SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission File No. 0-14147 QUESTAR PIPELINE COMPANY (Exact name of registrant as specified in its charter) STATE OF UTAH 87-0307414 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 45360, 180 East 100 South, Salt Lake City, Utah 84145-0360 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (801) 324-2400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of October 31, 2000 Common Stock, $1.00 par value 6,550,843 shares Registrant meets the conditions set forth in General Instruction H(a)(1) and (b) of Form 10-Q and is filing this Form 10-Q with the reduced disclosure format. 1 PART I FINANCIAL INFORMATION Item 1. Financial Statements QUESTAR PIPELINE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) 3 Months Ended 9 Months Ended 12 Months Ended September 30, September 30, September 30, 2000 1999 2000 1999 2000 1999 (In Thousands) REVENUES $ 28,187 $ 28,344 $ 87,452 $ 82,546 $117,066 $110,022 OPERATING EXPENSES Operating and maintenance 10,783 9,439 30,516 27,159 41,891 36,007 Depreciation 2,949 4,774 11,400 12,848 15,295 16,666 Other taxes 716 703 2,078 2,139 2,427 2,854 TOTAL OPERATING EXPENSES 14,448 14,916 43,994 42,146 59,613 55,527 OPERATING INCOME 13,739 13,428 43,458 40,400 57,453 54,495 INTEREST AND OTHER INCOME 688 416 2,273 3,666 2,836 3,833 OPERATIONS OF UNCONSOLIDATED AFFILIATES Income (loss) 324 (2,304) 720 (2,368) (2,021) (451) Write-down of investment in partnership (49,700) 324 (2,304) 720 (2,368) (51,721) (451) DEBT EXPENSE (4,295) (4,387) (13,386) (12,602) (18,250) (16,518) INCOME (LOSS) BEFORE INCOME TAXES 10,456 7,153 33,065 29,096 (9,682) 41,359 INCOME TAXES 3,890 2,685 12,299 10,634 (3,595) 14,591 NET INCOME (LOSS) $ 6,566 $ 4,468 $ 20,766 $ 18,462 $ (6,087) $ 26,768 See notes to consolidated financial statements 2 QUESTAR PIPELINE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 2000 1999 1999 (Unaudited) (In Thousands) ASSETS Current assets Cash and cash equivalents $ 854 $ 2,387 Notes receivable from Questar Corp 8,400 1,100 Accounts receivable 7,687 $ 24,860 21,704 Inventories - materials and supplies, at lower of average cost or market 2,520 2,916 2,443 Prepaid expenses and other 1,568 1,750 1,782 Total current assets 21,029 29,526 29,416 Property, plant and equipment 721,314 692,616 698,236 Less allowances for depreciation 239,446 228,207 228,784 Net property, plant and equipment 481,868 464,409 469,452 Investment in unconsolidated affiliates 20,029 54,737 11,724 Other assets 17,611 11,887 12,435 $540,537 $560,559 $ 523,027 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balance $ 107 Notes payable to Questar Corp. $ 9,500 72,300 $ 42,500 Accounts payable and accrued expenses 22,587 17,185 15,206 Total current liabilities 32,087 89,592 57,706 Long-term debt 245,015 202,996 245,001 Other liabilities 8,717 1,602 3,118 Deferred income taxes 52,766 66,830 49,891 Common shareholder's equity Common stock 6,551 6,551 6,551 Additional paid-in capital 112,034 82,034 82,034 Retained earnings 83,367 110,954 78,726 Total common shareholder' equity 201,952 199,539 167,311 $540,537 $560,559 $ 523,027 See notes to consolidated financial statements 3 QUESTAR PIPELINE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 9 Months Ended September 30, 2000 1999 (In Thousands) OPERATING ACTIVITIES Net income $ 20,766 $ 18,462 Depreciation 12,233 13,445 Deferred income taxes 2,875 3,320 (Income) loss from unconsolidated affiliates, net of cash distributions 720 3,988 36,594 39,215 Change in operating assets and liabilities 21,971 (40,486) NET CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES 58,565 (1,271) INVESTING ACTIVITIES Capital expenditures Purchase of property, plant and equipment (23,261) (23,443) Investment in unconsolidated affiliates (9,024) (4,014) Total capital expenditures (32,285) (27,457) Proceeds from (costs of) disposition of property, plant and equipment (1,388) 456 NET CASH USED IN INVESTING ACTIVITIES (33,673) (27,001) FINANCING ACTIVITIES Checks outstanding in excess of cash balance 107 Increase in notes receivable from Questar Corp. (7,300) Increase (decrease) in notes payable to Questar Corp. (33,000) 34,300 Equity investment 30,000 Payment of dividends (16,125) (16,125) NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (26,425) 