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, 1996 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 11450, 79 South State Street, Salt Lake City, Utah 84147 (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 September 30, 1996 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. QUESTAR PIPELINE COMPANY STATEMENTS OF INCOME (Unaudited) 3 Months Ended 9 Months Ended 12 Months Ended September 30, September 30, September 30, 1996 1995 1996 1995 1996 1995 (In Thousands) REVENUES $26,186 $23,243 $77,988 $70,925 $101,835 $94,955 OPERATING EXPENSES Operating and maintenance 9,577 8,062 29,152 25,491 37,664 33,515 Depreciation 3,637 3,203 10,449 9,615 13,745 12,800 Other taxes 549 941 2,493 2,906 2,957 3,749 TOTAL OPERATING EXPENSES 13,763 12,206 42,094 38,012 54,366 50,064 OPERATING INCOME 12,423 11,037 35,894 32,913 47,469 44,891 INTEREST AND OTHER INCOME 365 464 1,169 1,200 493 243 INCOME FROM UNCONSOLIDATED AFFILIATES 140 94 212 275 1,157 317 DEBT EXPENSE (3,189) (3,348) (10,035) (10,115) (13,392) (13,483) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 9,739 8,247 27,240 24,273 35,727 31,968 INCOME TAXES 3,619 3,062 10,334 8,703 13,123 10,173 INCOME FROM CONTINUING OPERATIONS 6,120 5,185 16,906 15,570 22,604 21,795 DISCONTINUED OPERATIONS - QUESTAR GAS MANAGEMENT COMPANY 704 1,495 2,404 2,471 3,534 NET INCOME $6,120 $5,889 $18,401 $17,974 $25,075 $25,329 See notes to financial statements. QUESTAR PIPELINE COMPANY CONDENSED BALANCE SHEETS (Unaudited) September 30, December 31, 1996 1995 1995 (In Thousands) ASSETS Current assets Cash and short-term investments $904 $1,578 $1,013 Notes receivable 18,725 16,692 Accounts receivable 8,579 8,432 13,706 Inventories 2,183 2,319 2,310 Other current assets 1,663 2,157 2,157 Total current assets 13,329 33,211 35,878 Property, plant and equipment 557,630 542,241 547,831 Less allowances for depreciation 193,030 184,664 183,840 Net property, plant and equipment 364,600 357,577 363,991 Investment in unconsolidated affiliates 12,146 8,038 9,084 Other assets 11,276 10,997 11,903 Investment in net assets of discontinued operations 26,376 27,752 $401,351 $436,199 $448,608 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Notes payable to Questar Corporation $9,200 $3,000 $15,200 Accounts payable and accrued expenses 13,341 15,249 12,783 Total current liabilities 22,541 18,249 27,983 Long-term debt 134,539 134,520 134,525 Deferred credits 4,898 4,636 5,346 Deferred income taxes 56,117 56,113 56,149 Common shareholder's equity Common stock 6,551 6,551 6,551 Additional paid-in capital 82,034 82,034 82,034 Retained earnings 94,671 134,096 136,020 Total common shareholder's equity 183,256 222,681 224,605 $401,351 $436,199 $448,608 See notes to financial statements. QUESTAR PIPELINE COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) 9 Months Ended September 30, 1996 1995 (In Thousands) OPERATING ACTIVITIES Net income $18,401 $17,974 Depreciation 12,214 9,564 Deferred income taxes (32) (199) Income from unconsolidated affiliates (212) (275) Income from discontinued operations (1,495) (2,404) 28,876 24,660 Changes in operating assets and liabilities 6,496 11,073 NET CASH PROVIDED FROM OPERATING ACTIVITIES 35,372 35,733 INVESTING ACTIVITIES Capital expenditures Purchase of property, plant and equipment (11,478) (13,700) Investments in partnerships (2,850) (406) Investment in discontinued operations (1,176) Total capital expenditures (14,328) (15,282) Costs of deposition of property, plant and equipment (1,345) (959) NET CASH USED IN INVESTING ACTIVITIES (15,673) (16,241) FINANCING ACTIVITIES Decrease in notes receivable 16,692 6,488 Decrease in notes payable to Questar Corporation (6,000) (11,600) Dividends paid (30,500) (14,250) NET CASH USED IN FINANCING ACTIVITIES (19,808) (19,362) INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS ($109) $130 See notes to financial statements. QUESTAR PIPELINE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS September 30, 1996 (Unaudited) Note A - Basis of Presentation The interim financial statements furnished 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, 1996, are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. 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, 1995. Note B - Discontinued Operations - Gathering Division Spin Down and Transfer Questar Pipeline transferred approximately $55 million of gas-gathering assets to Questar Gas Management Company, a wholly owned subsidiary. The transfer was approved by the Federal Energy Regulatory Commission February 28, 1996 and was effective March 1, 1996. Questar Gas Management was subsequently transferred to the nonregulated Market Resources group of Questar Corporation on July 1, 1996. The transaction was in the form of a stock dividend payable to Questar Corporation with no gain or loss recorded. Beginning in the third quarter of 1996, Questar Pipeline's prior-period financial statements were restated, showing gas-gathering operations as a discontinued business segment. QUESTAR PIPELINE COMPANY MANAGEMENT'S ANALYSIS September 30, 1996 (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, 1996 1995 1996 1995 1996 1995 (Dollars in Thousands) FINANCIAL RESULTS