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 JUNE 30, 1997 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 June 30, 1997 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. PART I FINANCIAL INFORMATION Item 1. Financial Statements QUESTAR PIPELINE COMPANY STATEMENTS OF INCOME (Unaudited) 3 Months Ended 6 Months Ended 12 Months Ended June 30, June 30, June 30, 1997 1996 1997 1996 1997 1996 (In Thousands) REVENUES $25,907 $25,726 $52,628 $51,802 $105,004 $98,892 OPERATING EXPENSES Operating and maintenance 9,637 9,314 18,545 19,575 38,929 36,149 Depreciation 3,614 3,434 7,211 6,812 14,605 13,311 Other taxes 664 902 1,415 1,944 1,990 3,349 TOTAL OPERATING EXPENSES 13,915 13,650 27,171 28,331 55,524 52,809 OPERATING INCOME 11,992 12,076 25,457 23,471 49,480 46,083 INTEREST AND OTHER INCOME 91 260 96 804 1,090 592 INCOME (LOSS) FROM UNCONSOLIDATED AFFILIATES (6) 35 (74) 72 36 1,111 DEBT EXPENSE (3,314) (3,452) (6,665) (6,846) (13,235) (13,551) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 8,763 8,919 18,814 17,501 37,371 34,235 INCOME TAXES 3,303 3,384 7,032 6,715 13,732 12,566 INCOME FROM CONTINUING OPERATIONS 5,460 5,535 11,782 10,786 23,639 21,669 DISCONTINUED OPERATIONS - QUESTAR GAS MANAGEMENT COMPANY 356 1,495 3,175 NET INCOME $5,460 $5,891 $11,782 $12,281 $23,639 $24,844 See notes to financial statements QUESTAR PIPELINE COMPANY CONDENSED BALANCE SHEETS (Unaudited) June 30, December 31, 1997 1996 1996 (In Thousands) ASSETS Current assets Cash and short-term investments $5,411 $1,254 $2,550 Notes receivable from Questar Gas Management 16,000 Accounts receivable $10,229 4,854 8,229 Inventories 2,363 2,186 2,301 Other current assets 1,754 1,513 1,938 Total current assets 19,757 25,807 15,018 Property, plant and equipment 566,777 552,372 562,711 Less allowances for depreciation 201,269 189,636 194,396 Net property, plant and equipment 365,508 362,736 368,315 Investment in discontinued operations 29,250 Investment in unconsolidated affiliates 14,323 9,155 14,347 Other assets 10,789 10,645 11,070 $410,377 $437,593 $408,750 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Notes payable to Questar Corporation $11,600 $700 $11,800 Accounts payable and accrued expenses 15,869 62,438 14,823 Total current liabilities 27,469 63,138 26,623 Long-term debt 134,554 134,535 134,544 Other liabilities 4,257 4,878 4,322 Deferred income taxes 58,572 53,406 58,768 Common shareholder's equity Common stock 6,551 6,551 6,551 Additional paid-in capital 82,034 82,034 82,034 Retained earnings 96,940 93,051 95,908 Total common shareholder's equity 185,525 181,636 184,493 $410,377 $437,593 $408,750 See notes to financial statements QUESTAR PIPELINE COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) 6 Months Ended June 30, 1997 1996 (In Thousands) OPERATING ACTIVITIES Net income $11,782 $12,281 Depreciation 7,768 7,670 Deferred income taxes (196) (2,743) Income from discontinued operations (1,495) Loss (income) from unconsolidated affiliates 74 (72) 19,428 15,641 Change in operating assets and liabilities (606) 30,825 NET CASH PROVIDED FROM OPERATING ACTIVITIES 18,822 46,466 INVESTING ACTIVITIES Capital expenditures Purchase of property, plant and equipment (4,227) (5,745) Other investments (50) Total capital expenditures (4,277) (5,745) Costs of disposition of property, plant and equipment (734) (669) NET CASH USED IN INVESTING ACTIVITIES (5,011) (6,414) FINANCING ACTIVITIES Decrease in note receivable from Questar Gas Management 689 Decrease in note payable to Questar Corporation (200) (14,500) Payment of dividends (10,750) (26,000) NET CASH USED IN FINANCING ACTIVITIES (10,950) (39,811) INCREASE IN CASH AND SHORT-TERM INVESTMENTS $2,861 $241 The $29,250,000 special dividend declaration of Questar Gas Management shares was a non-cash transaction and excluded from the Statement of Cash Flows. See notes to financial statements QUESTAR PIPELINE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS June 30, 1997 (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 six-month periods ended June 30, 1997, are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. 