18,282 DECREASE IN CASH AND CASH EQUIVALENTS $ (1,533) $ (9,990) See notes to consolidated financial statements 4 QUESTAR PIPELINE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (Unaudited) Note 1 - Basis of Presentation The interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three-and nine-month periods ended September 30, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1999. Note 2 - Investment in Unconsolidated Affiliates Questar Pipeline, directly or indirectly through subsidiaries, has interests in partnerships accounted for on an equity basis. Transportation of natural gas is the primary business activity of these partnerships. Summarized operating results of the partnerships are listed below. In 1999, income before income taxes includes capitalized financing charges called allowance for funds used during construction (AFUDC). 9 Months Ended September 30, 2000 1999 (In Thousands) Revenues $ 9,113 $ 7,268 Operating loss (4,978) (2,362) Loss before income taxes (14,532) (5,839) Note 3 - Receipt of Equity On March 1, 2000, Questar Pipeline received a $30 million equity investment from its parent company that was used to repay short-term debt. 5 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations QUESTAR PIPELINE COMPANY AND SUBSIDIARIES September 30, 2000 (Unaudited) Operating Results Following is a summary of financial and operating information for the Company: 3 Months Ended 9 Months Ended 12 Months Ended September 30, September 30, September 30, 2000 1999 2000 1999 2000 1999 FINANCIAL RESULTS - (dollars in thousands) Revenues From unaffiliated customers $ 10,454 $ 8,863 $ 30,355 $ 27,638 $ 39,639 $ 37,063 From affiliates 17,733 19,481 57,097 54,908 77,427 72,959 Total revenues $ 28,187 $ 28,344 $ 87,452 $ 82,546 $117,066 $110,022 Operating income $ 13,739 $ 13,428 $ 43,458 $ 40,400 $ 57,453 $ 54,495 Net income (loss) 6,566 4,468 20,766 18,462 (6,087) 26,768 OPERATING STATISTICS Natural gas transportation volumes (in thousands of decatherms) For unaffiliated customers 44,228 38,314 109,126 99,025 145,987 122,653 For Questar Gas 13,357 14,236 73,718 75,955 103,262 103,073 For other affiliated customers 2,436 1,006 5,437 9,464 8,126 16,708 Total transportation 60,021 53,556 188,281 184,444 257,375 242,434 Transportation revenue (per decatherm) $ 0.28 $ 0.32 $ 0.28 $ 0.28 $ 0.28 $ 0.29 Revenues were higher in the nine months and twelve months ended September 30, 2000 when compared with the same periods of 1999 due to gas-processing operations added mid-year 1999 and increased transportation demand. A $1.3 million reduction in and subsequent refund of processing fees in September 2000 caused third quarter 2000 revenues to fall below third quarter 1999 levels. Processing fees are determined on the basis of cost of service. The refund was the result of lower depreciation costs. Even considering the refund, gas-processing revenues for the first nine months of 2000 were $2.7 million higher than was reported for the same period of 1999. The gas-processing operations remove carbon dioxide from certain gas supplies to make them suitable for Questar Gas' system. Transportation revenues increased 3% in the third quarter and the first nine months of 2000 as a result of the addition of several short-term firm-transportation contracts. Storage revenues were 1% lower in the third quarter and the first nine months of 2000. Operating and maintenance (O & M) expenses were higher in the 2000 periods when compared with the 1999 periods due to the combined effect of one-time adjustments recorded last year that were not repeated in 2000, the inclusion of gas-processing operations beginning in mid-1999 and $.5 million of additional legal expenses. The one-time adjustments, mostly to capitalize costs incurred in constructing plant assets, reduced O & M expenses by $1.8 million in the second quarter of 1999. Gas processing costs were responsible for roughly $2 million of the increase in O & M expenses in the first nine months of 2000. 