Revenues From unaffiliated customers $9,539 $8,525 $28,986 $27,052 $38,714 $34,093 From affiliates 16,647 14,718 49,002 43,873 63,121 60,862 Total revenues $26,186 $23,243 $77,988 $70,925 $101,835 $94,955 Operating income $12,423 $11,037 $35,894 $32,913 $47,469 $44,891 Income from continuing operations 6,120 5,185 16,906 15,570 22,604 21,795 OPERATING STATISTICS Natural gas transportation volumes (in thousands of decatherms) For unaffiliated customers 30,502 36,580 103,533 114,127 141,349 146,484 For Mountain Fuel 14,035 10,888 67,617 55,640 91,849 78,998 For other affiliated customers 13,498 10,941 28,367 27,300 39,906 40,217 Total transportation 58,035 58,409 199,517 197,067 273,104 265,699 Transportation revenues (per decatherm) $0.29 $0.26 $0.25 $0.24 $0.24 $0.24 A rate increase and expanded firm gas-storage activities resulted in higher revenues in the 1996 periods presented. Questar Pipeline filed for a rate increase with the Federal Energy Regulatory Commission (FERC) on July 31, 1995. The Company began collecting revenues under the new rate structure, subject to refund, February 1, 1996. The FERC approved a rate settlement July 1, 1996. The settlement included a stated return on equity of 11.75% and allowed the Company to collect a greater share of costs from firm transportation customers. As a result of the new rate structure, Questar Pipeline is expected to add approximately $5.9 million to annual revenues or $3 million in after-tax income. The Company had fully reserved for the differences between the filed rates and the settlement rates and as a result there was no significant impact on net income. In addition to the rate increase, the Company reported higher revenues from its expanded firm gas-storage activities. Firm-storage capacity increased from 41.8 Bcf to 46.3 Bcf in May 1995. Operating and maintenance expenses were higher in all of the 1996 periods presented primarily because of increased maintenance-related activities, higher costs for communication and data processing activities and expenses associated with the rate case settlement. Depreciation expenses were higher in the 1996 periods as a result of increased investment in property, plant and equipment. A successful third quarter 1996 settlement of issues related to state property tax assessments spanning from 1988 through 1992 resulted in a $410,000 reduction of expense reported in other taxes. The increase in earnings from unconsolidated affiliates for the 12-month period ended September 30, 1996 includes Questar Pipeline's share of the proceeds received by Overthrust Pipeline Company from a buy-out of a shipper's transportation contract. In addition, Questar Pipeline increased its ownership of Overthrust to 36% with the purchase of Columbia Gulf Transmission's 18% interest in August of 1996 effective January 1, 1996. The effective income tax rate for the first nine months was 37.9% in 1996 compared with 35.9% in 1995. Questar Pipeline and an affiliated company, Mountain Fuel, continue work to consolidate various financial, technical, administrative and other support functions in an ongoing effort to improve efficiency and coordination. Questar Pipeline and Mountain Fuel comprise the Regulated Services group of Questar Corporation. Liquidity and Capital Resources -- Operating Activities: Net cash provided from operating activities was $35,372,000 for the first nine months of 1996 compared with $35,733,000 for the same period of 1995. An increase in cash flow from higher net income before depreciation expense was more than offset by less cash flow from operating assets and liabilities. Investing Activities: Capital expenditures were $14,328,000 in the first nine months of 1996, compared with $15,282,000 in the corresponding 1995 period. Capital expenditures for calendar year 1996 are estimated at $24,300,000. Financing Activities: The Company has a short-term line-of-credit arrangement with a bank totaling $200,000. In addition, Questar Corporation, its parent company, loans funds to the Company under a short-term arrangement. As of September 30, amounts borrowed from Questar Corporation were $9,200,000 in 1996 and $3,000,000 in 1995. No amounts were borrowed under the line-of-credit arrangement at either September 30, 1996 or September 30, 1995. Questar Pipeline's net cash provided from operating activities for the first nine months of 1996 and 1995 plus collection of notes receivable from an affiliated company funded capital expenditures, cash dividends and repayment of debt. Questar Pipeline paid a special dividend of $16,000,000 to Questar Corporation after collecting a note receivable from Questar Gas Management. Funding for 1996 capital expenditures is expected to be supplied from net cash flow provided from operations and borrowings from Questar Corporation. PART II OTHER INFORMATION Questar Pipeline Company has nothing to disclose in this section of the report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUESTAR PIPELINE COMPANY (Registrant) November 12, 1996 /s/ A. J. Marushack (Date) A. J. Marushack President and Chief Executive Officer November 12, 1996 /s/ S. E. Parks (Date) S. E. Parks Vice President, Treasurer and Chief Financial Officer