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, 1999 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, 1999 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 AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) 3 Months Ended 9 Months Ended 12 Months Ended September 30, September 30, September 30, 1999 1998 1999 1998 1999 1998 (In Thousands) REVENUES $ 28,344 $ 27,233 $ 82,546 $ 81,081 $ 110,022 $108,001 OPERATING EXPENSES Operating and maintenance 9,439 10,491 27,159 29,984 36,007 39,792 Depreciation 4,774 3,794 12,848 10,109 16,666 13,937 Other taxes 703 697 2,139 1,885 2,854 2,581 TOTAL OPERATING EXPENSES 14,916 14,982 42,146 41,978 55,527 56,310 OPERATING INCOME 13,428 12,251 40,400 39,103 54,495 51,691 INTEREST AND OTHER INCOME (EXPENSE) 416 (13) 3,666 (89) 3,833 215 EARNINGS (LOSS) FROM UNCONSOLIDATED AFFILIATES (2,304) 944 (2,368) 2,094 (451) 2,705 DEBT EXPENSE (4,387) (3,606) (12,602) (10,540) (16,518) (14,062) INCOME BEFORE INCOME TAXES 7,153 9,576 29,096 30,568 41,359 40,549 INCOME TAXES 2,685 3,605 10,634 10,983 14,591 14,740 NET INCOME $ 4,468 $ 5,971 $ 18,462 $ 19,585 $ 26,768 $ 25,809 See notes to consolidated financial statements QUESTAR PIPELINE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 1999 1998 1998 (Unaudited) (In Thousands) ASSETS Current assets Cash and short-term investments $ 2,922 $ 9,990 Accounts receivable $ 24,860 10,995 21,304 Inventories 2,916 2,217 2,203 Other current assets 1,750 1,590 1,714 Total current assets 29,526 17,724 35,211 Property, plant and equipment 692,616 603,262 670,456 Less allowances for depreciation 228,207 211,643 215,589 Net property, plant and equipment 464,409 391,619 454,867 Investment in unconsolidated affiliates 54,737 66,564 54,712 Other assets 11,887 12,957 12,506 $560,559 $ 488,864 $557,296 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balances $ 107 Notes payable to Questar Corporation 72,300 $ 92,900 $ 38,000 Accounts payable and accrued expenses 17,185 19,803 51,047 Total current liabilities 89,592 112,703 89,047 Long-term debt 202,996 114,577 202,991 Other liabilities 1,602 4,267 4,546 Deferred income taxes 66,830 63,171 63,510 Common shareholder's equity Common stock 6,551 6,551 6,551 Additional paid-in capital 82,034 82,034 82,034 Retained earnings 110,954 105,561 108,617 Total common shareholder's equity 199,539 194,146 197,202 $560,559 $ 488,864 $557,296 See notes to consolidated financial statements QUESTAR PIPELINE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 9 Months Ended September 30, 1999 1998 (In Thousands) OPERATING ACTIVITIES Net income $ 18,462 $ 19,585 Depreciation 13,445 11,063 Deferred income taxes 3,320 873 (Earnings) losses from unconsolidated affiliates, net of cash distributions 3,988 (2,094) 39,215 29,427 Change in operating assets and liabilities (40,486) (2,931) NET CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES (1,271) 26,496 INVESTING ACTIVITIES Capital expenditures Purchase of property, plant and equipment (23,443) (22,319) Investment in unconsolidated affiliates (4,014) (37,493) Total capital expenditures (27,457) (59,812) Proceeds from (costs of) disposition of property, plant and equipment 456 (2,187) NET CASH USED IN INVESTING ACTIVITIES (27,001) (61,999) FINANCING ACTIVITIES Checks outstanding in excess of cash balances 107 Increase in notes payable to Questar Corporation 34,300 67,100 Decrease in long-term debt (20,000) Payment of dividends (16,125) (15,750) NET CASH PROVIDED FROM FINANCING ACTIVITIES 18,282 31,350 DECREASE IN CASH AND SHORT- TERM INVESTMENTS $ (9,990) $ (4,153) See notes to consolidated financial statements QUESTAR PIPELINE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (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, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 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, 1998. Note 2 - Investment in Unconsolidated Affiliates Questar Pipeline has interests in partnerships accounted for on an equity basis. Transportation and processing of natural gas is the primary business activity of these partnerships. Summarized operating results of the partnerships are listed below. Income before income taxes includes capitalized financing charges called allowance for funds used during construction (AFUDC). 9 Months Ended September 30, 1999 1998 (In Thousands) Revenues $ 7,268 $ 3,666 Operating income (loss) (2,362) 1,306 Income (loss) before income taxes (5,839) 4,668 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations QUESTAR PIPELINE COMPANY AND SUBSIDIARIES September 30, 1999 (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, 1999 1998 1999 1998 1999 1998 FINANCIAL RESULTS - (dollars in thousands) Revenues From unaffiliated customers $ 8,863 $ 9,578 $ 27,638 $ 27,731 $ 37,063 $ 36,973 From affiliates 19,481 17,655 54,908 53,350 72,959 71,028 Total revenues $ 28,344 $ 27,233 $ 82,546 $ 81,081 $ 110,022 $ 108,001 Operating income $ 13,428 $ 12,251 $ 40,400 $ 39,103 $ 54,495 $ 51,691 Net income 4,468 5,971 18,462 19,585 26,768 25,809 OPERATING STATISTICS Natural gas transportation volumes (in thousands of decatherms) For unaffiliated customers 38,314 33,052 99,025 97,119 122,653 121,486 For Questar Gas 14,236 15,001 75,955 80,383 103,073 