NOTES ACCOMPANYING THE FINANCIAL STATEMENTS
The notes accompanying the financial statements apply to Questar Corporation, Questar Gas Company and Questar Pipeline Company unless otherwise noted.
Note 1 - Nature of Business
Questar Corporation is a Rockies-based integrated natural gas company with
three
principal complementary and wholly-owned lines of business:
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•
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Questar Gas Company (Questar Gas) provides retail natural gas distribution in Utah, Wyoming and Idaho.
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•
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Wexpro Company (Wexpro) develops and produces natural gas from cost-of-service reserves for Questar Gas customers.
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•
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Questar Pipeline Company (Questar Pipeline) operates interstate natural gas pipelines and storage facilities in the western United States and provides other energy services.
|
Questar is headquartered in Salt Lake City, Utah. Shares of Questar common stock trade on the New York Stock Exchange (NYSE:STR).
Note 2 - Basis of Presentation of Interim Financial Statements
The interim financial statements contain the accounts of Questar and its wholly-owned subsidiaries. The financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP) and with the instructions for Quarterly Reports on Form 10-Q and SEC Regulations S-X and S-K. All significant intercompany accounts and transactions have been eliminated in consolidation.
The financial statements reflect all normal, recurring adjustments and accruals that are, in the opinion of management, necessary for a fair presentation of financial position and results of operations for the interim periods presented. Interim financial statements do not include all of the information and notes required by GAAP for audited annual financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2012
.
The preparation of financial statements and notes in conformity with GAAP requires that management make estimates and assumptions that affect the amounts of revenues, expenses, assets and liabilities, and disclosure of contingent assets and liabilities. Actual results could differ from estimates. The results of operations for the three,
six
and 12 months ended
June 30, 2013
, are not necessarily indicative of the results that may be expected for the year ending
December 31, 2013
.
Certain reclassifications were made to prior year information to conform to the current year presentation. This includes reclassifications on the Questar Condensed Consolidated Statements of Comprehensive Income and Condensed Consolidated Balance Sheets to reflect revised accounting for reclassifications out of accumulated other comprehensive loss related to the Company's pension and other postretirement benefit plans.
Questar uses the equity method to account for its investment in an unconsolidated affiliate where it does not have control, but has significant influence. White River Hub, LLC is a limited liability company and FERC-regulated transporter of natural gas. Questar Pipeline owns
50%
of White River Hub, LLC and is the operator. Generally, the investment in White River Hub, LLC on the Company's balance sheets equals the Company's proportionate share of equity reported by White River Hub, LLC. The investment is assessed for possible impairment when events indicate that the fair value of the investment may be below the Company's carrying value. When such a condition is deemed to be other-than-temporary, the carrying value of the investment is written down to its fair value, and the amount of the write-down is included in the determination of net income.
Questar Gas obtains the majority of its gas supply from Wexpro's cost-of-service production and pays Wexpro an operator service fee based on the terms of the Wexpro Agreement. Questar Gas also obtains transportation and storage services from Questar Pipeline. These intercompany revenues and expenses are eliminated in the Questar Consolidated Statements of Income by reducing revenues and cost of sales. The underlying costs of Wexpro's production and Questar Pipeline's transportation and storage services are disclosed in other categories in the Consolidated Statements of Income, including operating and maintenance expense and depreciation, depletion and amortization expense. During the second and third quarters of the year, a significant portion of the natural gas from Wexpro production is injected into underground storage. This gas is withdrawn from
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Questar 2013 Form 10-Q
|
14
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storage as needed during the heating season in the first and fourth quarters. The cost of natural gas sold is credited with the value of natural gas as it is injected into storage and debited as it is withdrawn from storage. The reported balance in consolidated cost of sales may be a negative amount during the second and third quarters because of the entries to record injection of gas into storage and the elimination of intercompany transactions. The details of Questar's consolidated cost of sales are as follows:
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3 Months Ended
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6 Months Ended
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12 Months Ended
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|
June 30,
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|
June 30,
|
|
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
(in millions)
|
Questar Gas
|
|
|
|
|
|
|
|
|
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Gas purchases
|
$
|
10.3
|
|
|
$
|
2.8
|
|
|
$
|
113.6
|
|
|
$
|
64.3
|
|
|
$
|
153.5
|
|
|
$
|
135.1
|
|
Operator service fee
|
74.2
|
|
|
69.5
|
|
|
147.0
|
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|
135.2
|
|
|
285.8
|
|
|
266.7
|
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Transportation and storage
|
18.1
|
|
|
18.9
|
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|
40.1
|
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|
39.5
|
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|
80.2
|
|
|
78.2
|
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Gathering
|
4.5
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|
5.1
|
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|
9.1
|
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|
11.2
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|
18.4
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|
24.1
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Royalties
|
10.3
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6.2
|
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|
21.4
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|
16.4
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37.0
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|
37.4
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Storage (injection) withdrawal, net
|
(9.6
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)
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|
(16.5
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)
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19.2
|
|
|
10.9