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, 1996. Note 2 - 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 (FERC) February 28, 1996 and was effective March 1, 1996. Questar Gas Management was subsequently transferred to the nonregulated Market Resources group of Questar on July 1, 1996 and now is a wholly owned subsidiary of Entrada Industries. The transaction was in the form of a stock dividend payable to Questar with no gain or loss recorded. Questar Pipeline's financial statements for prior periods were restated reflecting gas-gathering operations as a discontinued business segment. Questar Pipeline has submitted an application to the FERC to transfer approximately $1.5 million of additional facilities to Questar Gas Management. The facilities consist of several miles of non-mainline laterals, a portion of a mainline pipeline and a compressor station. The application requested that the transfer be effective May 31, 1997. However, the transfer was delayed by a group of producers protesting part of the transfer. The FERC has not yet ruled on the Company's application. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations QUESTAR PIPELINE COMPANY June 30, 1997 (Unaudited) Operating Results Following is a summary of financial and operating information for the Company: 3 Months Ended 6 Months Ended 12 Months Ended June 30, June 30, June 30, 1997 1996 1997 1996 1997 1996 (Dollars In Thousands) FINANCIAL RESULTS Revenues From unaffiliated customers $8,732 $11,360 $17,863 $19,447 $37,253 $37,700 From affiliates 17,175 14,366 34,765 32,355 67,751 61,192 Total revenues $25,907 $25,726 $52,628 $51,802 $105,004 $98,892 Operating income $11,992 $12,076 $25,457 $23,471 $49,480 $46,083 Income from continuing operations $5,460 $5,535 $11,782 $10,786 $23,639 $21,669 OPERATING STATISTICS Natural gas transportation volumes (in thousands of decatherms) For unaffiliated customers 27,633 36,158 60,936 73,031 119,800 147,427 For Mountain Fuel 26,011 16,426 68,275 53,582 114,854 88,702 For other affiliated customers 10,993 10,271 17,809 14,869 47,267 37,349 Total transportation 64,637 62,855 147,020 141,482 281,921 273,478 Transportation revenue (per decatherm) $0.26 $0.28 $0.23 $0.24 $0.23 $0.24 Revenues were higher in the 6- and 12-month periods of 1997 due primarily to a rate increase, which became effective on February 1, 1996. Operating and maintenance expenses increased 3% in the second quarter of 1997 when compared to the second quarter of 1996 due primarily to charges for electronic field measurement services. Operating and maintenance expenses were lower in the first half of 1997 due to reduced labor and related costs and some operating efficiencies. Operating efficiencies resulted from the consolidation of certain administrative, marketing, financial, technical and related services under Questar Regulated Services Co., which wholly owns Questar Pipeline. These services were previously staffed and performed separately by Questar Pipeline and its affiliated company, Mountain Fuel. Operating and maintenance expenses were 8% higher for the 12-month period ended June 30, 1997 when compared with the same period of 1996, primarily because of some one-time costs associated with the spin-down of certain assets to Questar Gas Management Company and settlement issues in Questar Pipeline's most recent rate proceeding. Depreciation expense was higher in the 1997 periods as a result of increased investment in property, plant and equipment. Other taxes were lower in the 3- and 6-month periods of 1997 when compared with the same periods of 1996 primarily due to reduced payroll taxes because the number of employees has decreased from a year ago. Interest and other income was lower in the 3- and 6-month periods of 1997 because Questar Gas Management repaid a loan to the Company and the proceeds were dividended to Questar. The effective income tax rate for the first half was 37.4% in 1997 compared with 38.4% in 1996. On May 9, 1997, the Federal Energy Regulatory Commission (FERC) issued an "Order Instituting Proceeding" in Docket No. IN97-1, in which it alleges that Questar Pipeline had overcharged its affiliated company, Mountain Fuel, for gathering services provided from November 1988 through September 1992. The FERC order states that Questar Pipeline may have violated the Natural Gas Act by charging Mountain Fuel rates different from those rates specified in the tariff. The FERC is ordering Questar