.8       (0.1 )        8.1        63.9       (55.8 )
Corporate and other                          (2.0 )      (6.2 )      4.2         (6.2 )      (9.3 )       3.1
Net income                               $   85.1      $ 72.9     $ 12.2     $  173.4     $ 209.7     $ (36.3 )
Add: after-tax asset impairment
charge(1)                                       -           -          -         52.4           -        52.4
Adjusted earnings                        $   85.1      $ 72.9     $ 12.2     $  225.8     $ 209.7     $  16.1

Earnings per share - diluted             $   0.48      $ 0.41     $ 0.07     $   0.98     $  1.19     $ (0.21 )
Add: diluted loss per share attributable
to impairment(1)                                -           -          -         0.29           -        0.29
Adjusted earnings per share - diluted    $   0.48      $ 0.41     $ 0.07     $   1.27     $  1.19     $  0.08

Weighted-average diluted shares             176.1       176.1          -        176.1       176.5        (0.4 )

(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 due to the one-time nature of the impairment (see Note 11).

QUESTAR GAS
Questar Gas net income was $39.6 million in the first quarter of 2014 compared to $37.0 million in the first quarter of 2013. Net income was $55.4 million in the 12 months ended March 31, 2014, compared to $49.2 million in the year-earlier period. Questar Gas, because of the seasonal nature of its business, typically reports income in the first and fourth quarters of the year and losses in the second and third quarters of the year.

Questar 2014 Form 10-Q 24


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


Following is a summary of Questar Gas financial and operating results:
                                                   3 Months Ended Mar. 31,             12 Months Ended Mar. 31,
                                                2014        2013       Change        2014         2013       Change
                                                                          (in millions)
Net Income
Revenues
Residential and commercial sales              $ 376.4     $ 399.9     $ (23.5 )   $   886.8     $ 841.0     $ 45.8
Industrial sales                                  6.7         6.7           -          28.1        27.3        0.8
Transportation for industrial customers           4.3         3.5         0.8          15.2        12.6        2.6
Service                                           1.5         1.4         0.1           4.9         4.4        0.5
Other                                             7.4         7.1         0.3          28.5        28.7       (0.2 )
Total Revenues                                  396.3       418.6       (22.3 )       963.5       914.0       49.5
Cost of natural gas sold                        254.6       290.6       (36.0 )       614.6       587.7       26.9
Margin                                          141.7       128.0        13.7         348.9       326.3       22.6
Other Operating Expenses
Operating and maintenance                        39.8        33.7         6.1         119.2       111.8        7.4
General and administrative                       13.8        12.7         1.1          53.6        52.2        1.4
Retirement incentive                                -           -           -             -         2.4       (2.4 )
Depreciation and amortization                    13.2        12.1         1.1          50.8        47.5        3.3
Other taxes                                       5.1         5.2        (0.1 )        17.9        17.0        0.9
Total Other Operating Expenses                   71.9        63.7         8.2         241.5       230.9       10.6
OPERATING INCOME                                 69.8        64.3         5.5         107.4        95.4       12.0
Interest and other income                         1.3         1.2         0.1           5.2         5.5       (0.3 )
Interest expense                                 (7.1 )      (5.8 )      (1.3 )       (23.6 )     (23.1 )     (0.5 )
Income taxes                                    (24.4 )     (22.7 )      (1.7 )       (33.6 )     (28.6 )     (5.0 )
NET INCOME                                    $  39.6     $  37.0     $   2.6     $    55.4     $  49.2     $  6.2