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|
10.2
|
|
|
(10.7
|
)
|
Purchased-gas account adjustment
|
(25.7
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)
|
|
(11.8
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)
|
|
21.0
|
|
|
31.6
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|
5.5
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|
23.0
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Other
|
1.4
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1.3
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2.7
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2.6
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5.1
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|
5.1
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Total Questar Gas cost of natural gas sold
|
83.5
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|
75.5
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|
374.1
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|
311.7
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|
595.7
|
|
|
558.9
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Elimination of Questar Gas cost of natural gas sold - affiliated parties
|
(91.8
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)
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|
(87.7
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)
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(183.9
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)
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(171.7
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)
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(359.9
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)
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(340.0
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)
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Total Questar Gas cost of natural gas sold - unaffiliated parties
|
(8.3
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)
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|
(12.2
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)
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190.2
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|
140.0
|
|
|
235.8
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|
|
218.9
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Questar Pipeline
|
|
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Total Questar Pipeline cost of sales
|
1.0
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|
0.7
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|
2.2
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|
1.2
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|
7.7
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|
|
2.7
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Total cost of sales
|
$
|
(7.3
|
)
|
|
$
|
(11.5
|
)
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|
$
|
192.4
|
|
|
$
|
141.2
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|
|
$
|
243.5
|
|
|
$
|
221.6
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Note 3 - Comprehensive Income
Beginning in 2012, the Company and its subsidiaries adopted accounting guidance issued in June 2011 that resulted in the addition of statements of comprehensive income to the primary financial statements. Beginning in 2013, the Company and its subsidiaries adopted accounting guidance issued in February 2013 that requires additional disclosures about reclassifications from accumulated other comprehensive income into earnings.
Comprehensive income, as reported in Questar's Condensed Consolidated Statements of Comprehensive Income, is the sum of net income as reported in the Questar Consolidated Statements of Income and other comprehensive income (loss) (OCI). OCI includes recognition of the under-funded position of pension and other postretirement benefit plans, interest rate cash flow hedges, changes in the fair value of long-term investment, and the related income taxes. These transactions are not the culmination of the earnings process but result from periodically adjusting historical balances to fair value. Income or loss is recognized when the pension or other postretirement benefit (OPRB) costs are accrued, as the Company records interest expense for hedged interest payments and when the long-term investment is sold or otherwise realized. Details of the changes in the components of consolidated accumulated other comprehensive income (loss) (AOCI), net of income taxes, as reported in Questar's Condensed Consolidated Balance Sheets, are shown in the table below. The table also discloses details of income taxes related to each component of OCI.
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Questar 2013 Form 10-Q
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15
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Pension and OPRB
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Interest rate cash flow hedges
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Long-term invest.
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Total
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Pension and OPRB
|
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Interest rate cash flow hedges
|
|
Long-term invest.
|
|
Total
|
|
3 Months Ended
|
|
6 Months Ended
|
|
June 30, 2013
|
|
June 30, 2013
|
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(in millions)
|
AOCI at beginning of period
|
$
|
(218.3
|
)
|
|
$
|
(23.1
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)
|
|
$
|
0.1
|
|
|
$
|
(241.3
|
)
|
|
$
|
(223.2
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)
|
|
$
|
(23.2
|
)
|
|
$
|
0.1
|
|
|
$
|
(246.3
|
)
|
OCI before reclassifications
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
(0.1
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)
|
Reclassified from AOCI
(1)
|
7.9
|
|
|
0.1
|
|
|
—
|
|
|
8.0
|
|
|
15.7
|
|
|
0.3
|
|
|
—
|
|
|
16.0
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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OCI before reclassifications
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
—
|
|
|
—
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|
|
0.1
|
|
|
0.1
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|
Reclassified from AOCI
(2)
|
(3.1
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)
|
|
—
|
|
|
—
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|
|
(3.1
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)
|
|
(6.0
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
(6.1
|
)
|
Total income taxes
|
(3.1
|
)
|
|
—
|
|
|
0.1
|
|
|
(3.0
|
)
|
|
(6.0
|
)
|
|
(0.1
|
)
|
|
0.1
|
|
|
(6.0
|
)
|
Net other comprehensive income
|
4.8
|
|
|
0.1
|
|
|
—
|
|
|
4.9
|
|
|
9.7
|
|
|
0.2
|
|
|
—
|
|
|
9.9
|
|
AOCI at June 30, 2013
|
$
|
(213.5
|
)
|
|
$
|
(23.0
|
)
|
|
$
|
0.1
|
|
|
$
|
(236.4
|
)
|
|
$
|
(213.5
|
)
|
|
$
|
(23.0
|
)
|
|
$
|
0.1
|
|
|
$
|
(236.4
|
)
|
(1)
Interest rate cash flow hedge amounts are included in their entirety as charges to interest expense on the Consolidated Statements of Income.
(2)
Interest rate cash flow hedge amounts are included in their entirety as credits to income taxes on the Consolidated Statements of Income.
Pension and other postretirement benefits AOCI reclassifications are included in the computation of net periodic pension and postretirement benefit costs. See Note 10 for additional details.