109,202 For other affiliated customers 1,006 7,227 9,464 19,634 16,708 29,869 Total transportation 53,556 55,280 184,444 197,136 242,434 260,557 Transportation revenue (per decatherm) $ 0.32 $ 0.32 $ 0.28 $ 0.27 $ 0.29 $ 0.28 Revenues were 4% higher in the third quarter of 1999 and 2% higher in the first nine months of 1999 due primarily to the addition of carbon dioxide removal services. Beginning in the third quarter of 1999 a subsidiary of Questar Pipeline, Questar Transportation Services, initiated operations to remove carbon dioxide from pipeline gas owned by Questar Gas. Revenues for gas storage increased from an expansion of the Clay Basin storage complex beginning in May of 1998. Lower firm-transportation revenues have partially offset the increases in storage and carbon dioxide removal services. Average daily demand in the first nine months of 1999 was lower than in 1998 as a result of the expiration of several firm-transportation contracts. Operating and maintenance expenses were lower in the 1999 periods presented when compared with the 1998 periods due primarily to the effects of an early retirement program effective August 1998 and to the capitalization of a larger amount of administrative and general expenses in connection with construction projects. Labor-cost savings amounted to $1.6 million in the first nine months of 1999. Increased spending for information technology has partially offset the expense reductions discussed. Increased investments in capital projects have resulted in higher depreciation charges in the first nine months of 1999. Property taxes increased in conjunction with the expansion of investment in plant assets in 1999. Interest and other income in the first nine months of 1999 includes a reversal of a $2.5 million contingency reserve related to completion of the TransColorado Pipeline and $1.2 million of AFUDC (capitalized financing costs) from Questar Pipeline's capital projects. Debt expense was higher in the first nine months of 1999 as a result of borrowing $88.4 million in the fourth quarter of 1998. The medium-term notes have a weighted average coupon rate of 6.14% and a weighted average life of 12.6 years. The Company capitalized approximately $2 million of interest costs in the first nine months of 1999 in connection with construction of plant assets. Earnings from unconsolidated affiliates includes the Company's share of operating results reported by TransColorado Gas Transmission Co. and Overthrust Pipeline Co. Questar Pipeline's share of TransColorado's 1999 pretax loss was $3.2 million. The TransColorado Pipeline has been in service since March 31, 1999. The quantity of gas flowing through the pipeline has been below the current capacity of 160 MDth per day and priced at discounted rates because of poor basin differentials between the Rocky Mountains and the San Juan basin. The Company has a right to put its 50% ownership of the pipeline to the other owner over a 12-month beginning March 31, 2001. Questar Pipeline has guaranteed $100 million or 50% of a TransColorado Gas Transmission Co. bank loan used to finance construction of the pipeline. The effective income tax rate was 36.5% in the first nine months of 1999 compared with 35.9% for the same period in 1998. Liquidity and Capital Resources Operating Activities In the first nine months of 1999, operating activities resulted in a $1,271,000 net use of cash due primarily to changes in operating assets and liabilities. A $40,486,000 decrease in cash flow from operating assets and liabilities was caused by timing differences in paying costs of construction projects. Investing Activities Capital expenditures were $27,457,000 in the first nine months of 1999 compared with $59,812,000 in the corresponding 1998 period. The TransColorado Pipeline was under constructed a year ago. Capital expenditures for calendar year 1999 are estimated to be $64.3 million. Financing Activities Questar Corporation loans funds to the Company under a short-term arrangement. As of September 30, Questar Pipeline had borrowed from Questar $72.3 million in 1999 and $92.9 million in 1998. Remaining 1999 capital expenditures are expected to be financed with net cash provided from operating activities and short- and long-term debt including borrowings on an active medium-term note program and from Questar. In October 1999, the Company borrowed $42 million with a weighted average coupon rate of 7.48% and a 10 year life on its medium-term note program. Regulatory Matters The Federal Energy Regulatory Commission issued a preliminary determination approving Questar Southern Trails' proposal to convert a 700-mile pipeline from liquid transportation to natural gas transportation. However, an issuance of a certificate is dependent on completion of a favorable environmental review. Questar Pipeline is actively working to complete the environmental review and to obtain contracts with shippers to provide the market support for incurring the conversion costs. Overthurst Pipeline filed a general rate case October 1, 1999 requesting a $1 million increase in its cost of service. Year 2000 Issues Questar Corporation established a team to address the issue of computer programs and embedded computer chips being unable