6 On June 15, 2000, a lawsuit was filed against Questar Pipeline Company and several of its affiliates by the partner in the TransColorado Pipeline. The Company filed a counterclaim July 27, 2000. The Company has been incurring expenses in the defense of its position in the case. Depreciation expense was reduced by $1.3 million in the third quarter of 2000 reflecting a change from 10 years to 20 years in the estimated useful life of the gas processing plant. Depreciation on the plant is calculated on the straight line method. Interest and other income in the first nine months of 1999 was increased by the reversal of a $2.5 million contingency reserve that was not repeated in 2000. The transaction was related to the completion of the TransColorado Pipeline and another construction project. Earnings from unconsolidated affiliates in 1999 included the Company's share of losses reported by TransColorado of $2.6 million for the third quarter and $3.2 million for the first nine months that were not repeated in the same periods of 2000. In the fourth quarter of 1999, the Company wrote down its subsidiary's investment in the TransColorado Pipeline. Debt expense was higher in the nine-and twelve-month periods of 2000 when compared with the 1999 periods because of additional long-term borrowings. The Company borrowed $42 million in October 1999 through a medium-term note program. The amount of capitalized interest costs associated with construction projects has increased by $.4 million in the first nine months of 2000 when compared with the prior year period. The effective income tax rate was 37.2% in the first nine months of 2000 compared with 36.5% in the 1999 period. Liquidity and Capital Resources Operating Activities Net cash provided from operating activities of $57,125,000 in the first nine months of 2000 was $58,396,000 more than the amount reported for the same period of 1999 due primarily to higher income and changes in operating assets and liabilities. The changes were associated primarily from lower payments to vendors when compared with a year ago due to the completion of construction projects. Investing Activities Capital expenditures were $30,845,000 in the first nine months of 2000 compared with $27,457,000 in the corresponding 1999 period. The increase in the 2000 period is primarily due to expenditures for the Southern Trails pipeline and the purchase of an additional 18% interest in the Overthrust Pipeline partnership effective January 1, 2000. Capital expenditures for calendar year 2000 are estimated to be $57.9 million. Capital expenditures include capitalized financing charges (AFUDC) of approximately $4.2 million in 2000 and $3.2 million in 1999. Financing Activities Cash flow from operations plus an equity investment from the Company's parent company were sufficient to fund capital expenditures, repay a portion of debt owed to Questar Corporation and pay common dividends. Questar Corporation makes loans to the Company under a short-term credit arrangement. Borrowings from Questar as of September 30, amounted to $9.5 million in 2000 and $72.3 million in 1999. Remaining 2000 capital expenditures are expected to be financed with net cash provided from operating activities, borrowings from Questar Corporation and a possible equity investment from the Company's parent company. 7 Early Retirement Offered On August 28, 2000, Questar's Regulated Services unit announced an early retirement window program to be effective October 31, 2000. A total of 281 employees and 14 disability recipients from Questar Gas, Questar Pipeline and Questar Regulated Services were eligible for the enhanced benefit. The offer was accepted by 262 of Regulated Services' employees and all 14 long-term disability recipients. The window program is projected to result in pretax labor cost savings for Regulated Services of over $1 million in 2000 and $6-8 million yearly. Regulatory Matters The Federal Energy Regulatory Commission (FERC) issued a final order granting a certificate of convenience and necessity to Questar's Southern Trails Pipeline. The FERC's July 28 ruling came after the agency became satisfied that the pipeline was in the public convenience and necessity and could be completed in an environmentally sound manner. Southern Trails must receive final environmental approvals from state and federal agencies before conversion to carry natural gas can begin. Under the terms of the certificate, the Company has two years in which to convert the line to carry natural gas. Questar Pipeline is actively working