Comprehensive income (loss), as reported in Questar Pipeline's Condensed Consolidated Statements of Comprehensive Income, is the sum of net income as reported in the Questar Pipeline Consolidated Statements of Income and OCI. OCI includes interest rate cash flow hedges and the related income taxes. These transactions are not the culmination of the earnings process but result from periodically adjusting historical balances to fair value. Income or loss is recognized as the company records interest expense for hedged interest payments. Disclosures above regarding interest rate cash flow hedges, including income taxes and income statement reclassifications effects, apply to Questar Pipeline.
Note 4 - Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted EPS includes the potential increase in the number of outstanding shares that could result from the exercise of in-the-money stock options, the vesting of restricted stock units (RSUs) with forfeitable dividends and the distribution of performance shares that are part of the Company's Long-Term Stock Incentive Plan (LTSIP), less shares repurchased under the treasury stock method. Restricted shares and RSUs with nonforfeitable dividends are participating securities for the computation of basic earnings per share. The application of the two-class method had an insignificant impact on the calculation of both basic and diluted EPS. A reconciliation of the components of basic and diluted shares used in the EPS calculation follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended
|
|
6 Months Ended
|
|
12 Months Ended
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
(in millions)
|
Weighted-average basic common shares outstanding
|
175.5
|
|
|
177.2
|
|
|
175.4
|
|
|
177.8
|
|
|
175.3
|
|
|
177.7
|
|
Potential number of shares issuable under the Company's LTSIP
|
0.8
|
|
|
1.1
|
|
|
0.8
|
|
|
1.1
|
|
|
0.8
|
|
|
1.2
|
|
Weighted-average diluted common shares outstanding
|
176.3
|
|
|
178.3
|
|
|
176.2
|
|
|
178.9
|
|
|
176.1
|
|
|
178.9
|
|
|
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Questar 2013 Form 10-Q
|
16
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Note 5 - Asset Retirement Obligations
Questar records an asset retirement obligation (ARO) along with an increase to the carrying value of the related property, plant and equipment when there is a legal obligation associated with the retirement of a tangible long-lived asset. Questar's AROs apply primarily to abandonment costs associated with gas and oil wells, production facilities and certain other properties. The Company has not recorded AROs on a majority of its long-lived transportation and distribution assets because the Company does not have a legal obligation to restore the area surrounding abandoned assets. The fair value of retirement costs is estimated by Company personnel based on abandonment costs of similar properties available to field operations and depreciated over the life of the related assets. Revisions to estimates result from material changes in the expected timing or amount of cash flows associated with AROs. Income or expense resulting from the settlement of ARO liabilities is included in net gain (loss) from asset sales in the Consolidated Statements of Income. The ARO liability is adjusted to present value each period through an accretion calculation using a credit-adjusted risk-free interest rate. Changes in Questar's AROs from the Condensed Consolidated Balance Sheets were as follows:
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|
|
|
|
|
|
|
|
6 Months Ended
|
|
June 30,
|
|
2013
|
|
2012
|
|
(in millions)
|
AROs at beginning of year
|
$
|
67.2
|
|
|
$
|
63.8
|
|
Accretion
|
1.5
|
|
|
1.5
|
|
Liabilities incurred
|
1.3
|
|
|
1.7
|
|
Revisions in estimated cash flows
|
(6.8
|
)
|
|
(1.2
|
)
|
Liabilities settled
|
(0.8
|
)
|
|
(0.2
|
)
|
AROs at June 30,
|
$
|
62.4
|
|
|
$
|
65.6
|
|
Wexpro collects from Questar Gas and deposits in trust certain funds related to AROs. The funds are recorded as other noncurrent assets and used to satisfy retirement obligations as the properties are abandoned. The accounting treatment of reclamation activities associated with AROs for properties administered under the Wexpro Agreement is defined in a guideline letter between Wexpro and the Utah Division of Public Utilities and the staff of the Wyoming Public Service Commission (PSCW).
Note 6 - Fair Value Measurements
Questar complies with the provisions of the accounting standards for fair value measurements and disclosures. The standards establish a fair value hierarchy. Level 1 inputs are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company had no assets or liabilities measured using Level 3 inputs at
June 30, 2013
,
June 30, 2012
or
December 31, 2012
.
Beginning in 2012, Questar adopted fair value accounting guidance issued in May 2011. The guidance did not result in any changes to the reported amounts of assets or liabilities, but did result in disclosure of the fair value hierarchy levels associated with fair value estimates for financial assets and liabilities not carried at fair value.