Operating Statistics
Natural gas volumes (MMdth)
Residential and commercial sales                 43.9        53.1        (9.2 )       105.7       105.7          -
Industrial sales                                  1.1         1.2        (0.1 )         4.3         4.7       (0.4 )
Transportation for industrial customers          20.5        16.9         3.6          68.1        63.3        4.8
Total industrial                                 21.6        18.1         3.5          72.4        68.0        4.4
Total deliveries                                 65.5        71.2        (5.7 )       178.1       173.7        4.4
Natural gas revenue (per dth)
Residential and commercial sales              $  8.57     $  7.53     $  1.04     $    8.39     $  7.95     $ 0.44
Industrial sales                                 6.63        5.85        0.78          6.67        5.85       0.82
Transportation for industrial customers          0.21        0.21           -          0.22        0.20       0.02
Colder (warmer) than normal temperatures        (16%)         18%       (34%)          (8%)        (2%)       (6%)
Temperature-adjusted usage per customer (dth)    50.0        47.6         2.4         110.4       105.5        4.9
Customers at March 31, (in thousands)             953         937          16

Margin Analysis
Questar Gas margin (revenues minus gas costs) increased $13.7 million in the first quarter of 2014 compared to the first quarter of 2013, and increased $22.6 million in the 12 months ended March 31, 2014, compared to the 12 months ended March 31, 2013.

Questar 2014 Form 10-Q 25


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


Following is a summary of major changes in Questar Gas margin:
                                                              3 Months          12 Months
                                                            2014 vs. 2013     2014 vs. 2013
                                                                     (in millions)
Customer growth                                            $         1.7     $         4.2
Customers switching from sales to transportation service             0.8               2.2
Change in rates                                                      2.8               3.1
Infrastructure-replacement cost recovery                             0.7               5.2
Demand-side management cost recovery                                 7.8               8.9
Recovery of gas-cost portion of bad-debt costs                      (0.2 )            (1.0 )
Other                                                                0.1                 -
Increase                                                   $        13.7     $        22.6

At March 31, 2014, Questar Gas served 952,516 customers, up 1.6% from 937,447 at March 31, 2013. Customer growth increased the margin by $1.7 million in the first quarter of 2014 and $4.2 million in the 12 months ended March 31, 2014.

Effective March 1, 2014, Questar Gas increased its rates in Utah by $7.6 million as a result of a general rate case filed in Utah in July 2013. The order in this rate case authorized an allowed return on equity of 9.85%.

Questar Gas benefits from a conservation enabling (revenue decoupling) tariff. Under this tariff, Questar Gas is allowed to earn a specified revenue for each general service customer per month. Differences between the allowed revenue and the amount billed to customers are recovered from customers or refunded to customers through future rate changes. Because of this tariff, changes in usage per customer do not impact the company's margin. In addition, a weather-normalization adjustment of customer bills offsets the revenue impact 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 recognized $0.7 million of increased margin due to the infrastructure cost-tracking mechanism in the first quarter of 2014 and $5.2 million in the 12 months ended March 31, 2014.

Higher recovery of demand-side management (DSM) costs increased Questar Gas margin during the three- and 12-month periods ended March 31, 2014. 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.

Cost of Natural Gas Sold
Cost of natural gas sold decreased 12% in the first quarter of 2014, and increased 5% in the 12 months ended March 31, 2014, compared to the same periods of 2013. The decrease in the first quarter 2014 was primarily due to lower volumes resulting from warmer weather. The increase for the 12 months ended March 31, 2014 was due to higher gas prices and higher volumes resulting from customer growth. Questar Gas accounts for purchased-gas costs in accordance with procedures authorized by the Public Service Commission of Utah (PSCU) and the Wyoming Public Service Commission (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 March 31, 2014, Questar Gas had a $1.9 million over-collected balance in the purchased-gas adjustment account representing amounts recovered from customers in excess of costs incurred.

Other Expenses
Operating and maintenance expenses increased 18% in the first quarter of 2014, and increased 7% in the 12 months ended March 31, 2014, compared to the same periods of 2013. These increases included higher DSM costs of $7.8 million, and $8.9 million for the three- and 12-month periods, respectively. The DSM costs are for the company's energy efficiency program and are recovered from customers through periodic rate changes. Excluding DSM costs, operating and maintenance expenses decreased 7% in the first quarter of 2014 and decreased 2% in the 12 months ended March 31, 2014, compared to the 2013 periods. General and administrative expenses increased 9% and 3% in the three and 12 months ended March 31, 2014, respectively, compared to the prior year periods due to higher corporate allocated costs. Operating, maintenance, general and administrative expenses per customer, exclusive of DSM costs, were $142 in the 12 months ended March 31, 2014, compared to $144 in the 12 months ended March 31, 2013.