Pipeline to show why the allegations are incorrect and why it should not refund the alleged overcharge of $3.4 million plus interest to Mountain Fuel. Questar Pipeline believes that it did not overcharge Mountain Fuel. Questar Pipeline also believes that its actions were fully justified and in full compliance with applicable law and FERC orders, based on its understanding of the issues dealing with jurisdiction over gathering during the period in question. Management does not believe the ultimate outcome of this order will have a material impact on results of operations, financial position or liquidity. Liquidity and Capital Resources Operating Activities: Net cash provided from operating activities of $18,822,000 for the first half of 1997 was lower when compared with $46,466,000 for the same period in 1996 due primarily to changes in operating assets and liabilities. The 1996 period included a $16,000,000 special dividend declaration associated with the loan repayment from Questar Gas Management. Also, the first half of 1996 included the collection of rates subject to refund amounting to $7,400,000. Investing Activities: Capital expenditures were $4,277,000 in the first half of 1997 compared with $5,745,000 in the corresponding 1996 period. Capital expenditures for calendar year 1997 are estimated to be $48,500,000, which includes $18,600,000 earmarked for the Company's share of the second phase of the TransColorado Pipeline. The second phase will cost approximately $200 million and includes 270 miles of 22- and 24-inch pipeline and two compressor plants. The Company will ultimately have a 50% share of the project after completing a purchase of 50% of El Paso Energy Corporation's interest in Phase II and 100% of El Paso's interest in Phase I. Financing Activities: The Company has a short-term line-of-credit arrangement with a bank totaling $200,000. In addition, Questar Corporation loans funds to the Company under a short-term arrangement. As of June 30, amounts borrowed from Questar were $11,600,000 in 1997 and $700,000 in 1996. No amounts were borrowed under the short-term line-of-credit arrangement at June 30, 1997. First half financing activities in 1997 and 1996 included payment of dividends and a partial repayment of the Company's notes payable to Questar. Capital expenditures for 1997 are expected to be financed from net cash flow provided from operations and borrowings from Questar. This 10-Q contains forward-looking statements about the future operations 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. PART II OTHER INFORMATION Item 1. Legal Proceedings. On August 7, 1997, Questar Pipeline Company (Questar Pipeline or the Company) filed a formal Answer and Motion for Hearing in response to an Order Instituting Proceeding issued by the Federal Energy Regulatory Commission (the FERC). This order, which contains allegations that the Company charged gathering rates higher than specified in its tariff to Mountain Fuel Supply Company for the period from November 1, 1988 through September 30, 1992, is described in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. In its answer, Questar Pipeline emphasized that the issues raised by the FERC were treated in earlier rate settlements involving interested parties and that all parties are bound by these settlements. In addition, the Company denied that it overcharged Mountain Fuel when collecting rates for gathering activities. Questar Pipeline believes that its gathering rates were fully justified and that its activities were in full compliance with applicable law and FERC orders. The Company requested the FERC to dismiss the proceeding or to conduct a full hearing on the issues. Questar Pipeline transferred its gathering assets to Questar Gas Management Company, an affiliated entity, effective March 1, 1996, but is the responsible party for any ultimate outcome. Item 6. Exhibits and Reports on Form 8-K. a. The following exhibit has been filed as part of this report: Exhibit No.Exhibit 3.3. Bylaws (as amended on August 12, 1997). 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) August 13, 1997 /s/ D. N. Rose (Date) D. N. Rose President and Chief Executive Officer August 13, 1997 /s/ S. E. Parks (Date) S. E. Parks Vice President, Treasurer and Chief Financial Officer