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Questar 2013 Form 10-Q
|
17
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Questar
The following table discloses the carrying amount, estimated fair value and level within the fair value hierarchy of certain financial instruments not disclosed in other notes to Questar's financial statements in this Quarterly Report on Form 10-Q:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hierarchy Level of Fair Value Estimates
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
|
June 30, 2013
|
|
June 30, 2012
|
|
Dec. 31, 2012
|
|
|
(in millions)
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
1
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16.8
|
|
|
$
|
16.8
|
|
Long-term investment
|
1
|
16.5
|
|
|
16.5
|
|
|
14.7
|
|
|
14.7
|
|
|
15.5
|
|
|
15.5
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Checks outstanding in excess of cash balances
|
1
|
0.5
|
|
|
0.5
|
|
|
11.8
|
|
|
11.8
|
|
|
—
|
|
|
—
|
|
Short-term debt
|
1
|
206.0
|
|
|
206.0
|
|
|
190.0
|
|
|
190.0
|
|
|
263.0
|
|
|
263.0
|
|
Long-term debt, including current portion
|
2
|
1,100.0
|
|
|
1,200.3
|
|
|
1,083.4
|
|
|
1,245.5
|
|
|
1,140.9
|
|
|
1,303.1
|
|
The carrying amounts of cash and cash equivalents, checks outstanding in excess of cash balances and short-term debt approximate fair value. The long-term investment is recorded at fair value and consists of money market and short-term bond index mutual funds held in Wexpro's trust (see Note 5). The fair value of the long-term investment is based on quoted prices for the underlying funds. The fair value of fixed-rate long-term debt is based on the discounted present value of cash flows using the Company's current credit risk-adjusted borrowing rates.
Questar Gas
The following table discloses the carrying amount, estimated fair value and level within the fair value hierarchy of certain financial instruments not disclosed in other notes to Questar Gas's financial statements in this Quarterly Report on Form 10-Q:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hierarchy Level of Fair Value Estimates
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
|
June 30, 2013
|
|
June 30, 2012
|
|
Dec. 31, 2012
|
|
|
(in millions)
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
1
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
|
$
|
1.4
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Checks outstanding in excess of cash balances
|
1
|
3.4
|
|
|
3.4
|
|
|
5.4
|
|
|
5.4
|
|
|
—
|
|
|
—
|
|
Notes payable to Questar
|
1
|
137.3
|
|
|
137.3
|
|
|
102.1
|
|
|
102.1
|
|
|
166.1
|
|
|
166.1
|
|
Long-term debt, including current portion
|
2
|
386.5
|
|
|
433.3
|
|
|
368.0
|
|
|
449.1
|
|
|
426.5
|
|
|
503.7
|
|
The carrying amounts of cash and cash equivalents, checks outstanding in excess of cash balances and notes payable to Questar approximate fair value. The fair value of fixed-rate long-term debt is based on the discounted present value of cash flows using Questar Gas's current credit risk-adjusted borrowing rates.
Questar Pipeline
The following table discloses the carrying amount, estimated fair value and level within the fair value hierarchy of certain financial instruments not disclosed in other notes to Questar Pipeline's financial statements in this Quarterly Report on Form 10-Q:
|
|
|
|
Questar 2013 Form 10-Q
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hierarchy Level of Fair Value Estimates
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
|
June 30, 2013
|
|
June 30, 2012
|
|
Dec. 31, 2012
|
|
|
(in millions)
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
1
|
$
|
5.7
|
|
|
$
|
5.7
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
7.1
|
|
|
$
|
7.1
|
|
Notes receivable from Questar
|
1
|
34.4
|
|
|
34.4
|
|
|
18.8
|
|
|
18.8
|
|
|
38.7
|
|
|
38.7
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
2
|
458.9
|
|
|
508.1
|
|
|
459.0
|
|
|
535.9
|
|
|
458.9
|
|
|
536.6
|
|
The carrying amounts of cash and cash equivalents and notes receivable from Questar approximate fair value. The fair value of fixed-rate long-term debt is based on the discounted present value of cash flows using Questar Pipeline's current credit risk-adjusted borrowing rates.
Note 7 - Derivative Instruments and Hedging Activities
Questar and its subsidiaries may enter into derivative instruments to manage exposure to changes in current and future market interest rates. In order to mitigate its exposure to changes in the fair value of its fixed-rate corporate debt resulting from changes in benchmark interest rates, in the second quarter of 2011 Questar executed a fixed-to-floating interest rate swap transaction with a counterparty and converted
$125.0 million
of its
2.75%
fixed-rate long-term debt to floating-rate debt. The 2.75% rate was swapped for a London Interbank Offered Rate (LIBOR)-based floating rate. Questar terminated and settled this hedge transaction in March
2012
, for a deferred gain of
$7.2 million
, which is being amortized to interest expense through the maturity of the notes in
2016
. Prior to its termination, this swap was accounted for as a fair value hedge under the accounting standards for derivatives and hedging.
Questar Pipeline entered into forward starting swaps totaling
$150.0 million
in the second and third quarters of 2011 in anticipation of issuing
$180.0 million
of notes in December 2011. Settlement of these swaps required payments of
$37.3 million
in the fourth quarter of 2011 because of declines in interest rates. These swaps qualified as cash flow hedges and the settlement payments are being amortized to interest expense over the
30
-year life of the debt.