Questar 2014 Form 10-Q 26


Other taxes were essentially flat in the first quarter of 2014 and increased 5% in the 12 months ended March 31, 2014, compared to year-earlier periods due to increased property taxes.

Depreciation and amortization expense increased 9% in the first quarter of 2014 and 7% for the 12 months ended March 31, 2014, compared to the 2013 periods. The higher expense was caused by plant additions driven by customer growth and infrastructure replacements.

WEXPRO
Wexpro reported net income of $31.8 million in the first quarter of 2014,
compared to $26.3 million in the first quarter of 2013, a 21% increase. Wexpro
earned $116.1 million for the 12 months ended March 31, 2014, compared to $105.9
million for the year-earlier period. Following is a summary of Wexpro financial
and operating results:
                                              3 Months Ended Mar. 31,             12 Months Ended Mar. 31,
                                           2014        2013       Change        2014         2013       Change
                                                                     (in millions)
Net Income
Revenues
Operator service fee                     $  89.6     $  72.6     $  17.0     $   311.0     $ 280.0     $ 31.0
Oil and NGL sales                            9.8        10.4        (0.6 )        40.3        38.2        2.1
Natural gas sales and other                  2.0         0.1         1.9           6.9         0.2        6.7
Total Revenues                             101.4        83.1        18.3         358.2       318.4       39.8
Operating Expenses
Operating and maintenance                    7.3         7.1         0.2          28.0        26.7        1.3
Gathering and other handling                 0.4           -         0.4           1.2           -        1.2
General and administrative                   7.8         7.3         0.5          29.2        27.8        1.4
Retirement incentive                           -           -           -             -         0.2       (0.2 )
Production and other taxes                  10.1         7.2         2.9          31.2        21.1       10.1
Depreciation, depletion and amortization    27.3        21.4         5.9          91.7        80.1       11.6
Oil and NGL income sharing                     -         0.3        (0.3 )         0.3         2.0       (1.7 )
Total Operating Expenses                    52.9        43.3         9.6         181.6       157.9       23.7
Net gain (loss) from asset sales               -           -           -          (0.2 )       0.2       (0.4 )
OPERATING INCOME                            48.5        39.8         8.7         176.4       160.7       15.7
Interest and other income                    0.3         1.2        (0.9 )         4.1         3.2        0.9
Interest expense                               -           -           -          (0.1 )         -       (0.1 )
Income taxes                               (17.0 )     (14.7 )      (2.3 )       (64.3 )     (58.0 )     (6.3 )
NET INCOME                               $  31.8     $  26.3     $   5.5     $   116.1     $ 105.9     $ 10.2

Operating Statistics
Production volumes
Natural gas - cost-of-service deliveries
(Bcf)                                       18.5        15.4         3.1          62.3        57.9        4.4
Natural gas - sales (Bcf)                    0.4           -         0.4           1.8           -        1.8
Oil and NGL (Mbbl)                           166         165           1           618         674        (56 )
Natural gas average sales price (per
Mcf)                                     $  4.68     $     -     $  4.68     $    3.97     $     -     $ 3.97
Oil and NGL average sales price (per
bbl)                                     $ 84.60     $ 83.22     $  1.38     $   85.58     $ 79.60     $ 5.98
Investment base at March 31, (in
millions)                                $ 687.7     $ 526.8     $ 160.9

Revenues
Wexpro earned a 19.3% after-tax return on its average investment base for the 12 months ended March 31, 2014. Wexpro 2014 operating results benefited from a higher average investment base compared to the prior year periods. Pursuant to the terms of 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 acquired properties and commercial wells and related facilities adjusted for working capital and

Questar 2014 Form 10-Q 27


reduced for deferred income taxes and accumulated depreciation, depletion and amortization. The investment base grew by 31% in the 12 months ended March 31, 2014. The increase was due to investment in commercial wells and the addition of the Trail acquisition properties to the investment base in the first quarter of 2014, partially offset by additional deferred income taxes. Following is a summary of changes in the Wexpro investment base:

                                            12 Months Ended Mar. 31,
                                              2014             2013
                                                  (in millions)
Beginning investment base                $     526.8       $     492.5
Property acquisitions                          103.7                 -
Successful development wells                   161.8             126.1
Depreciation, depletion and amortization       (86.1 )           (75.7 )
Change in deferred income taxes                (18.5 )           (16.1 )
Ending investment base                   $     687.7       $     526.8

Wexpro produced 18.5 Bcf of cost-of-service natural gas for Questar Gas during the first quarter of 2014, up 20% from the first quarter of 2013. Wexpro produced 62.3 Bcf of cost-of-service gas in the 12 months ended March 31, 2014, compared to 57.9 Bcf in the 12 months ended March 31, 2013. Wexpro natural gas production provides about 60% of Questar Gas's annual supply requirements.

Revenues from oil and natural gas liquids (NGL) sales decreased 6% in the first quarter of 2014 compared to the first quarter of 2013, and were up 5% in the 12 months ended March 31, 2014 over the year-earlier period. The decrease for the quarter was due to lower volumes of oil and NGL for which income is shared with Questar Gas customers pursuant to the Wexpro Agreement. The 12-month increase was due to higher prices of shared oil and NGL. Revenues from natural gas sales were primarily attributable to production from the Trail acquisition prior to its February 1, 2014 inclusion in the Wexpro II Agreement. See below and Note 12.

Expenses
Operating and maintenance expenses were up 3% in the first quarter of 2014, and 5% in the 12-month period ended March 31, 2014, compared to prior year periods. The increases were due largely to higher production. Lease operating expense per Mcfe was $0.37 in the first quarter of 2014 compared to $0.43 in the first quarter of 2013. General and administrative expenses were higher in the three- and 12-month periods ended March 31, 2014, compared to prior year periods. The increases were due to higher employee and corporate allocated costs.

Production and other taxes were higher in the three and 12 months ended March 31, 2014, compared to prior year periods. The variability in production and other taxes is due to changes in the production volumes and the prices of natural gas, oil and NGL.

Depreciation, depletion and amortization expense increased 28% in the first quarter of 2014 and increased 14% in the 12 months ended March 31, 2014, compared to the 2013 periods. The increases were due to higher production volumes and investment in natural gas properties, wells and facilities.

Wexpro II
Wexpro and Questar Gas have received approval of the PSCU and PSCW (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 entitled to a return on the acquisition costs based on Questar Gas's approved cost of capital. Future development investment will earn returns consistent with the original Wexpro Agreement.

Acquisition of Producing Properties and Inclusion in Wexpro II On September 4, 2013, Wexpro completed the transaction announced in July 2013 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, effective February 1, 2014. 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

Questar 2014 Form 10-Q 28


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 PIPELINE
Questar Pipeline reported first quarter 2014 net income of $15.7 million compared with $15.8 million in the first quarter of 2013. Questar Pipeline earned $8.1 million in the 12 months ended March 31, 2014, compared to $63.9 million in the 12 months ended March 31, 2013. The primary driver of the significant decrease in earnings for the 12 months ended March 31, 2014 was a $52.4 million after-tax write-down of the eastern segment of Southern Trails Pipeline in the third quarter of 2013.