on right-of-way issues and exploring marketing opportunities to subscribe Southern Trails' pipeline capacity. Revenue Recognition Guideline Issued by the Securities and Exchange Commission (SEC) In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." The SAB raised issues concerning the timing of recording revenues given that sales transactions may contain some conditions allowing customers to return products or receive refunds. The SEC expects companies that make conditional sales to postpone fully recognizing revenues until the earnings process is completed. The Company records revenues when services are provided or products are delivered. Periodically revenues are collected subject to refunds pending final orders from regulatory agencies. In those situations, revenues are reported net of estimated refunds. The pronouncement is effective for Questar Pipeline beginning with the fourth quarter of 2000 and is not expected to cause a change in the method used to record revenues. Forward-Looking Statements This 10-Q contains forward-looking statements about future operations, capital spending, regulatory matters and expectations of Questar Pipeline. According to management, these statements are made in good faith and are reasonable representations of the Company's expected performance at the time. Actual results may vary from management's stated expectations and projections due to a variety of factors. Important assumptions and other significant factors that could cause actual results to differ materially from those discussed in forward-looking statements include changes in general economic conditions, gas prices and availability of gas supplies, competition, regulatory issues, weather conditions and other factors beyond the control of the Company. These other factors include the rate of inflation and adverse changes in the business or financial condition of the Company. These factors are not necessarily all of the important factors that could cause actual results to differ significantly from those expressed in any forward-looking statements. Other unknown or unpredictable factors could also have a significant adverse effect on future results. The Company does not undertake an obligation to update forward-looking information contained herein or elsewhere to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information. 8 Part II Other Information Item 1. Legal Proceedings. On October 31, 2000, KN TransColorado, Inc. ("KNTC"), a subsidiary of Kinder-Morgan, Inc. ("Kinder-Morgan") filed a motion to dissolve the TransColorado Gas Transmission Company ("TC Partnership") and appoint a receiver to operate the TransColorado pipeline project. KNTC and Questar TransColorado, Inc. ("QTC"), which is a wholly owned subsidiary of Questar Pipeline Company ("Questar Pipeline" or the "Company"), are 50 percent owners in the TC Partnership. The motion was filed as part of the complex litigation that is pending in a Colorado state district court in which the Company and Questar Corporation are named defendants in addition to QTC. The litigation involves claims and counterclaims concerning QTC's contractual right to put its 50 percent ownership interest in the TC Partnership to KNTC during the 12-month period commencing March 31, 2001. See the Company's Form 10-Q for the quarter ended June 30, 2000, Item 1. Legal Proceedings, for additional information concerning the case. QTC has submitted KNTC 's motion to dissolve the TC Partnership and appoint a receiver to the administrative agent for the TC Partnership's $200,000,000 credit facility to determine if it has any impact on the terms of such facility. After the original complaint was filed in June of 2000, QTC and KNTC, on behalf of the TC Partnership, and Questar Pipeline and Kinder-Morgan, as guarantors, executed an amendment to the credit agreement that the complaint itself did not constitute an event of default. Questar Pipeline has provided a guaranty of $100,000,000 for the credit facility. QTC and its affiliates have filed a motion to dismiss KNTC's complaint or, in the alternative, to stay the action and refer some issues raised in the complaint to the Federal Energy Regulatory Commission for resolution. They also filed a counterclaim and third party complaint against KNTC and