The following table presents the pre-tax effects of the derivative instruments designated as a fair value hedge (including the hedged item) and cash flow hedges on the Consolidated Statements of Income as well as the pre-tax effects of the derivative instruments designated as cash flow hedges on OCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended
|
|
6 Months Ended
|
|
12 Months Ended
|
|
Financial Statement Location of Gain (Loss)
|
June 30,
|
|
June 30,
|
|
June 30,
|
Instrument and Activity
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
(in millions)
|
Fair Value Hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
Questar Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivative instrument
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain
|
Interest expense
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.9
|
|
2.75% Notes due 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Questar Pipeline
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferrals of effective portions
|
OCI
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(38.1
|
)
|
Losses reclassified from AOCI into earnings for effective portions
|
Interest expense
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.3
|
)
|
|
(0.2
|
)
|
|
(0.5
|
)
|
|
(0.3
|
)
|
|
|
|
|
Questar 2013 Form 10-Q
|
19
|
|
There was
no
ineffectiveness recognized on the fair value hedge for the three,
six
and 12 months ended
June 30, 2013
and
2012
. There was
no
ineffectiveness recognized on the cash flow hedges for the three and
six
months ended
June 30, 2013
and
2012
and the 12 months ended
June 30, 2013
.
Ineffectiveness recognized on the cash flow hedges was de minimis
in the 12 months ended
June 30, 2012
. Reclassifications into earnings of amounts reported in AOCI will continue while interest expense is recorded for the hedged interest payments through maturity in
2041
. Pre-tax net losses of
$0.5 million
are expected to be reclassified from AOCI to the Consolidated Statements of Income in the next 12 months. As of
June 30, 2013
, the Company was not hedging any exposure to variability in future cash flows of forecasted transactions. There were no derivative assets or liabilities outstanding at
June 30, 2013
,
June 30, 2012
or
December 31, 2012
.
Note 8 - Share-Based Compensation
Questar may issue stock options, restricted shares, RSUs and performance shares to certain officers, employees and non-employee directors under its LTSIP. Questar recognizes expense over time as the stock options, restricted shares, RSUs and performance shares vest. Total share-based compensation expense amounted to
$8.3 million
for the first
half
of
2013
compared to
$5.2 million
in
2012
. Deferred share-based compensation, representing the unvested value of restricted share and RSU awards, amounted to
$8.5 million
at
June 30, 2013
. For the first
half
, cash flow from income tax benefits in excess of recognized compensation expense amounted to
$1.4 million
in
2013
compared to
$3.9 million
in
2012
. There were
5,573,044
shares available for future grants at
June 30, 2013
.
Unvested stock options decreased by
29,398
shares to
zero
shares in the first
half
of
2013
.
No
stock options were granted in the first
half
of
2013
. Stock option transactions under the terms of the LTSIP are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Exercise
Price Range
|
|
Weighted-Average Exercise Price
|
Balance at December 31, 2012
|
770,923
|
|
|
$
|
4.37
|
|
-
|
$
|
17.35
|
|
|
$
|
11.35
|
|
Exercised
|
(50,750
|
)
|
|
4.37
|
|
|
4.37
|
|
|
4.37
|
|
Balance at June 30, 2013
|
720,173
|
|
|
$
|
7.84
|
|
-
|
$
|
17.35
|
|
|
$
|
11.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of exercise
prices
|
|
Number outstanding at June 30, 2013
|
|
Weighted-average remaining term in years
|
|
Weighted-average exercise price
|
|
Number exercisable at June 30, 2013
|
|
Weighted-average exercise price
|
$
|
7.84
|
|
-
|
$
|
11.40
|
|
|
404,174
|
|
|
2.4
|
|
$
|
10.52
|
|
|
404,174
|
|
|
$
|
10.52
|
|
13.10
|
|
-
|
17.35
|
|
|
315,999
|
|
|
3.0
|
|
13.54
|
|
|
315,999
|
|
|
13.54
|
|
|
|
|
|
720,173
|
|
|
2.7
|
|
$
|
11.84
|
|
|
720,173
|
|
|
$
|
11.84
|
|
Restricted share grants typically vest in equal installments over a
three
- or
four
-year period from the grant date. Several grants vest in a single installment after a specified period. The weighted-average remaining vesting period of unvested restricted shares at
June 30, 2013
, was
12 months
. Transactions involving restricted shares under the terms of the LTSIP are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Shares
Outstanding
|
|
Price Range
|
|
Weighted-Average Price
|
Balance at December 31, 2012
|
810,342
|
|
|
$
|
13.10
|
|
-
|
$
|
20.90
|
|
|
$
|
17.74
|
|
Granted
|
658
|
|
|
21.53
|
|
|
21.53
|
|
|
21.53
|
|
Vested
|
(338,750
|
)
|
|
13.10
|
|
-
|
19.39
|
|
|
17.54
|
|
Balance at June 30, 2013
|
472,250
|
|
|
$
|
13.10
|
|
-
|
$
|
21.53
|
|
|
$
|
17.89
|
|
Starting in the first quarter of 2013, Questar granted RSUs to certain officers, employees and non-employee directors under its LTSIP.