Questar 2014 Form 10-Q 29


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


Following is a summary of Questar Pipeline financial and operating results:
                                              3 Months Ended Mar. 31,             12 Months Ended Mar. 31,
                                           2014        2013       Change        2014        2013       Change
                                                                     (in millions)
Net Income
Revenues
Transportation                           $  49.4     $  49.2     $   0.2     $  194.8     $ 195.2     $  (0.4 )
Storage                                      9.6         9.7        (0.1 )       37.2        38.4        (1.2 )
NGL sales - transportation                   2.0         2.0           -          7.7         7.0         0.7
NGL sales - field services                     -         0.9        (0.9 )        1.0         6.8        (5.8 )
Energy services                              2.8         3.0        (0.2 )       12.5        14.5        (2.0 )
Natural gas sales                            1.5         0.8         0.7          4.5         5.2        (0.7 )
Other                                        2.0         2.2        (0.2 )        8.0         9.2        (1.2 )
Total Revenues                              67.3        67.8        (0.5 )      265.7       276.3       (10.6 )
Operating Expenses
Operating and maintenance                    8.1         7.4         0.7         33.2        34.0        (0.8 )
General and administrative                  11.5        12.4        (0.9 )       45.8        50.3        (4.5 )
Retirement incentive                           -           -           -            -         0.9        (0.9 )
Depreciation and amortization               13.6        14.1        (0.5 )       55.0        54.9         0.1
Asset impairment                               -           -           -         80.6           -        80.6
Other taxes                                  2.3         2.5        (0.2 )        9.1         9.1           -
Cost of sales                                1.7         1.2         0.5          6.6         7.4        (0.8 )
Total Operating Expenses                    37.2        37.6        (0.4 )      230.3       156.6        73.7
Net gain from asset sales                      -           -           -            -         2.7        (2.7 )
OPERATING INCOME                            30.1        30.2        (0.1 )       35.4       122.4       (87.0 )
Interest and other income                    0.3         0.3           -          1.8         0.9         0.9
Income from unconsolidated affiliate         0.9         0.9           -          3.7         3.7           -
Interest expense                            (6.5 )      (6.5 )         -        (25.8 )     (26.2 )       0.4
Income taxes                                (9.1 )      (9.1 )         -         (7.0 )     (36.9 )      29.9
NET INCOME                               $  15.7     $  15.8     $  (0.1 )   $    8.1     $  63.9     $ (55.8 )

Operating Statistics
Natural gas transportation volumes (MMdth)
For unaffiliated customers                 169.7       181.8       (12.1 )      741.3       783.3       (42.0 )
For Questar Gas                             46.2        51.9        (5.7 )      113.8       115.8        (2.0 )
Total transportation                       215.9       233.7       (17.8 )      855.1       899.1       (44.0 )
Transportation revenue (per dth)         $  0.23     $  0.21     $  0.02     $   0.23     $  0.22     $  0.01
Net firm-daily transportation demand at
March 31, (in Mdth)                        5,068       5,119         (51 )
Natural gas processing
NGL sales (Mbbl)                              32          47         (15 )        148         238         (90 )
NGL average sales price (per bbl)        $ 62.18     $ 62.64     $ (0.46 )   $  58.53     $ 58.23     $  0.30

Revenues
As of March 31, 2014, Questar Pipeline had net firm transportation contracts of 5,068 Mdth per day, including 1,020 Mdth per day from Questar Pipeline's 50% ownership of White River Hub, compared with 5,119 Mdth per day as of March 31, 2013. Questar Pipeline earns more revenue from Questar Gas than from any other single customer, with contracts for 916 Mdth per day during the heating season and 841 Mdth per day during off-peak months. The majority of Questar Gas transportation contracts extend through mid-2017. Rockies Express Pipeline has leased capacity on the Questar Overthrust Pipeline for 625

Questar 2014 Form 10-Q 30


Mdth per day through 2027. Wyoming Interstate Company has contracts on Questar Overthrust Pipeline for 544 Mdth per day with a weighted-average remaining life of 7.2 years. White River Hub's contracts have a weighted-average remaining life of 12.1 years.

Questar Pipeline owns and operates the Clay Basin underground storage complex in eastern Utah. This facility is 100% subscribed under long-term contracts. In addition to Clay Basin, Questar Pipeline owns and operates three smaller aquifer gas storage facilities. Questar Gas has contracted for 26% of firm storage capacity at Clay Basin with contracts expiring in 2017, 2019 and 2020 and 100% of the firm storage capacity at the aquifer facilities with the contracts extending through 2018. Storage revenue was essentially flat in the first quarter of 2014 compared to the first quarter of 2013 and fell 3% for the 12 . . .

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