to distinguish between the year 1900 and the year 2000 (Y2K). The team identified 55 projects among Questar and its affiliated companies that were classified into application software, infrastructure, non-information technology equipment or critical third-party associations. As of September 30, 1999 those 55 projects have been assessed, remediated, tested and determined to be completed. In the process, Questar employees contacted more than 8,000 vendors and suppliers to assess their readiness to meet obligations to the Company. The estimated cost of the Y2K project is $5.1 million. Questar Pipeline's portion of the Y2K costs is estimated to be $1.0 million. The Company has no cause to believe that Y2K will disrupt operations but has developed contingency plans to ensure service is not disrupted due to Y2K problems. Operators, engineers, information-technology, communications and other employees will be available during the last half of December 1999 and into January 2000, to be prepared to respond to unforeseen contingencies that may arise. Failure to correct a material Y2K problem could result in an interruption, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. The complete text of Questar Pipeline's Y2K disclosure can be viewed in Form 10-K for December 31, 1998, filed with the Securities and Exchange Commission or on Questar's website at www.questar.com. 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, the adverse effects of failure to achieve Y2K compliance 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. PART II OTHER INFORMATION Item 1. Legal Proceedings. a. Questar Pipeline Company (Questar Pipeline or the Company) and several other affiliates of Questar Corporation are named defendants in several actions filed by Jack J. Grynberg, an independent producer. The action that was filed under the Federal False Claims Act has recently been consolidated with the approximately 76 actions filed by the same producer against other pipelines and their affiliates. The cases have been consolidated in federal district court for the district of Wyoming for pre-trial motions and discovery. The cases involve allegations that the pipelines mismeasured the heating content of natural gas volumes and understated the value of gas on which royalty payments are due the federal government. Mr. Grynberg recently filed a complaint against the Company in a state district court in Utah alleging that Questar Pipeline mismeasured the heating content of natural gas volumes produced in southwest Wyoming that were attributable to the producer's working interest. The Company filed a motion to stay this action pending the resolution of similar issues in other actions. Finally, Questar Pipeline is a named defendant in another case that Mr.Grynberg filed in Wyoming's federal district court that has been stayed pending the resolution of an appeal to the Court of Appeals for the Tenth Circuit in yet another case that involves the producer and an affiliate of the Company. See the Company's Report on Form 10-Q for the quarter ended June 30, 1999, Item 1. Legal Proceedings. b. On October 15, 1999, the Federal Energy Regulatory Commission (the FERC) issued a Preliminary Decision on Non-Environmental Issues in the Company's application to convert an oil pipeline to natural gas. The 700-mile pipeline, which has been designated as the Southern Trails line, extends from the Four Corners area of Utah, Colorado, New Mexico, and Arizona to Long Beach, California. The FERC made a preliminary decision that a certificate of public convenience and necessity should be issued to Southern Trails under the optional certificate procedures and dismissed as "speculative" the allegations made by an intervening local distribution company that the line would result in idle capacity and unrecovered costs on other systems. Final regulatory approval is dependent on the completion of a favorable environmental review. Questar Pipeline is actively working to complete the environmental review and to obtain contracts with shippers to provide market support for the conversion. c. The Company and Colorado Interstate Gas Company (CIG) are parties to a letter agreement effective Septemer 30, 1999, for the joint construction and operation of a 75-mile, 24-inch diameter pipeline that extends from the Price area of eastern Utah to a proposed interconnect with Kern River Gas Transmission Company located near Elberta, Utah. The new line, which parallels an existing line owned by Questar Pipeline, is scheduled to be in service prior to the 2000-2001 heating season. It will provide additional transportation capacity to move gas into the Wasatch Front of Utah and into the Kern River line. Item 6. Exhibits and Reports on Form 8-K a. The following exhibits have been filed as part of this report. Exhibit No. Exhibit 12. Ratio of earnings to fixed charges. b. The Company did not file a Current Report on Form 8-K during the quarter. 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 10, 1999 /s/ D. N. Rose D. N. Rose President and Chief Executive Officer November 10, 1999 /s/ S. E. Parks S. E. Parks Vice President, Treasurer, and Chief Financial Officer EXHIBIT INDEX Exhibit Number Exhibit 12. Ratio of earnings to fixed charges.