One
share of Questar common stock will be distributed for each RSU at the time of vesting. RSU grants typically vest in equal installments over a
three
-year period from the grant date. Several grants vest in a single installment after a specified period. The weighted-average remaining vesting period of unvested RSUs at
June 30, 2013
, was
20 months
.
|
|
|
|
Questar 2013 Form 10-Q
|
20
|
|
Transactions involving RSUs under the terms of the LTSIP are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
Outstanding
|
|
Price Range
|
|
Weighted-Average Price
|
Granted
|
322,026
|
|
|
$
|
23.09
|
|
-
|
$
|
25.44
|
|
|
$
|
23.63
|
|
Vested
|
(4,234
|
)
|
|
23.62
|
|
|
23.62
|
|
|
23.62
|
|
Balance at June 30, 2013
|
317,792
|
|
|
$
|
23.09
|
|
-
|
$
|
25.44
|
|
|
$
|
23.63
|
|
Grants of RSUs with deferred share distributions (deferred RSUs) typically vest in equal installments over a
three
-year period from the grant date. At
June 30, 2013
, Questar's outstanding deferred RSUs totaled
72,482
with a weighted-average price of
$15.62
per share. The deferred RSUs were fully vested as of July 1, 2013.
One
share of Questar common stock will be distributed for each vested deferred RSU (including accrued reinvested dividend equivalents) at the time of the grantee's separation from service.
Questar grants performance shares to certain Company executive officers under the terms of the LTSIP. The awards are designed to motivate and reward these executives for long-term Company performance and provide an incentive for them to remain with the Company. The target number of performance shares for each executive officer is subject to adjustment upward or downward based on the Company's performance relative to a specified peer group of companies over a
three
-year performance period with respect to defined performance criteria. Each
three
-year performance period commences at the beginning of the year of grant. The actual performance shares awarded, if any, are distributed in the quarter following the conclusion of the performance period so long as such executive officer was employed by the Company or its affiliates as of the last day of the performance period.
Half of any award will be distributed in shares of Questar common stock and half in cash. The Monte Carlo simulation method was used to estimate the grant-date fair value of the performance share awards. The liability associated with awards to be settled in cash is adjusted to its estimated fair value through earnings on a quarterly basis. Equity- and liability-based performance share compensation expense amounted to
$3.9 million
in the first
half
of
2013
and
$1.0 million
in the first
half
of
2012
. The weighted-average remaining vesting period of unvested performance shares at
June 30, 2013
, was
18 months
. Performance share transactions under the terms of the LTSIP are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Number of Performance Shares Outstanding
|
|
Grant-Date
Fair Value Range
|
|
Weighted- Average Grant-Date Fair Value
|
Balance at December 31, 2012
|
264,867
|
|
|
$
|
18.23
|
|
-
|
$
|
25.42
|
|
|
$
|
21.94
|
|
Granted
|
126,606
|
|
|
39.62
|
|
|
39.62
|
|
|
39.62
|
|
Balance at June 30, 2013
|
391,473
|
|
|
$
|
18.23
|
|
-
|
$
|
39.62
|
|
|
$
|
27.66
|
|
Note 9 - Operations by Line of Business
Questar's
three
principal complementary lines of business include Questar Gas, which provides retail natural gas distribution in Utah, Wyoming and Idaho; Wexpro, which develops and produces natural gas from cost-of-service reserves for Questar Gas customers; and Questar Pipeline, which operates interstate natural gas pipelines and storage facilities. Line-of-business information is presented according to senior management's basis for evaluating performance and considering differences in the nature of products, services and regulation, among other factors.
|
|
|
|
Questar 2013 Form 10-Q
|
21
|
|
Following is a summary of operations by line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months Ended
|
|
6 Months Ended
|
|
12 Months Ended
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
(in millions)
|
Revenues from Unaffiliated Customers
|
|
|
|
|
|
|
|
|
|
|
|
Questar Gas
|
$
|
140.1
|
|
|
$
|
130.2
|
|
|
$
|
558.4
|
|
|
$
|
496.2
|
|
|
$
|
921.9
|
|
|
$
|
883.8
|
|
Wexpro
|
8.5
|
|
|
8.1
|
|
|
18.8
|
|
|
17.3
|
|
|
37.6
|
|
|
32.6
|
|
Questar Pipeline
|
47.0
|
|
|
50.1
|
|
|
95.3
|
|
|
100.6
|
|
|
197.8
|
|
|
199.2
|
|
Total
|
$
|
195.6
|
|
|
$
|
188.4
|
|
|
$
|
672.5
|
|
|
$
|
614.1
|
|
|
$
|
1,157.3
|
|
|
$
|
1,115.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Affiliated Companies
|
|
|
|
|
|
|
|
|
|
|
|
Questar Gas
|
$
|
0.1
|
|
|
$
|
1.0
|
|
|
$
|
0.4
|
|
|
$
|
1.8
|
|
|
$
|
1.1
|
|
|
$
|
3.3
|
|
Wexpro
|
74.3
|
|
|
69.6
|
|
|
147.1
|
|
|
135.3
|
|
|
285.9
|
|
|
266.9
|
|
Questar Pipeline
|
17.7
|
|
|
18.3
|
|
|
37.2
|
|
|
36.8
|
|
|
74.8
|
|
|
73.9
|
|
Total
|
$
|
92.1
|
|
|
$
|
88.9
|
|
|
$
|
184.7
|
|
|
$
|
173.9
|
|
|
$
|
361.8
|
|
|
$
|
344.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Questar Gas
|
$
|
2.2
|
|
|
$
|
1.5
|
|
|
$
|
66.5
|
|
|
$
|
63.3
|
|
|
$
|
96.1
|
|
|
$
|
92.9
|
|
Wexpro
|
41.4
|
|
|
39.7
|
|
|
81.2
|
|
|
76.9
|
|
|
162.4
|
|
|
152.0
|
|
Questar Pipeline
|
28.1
|
|
|
30.8
|
|
|
58.3
|
|
|
62.6
|
|
|
119.7
|
|
|
127.5
|
|
Corporate and other
|
(0.5
|
)
|
|
0.6
|
|
|
(3.4
|
)
|
|
0.7
|
|
|
(3.4
|
)
|
|
1.5
|
|
Total
|
$
|
71.2
|
|
|
$
|
72.6
|
|
|
$
|
202.6
|
|
|
$
|
203.5
|
|
|
$
|
374.8
|
|
|
$
|
373.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Questar Gas
|
$
|
(1.2
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
35.8
|
|
|
$
|
32.6
|
|
|
$
|
50.3
|
|
|
$
|
44.9
|
|
Wexpro
|
28.4
|
|
|
25.8
|
|
|
54.7
|
|
|
50.1
|
|
|
108.5
|
|
|
99.3
|
|
Questar Pipeline
|
14.5
|
|
|
16.1
|
|
|
30.3
|
|
|
32.7
|
|
|
62.3
|
|
|
68.7
|
|
Corporate and other
|
(2.3
|
)
|
|
(0.4
|
)
|
|
(8.5
|
)
|
|
(1.0
|
)
|
|
(11.2
|
)
|
|
(0.8
|
)
|
Total
|
$
|
39.4
|
|
|
$
|
39.2
|
|
|
$
|
112.3
|
|
|
$
|
114.4
|
|
|
$
|
209.9
|
|
|
$
|
212.1
|
|
Note 10 - Employee Benefits
The Company has a noncontributory defined benefit pension plan and a life insurance plan covering a majority of its employees and a postretirement medical plan providing coverage to less than half of its employees. Employees hired or rehired after June 30, 2010 are not eligible for the noncontributory defined benefit pension plan and employees hired or rehired after December 31, 1996, are not eligible for the postretirement medical plan and are not eligible to receive basic life insurance once they retire.
Questar is subject to and complies with minimum-required and maximum-allowed annual contribution levels for its qualified pension plan as determined by the Employee Retirement Income Security Act and the Internal Revenue Code. The
2013
estimated net cost for the qualified pension plan is
$32.2 million
.