specified affiliates, including Kinder-Morgan. Item 5. Other Information. Messrs. Gary W. DeBernardi, Lowell F. Gill, and Stephen C. Yeager resigned as officers of the Company effective October 31, 2000, in conjunction with their retirements. Mr. DeBernardi, age 57, had served as Vice President, Technical Services, for Questar Pipeline and its primary affiliates, Questar Gas Company ("Questar Gas") and Questar Regulated Services Company ("QRS") and had over 31 years of service. Mr. Gill, age 58, had served as Vice President and General Manager of the Company and several of its subsidiaries including QTC, and as Vice President, Transportation Operations, for Questar Gas and QRS; he had 38 years of service. Mr. Yeager, age 53, had served as Vice President, Business Development, for the Company, Questar Gas, and QRS and had over 24 years of service. The retirements of these officers, together with the retirements of other employees in the Regulated Services unit, led to a reorganization of responsibilities and the appointment of three new officers effective November 1, 2000. Ms. Susan Glasmann, age 53, was named to serve as Vice President, Operations, for the 9 Company, Questar Gas, and QRS. She had been serving as Vice President and General Manager for Questar Gas. The operations within the three companies were consolidated under her leadership. Mr. Alan K. Allred, age 50, was appointed to serve as Vice President, Business Development, for Questar Pipeline and its affiliates in the Regulated Services group. Mr. Allred has more than 22 years of service with the Company and its affiliates and had been serving as Manager, Regulatory Affairs. In his new position, Mr. Allred has responsibility for regulatory affairs, gas supply management, capacity marketing, gas control, partnerships, acquisitions, and new ventures. Mr. Shahab Saeed, age 41, was named to serve as Vice President, Support Services, for Questar Pipeline and affiliates in the Regulated Services group. He had more than 19 years of service and had been serving as Manager, Administrative Services. Mr. Saeed, in his new position, has responsibility for engineering, human resources, information services, system integrity, safety and environmental activities, research and development, materials and equipment, and facilities. Messrs. R. D. Cash, D. N. Rose and S. E. Parks will continue to serve in their executive officer positions as Chairman of the Board, President and Chief Executive Officer, and Vice President, Treasurer and Chief Financial Officer, respectively. Item 6. Exhibits and Reports on Form 8-K a. The following exhibit has been filed as part of this report. Exhibit No. Exhibit 10.1.* Joint Annual Management Incentive Plan adopted by Questar Pipeline Company, Questar Gas Company, and Questar Regulated Services Company as amended and restated effective October 26, 2000. 10.2.* Questar Pipeline Company Deferred Compensation Plan for Directors as amended and restated effective October 26, 2000. 10.3.* Questar Corporation Long-term Stock Incentive Plan as amended and restated effective October 26, 2000. (Exhibit No. 10.3. to Questar Corporation's Form 10-Q Report for Quarter Ended September 30, 2000.) *Exhibit so marked is a management contract or compensation plan or arrangement. (b) The Company did not file any Current Reports on Form 8-K during the quarter. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUESTAR PIPELINE COMPANY (Registrant) November 13, 2000 /s/ D. N. Rose D. N. Rose President and Chief Executive Officer November 13, 2000 /s/ S. E. Parks S. E. Parks Vice President, Treasurer, and Chief Financial Officer 11 EXHIBIT INDEX Exhibit Number Exhibit 10.1.* Joint Annual Management Incentive Plan adopted by Questar Pipeline Company, Questar Gas Company, and Questar Regulated Services Company as amended and restated effective October 26, 2000. 10.2.* Questar Pipeline Company Deferred Compensation Plan for Directors as amended and restated effective October 26, 2000. 10.3.* Questar Corporation Long-term Stock Incentive Plan as amended and restated effective October 26, 2000. (Exhibit No. 10.3. to Questar Corporation's Form 10-Q Report for Quarter Ended September 30, 2000.) *Exhibit so marked is a management contract or compensation plan or arrangement.