The Company also has a nonqualified pension plan that covers a group of management employees in addition to the noncontributory qualified pension plan. The nonqualified pension plan provides for defined benefit payments upon retirement of the management employee, or to the spouse upon death of the management employee, above the benefit limit defined by the Internal Revenue Service for the qualified plan. The nonqualified pension plan is unfunded; claims are paid from the Company's general funds. The
2013
net cost for the nonqualified pension plan is estimated to be
$3.4 million
.
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Questar 2013 Form 10-Q
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22
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Components of the qualified and nonqualified net pension cost included in the determination of net income are listed in the table below:
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3 Months Ended
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6 Months Ended
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12 Months Ended
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June 30,
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June 30,
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June 30,
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2013
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|
2012
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2013
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2012
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2013
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2012
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(in millions)
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Service cost
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$
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3.4
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$
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3.2
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$
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6.8
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$
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6.5
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$
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13.5
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$
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11.4
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Interest cost
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7.9
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7.8
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15.8
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15.5
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31.4
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29.8
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Expected return on plan assets
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(9.6
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)
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(8.0
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)
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(19.1
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)
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(15.7
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)
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(35.2
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)
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(29.1
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)
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Prior service and other costs
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0.3
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0.4
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0.6
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0.7
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1.0
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2.0
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Recognized net actuarial loss
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6.9
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5.4
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13.7
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|
10.8
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27.8
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|
17.7
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Net pension cost
|
$
|
8.9
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|
$
|
8.8
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$
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17.8
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$
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17.8
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$
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38.5
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$
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31.8
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The Company currently estimates a
$5.0 million
net cost for postretirement benefits other than pensions in
2013
before
$0.8 million
for accretion of a regulatory liability. Net postretirement benefit cost components are listed in the table below:
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3 Months Ended
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6 Months Ended
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12 Months Ended
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June 30,
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June 30,
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June 30,
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2013
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|
2012
|
|
2013
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|
2012
|
|
2013
|
|
2012
|
|
(in millions)
|
Service cost
|
$
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0.2
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|
|
$
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0.2
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$
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0.4
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$
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0.3
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$
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0.8
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$
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0.5
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Interest cost
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0.9
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0.9
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1.9
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1.8
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3.9
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3.8
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Expected return on plan assets
|
(0.6
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)
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(0.6
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)
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(1.3
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)
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(1.1
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)
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(2.5
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)
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(2.4
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)
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Amortization of transition obligation
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—
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0.4
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—
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0.8
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0.8
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1.8
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Recognized net actuarial loss
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0.7
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0.5
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1.4
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1.1
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2.8
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1.1
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Accretion of regulatory liability
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0.2
|
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0.2
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0.4
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0.4
|
|
|
0.8
|
|
|
0.8
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|
Net postretirement benefit cost
|
$
|
1.4
|
|
|
$
|
1.6
|
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|
$
|
2.8
|
|
|
$
|
3.3
|
|
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$
|
6.6
|
|
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$
|
5.6
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Note 11 - Debt
The Company has a revolving credit facility with various lenders to provide back-up credit liquidity support for its commercial paper program. Credit commitments under this revolving credit facility totaled
$750.0 million
at
June 30, 2013
, with
no
amounts borrowed. This revolving credit facility has interest-rate options generally below the prime interest rate and carries commitment fees on the unused balance. In April 2013, Questar amended and restated its revolving credit facility to increase its size from
$500.0 million
to
$750.0 million
and extend its maturity from
August 31, 2016
to
April 19, 2018
. Under the facility, consolidated funded debt cannot exceed
70%
of consolidated capitalization. Commercial paper outstanding amounted to
$206.0 million
at
June 30, 2013
,
$190.0 million
at
June 30, 2012
and
$263.0 million
at
December 31, 2012
.
Except for the amendment and restatement to the Company's revolving credit facility, there have not been any significant new borrowings or modifications of existing financing arrangements at Questar, Questar Gas or Questar Pipeline since
December 31, 2012
.
Note 12 - Strategic Review of Questar Southern Trails Pipeline
In the fourth quarter of 2012, Questar Pipeline initiated a strategic review of Questar Southern Trails Pipeline. All strategic options were analyzed, including joint ventures, asset sales or other alternatives. The western segment of Southern Trails Pipeline runs 96 miles from Whitewater to Long Beach, California. This segment has not been placed in service. The eastern segment of Southern Trails Pipeline runs 487 miles from the San Juan Basin in New Mexico to connections with other pipelines in the eastern portion of southern California.
As a result of that review, Questar Pipeline entered into an agreement with another pipeline company to evaluate and potentially convert the western portion of its Southern Trails Pipeline back to its original purpose as a crude oil transport pipeline and to develop a rail terminal to offload crude from railcars and into the pipeline for transportation to refineries in
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Questar 2013 Form 10-Q
|
23
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Long Beach, California. Questar Pipeline's net book value of the western segment of Southern Trails Pipeline is approximately
$21 million
.
Questar Pipeline is also in discussions with parties to either purchase the eastern segment of Southern Trails Pipeline or to enter into a long-term transportation contract for the full capacity of the pipeline. Questar Pipeline's net book value of the eastern segment of Southern Trails Pipeline is approximately
$81 million
.
Current expectations of future net cash flows from the western and eastern segments show that the carrying values are recoverable assuming the projects described above are successful. However, asset impairments may be indicated if the projects are not successful.
Note 13 - Subsequent Events
Questar Gas
Utah General Rate Case
- On July 1, 2013, Questar Gas filed a general rate case in Utah requesting an increase in revenues of
$19 million
and a continuation of its
10.35%
authorized return on equity. A decision on the case is expected in the
first quarter of 2014
, with any changes becoming effective in the same quarter.
Long-term Debt Commitment
- Questar Gas has entered into a commitment to borrow
$150 million
of long-term debt in the private placement market to be funded in
December 2013
. Questar Gas will issue
$90 million
of
30
-year notes with an interest rate of
4.78%
and
$60 million
of
35
-year notes with an interest rate of
4.83%
. Proceeds from the debt issuance will be used to repay existing indebtedness and for general corporate purposes.
Wexpro
Acquisition
- On July 29, 2013, Wexpro Company entered into a definitive agreement to acquire an additional interest in natural gas-producing properties for
$106.4 million
. Wexpro is increasing its working interest in existing Wexpro-operated wells in the Trail Unit of southwestern Wyoming's Vermillion Basin.
Questar Pipeline
Strategic Review of Questar Southern Trails Pipeline
- In July 2013, Questar Pipeline entered into an agreement with another pipeline company to evaluate and potentially convert the western portion of its Southern Trails Pipeline back to its original purpose as a crude oil transport pipeline and to develop a rail terminal to offload crude from railcars and into the pipeline for transportation to refineries in Long Beach, California. Questar Pipeline is also in discussions with parties to either purchase the eastern segment of Southern Trails Pipeline or to enter into a long-term transportation contract for the full capacity of the pipeline.
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Questar 2013 Form 10-Q
|
24
|
|