<Page>
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, 2001.
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, 2001
- --------------------------------------------------------------------------------
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.
<Page>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- --------- ---------
(In Thousands)
REVENUES $ 30,464 $ 28,187 $ 92,411 $ 87,452 $ 124,035 $ 117,066
OPERATING EXPENSES
Operating and maintenance 11,841 10,783 34,049 30,516 47,294 41,891
Depreciation 3,861 2,949 12,085 11,400 16,076 15,295
Other taxes 710 716 2,285 2,078 3,278 2,427
--------- --------- --------- --------- --------- ---------
TOTAL OPERATING EXPENSES 16,412 14,448 48,419 43,994 66,648 59,613
--------- --------- --------- --------- --------- ---------
OPERATING INCOME 14,052 13,739 43,992 43,458 57,387 57,453
INTEREST AND OTHER
INCOME 1,204 688 3,945 2,273 4,697 2,836
OPERATIONS OF UNCONSOLIDATED
AFFILIATES
Income (loss) (201) 324 (1,521) 720 (1,021) (2,021)
Write-down of investment in partnership (49,700)
--------- --------- --------- --------- --------- ---------
(201) 324 (1,521) 720 (1,021) (51,721)
DEBT EXPENSE (3,509) (4,295) (11,824) (13,386) (16,022) (18,250)
--------- --------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES 11,546 10,456 34,592 33,065 45,041 (9,682)
INCOME TAXES 4,353 3,890 12,891 12,299 14,281 (3,595)
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 7,193 $ 6,566 $ 21,701 $ 20,766 $ 30,760 $ (6,087)
========= ========= ========= ========= ========= =========
</Table>
See notes to consolidated financial statements
2
<Page>
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
September 30, December 31,
2001 2000 2000
(Unaudited)
-------- -------- ------------
(In Thousands)
ASSETS
Current assets
Cash and cash equivalents $ 908 $ 854 $ 1,855
Notes receivable from Questar Corporation 30,100 8,400 20,700
Accounts receivable 7,315 7,687 11,667
Inventories - materials and supplies, at
lower of average cost or market 2,549 2,520 2,276
Prepaid expenses and other 249 1,568 477
-------- -------- --------
Total current assets 41,121 21,029 36,975
Property, plant and equipment 815,323 721,314 731,246
Less accumulated depreciation 253,137 239,446 243,006
-------- -------- --------
Net property, plant and equipment 562,186 481,868 488,240
Investment in unconsolidated affiliates 22,267 20,029 19,088
Regulatory and other assets 18,271 17,611 16,428
-------- -------- --------
$643,845 $540,537 $560,731
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Notes payable to Questar Corporation $ 9,500
Accounts payable and accrued
expenses $ 21,799 22,587 $ 10,103
-------- -------- --------
Total current liabilities 21,799 32,087 10,103
Long-term debt 310,045 245,015 245,020
Other liabilities 2,908 8,717 7,231
Deferred income taxes 68,631 52,766 62,741
Common shareholder's equity
Common stock 6,551 6,551 6,551
Additional paid-in capital 142,034 112,034 142,034
Retained earnings 91,877 83,367 87,051
-------- -------- --------
Total common shareholder's equity 240,462 201,952 235,636
-------- -------- --------
$643,845 $540,537 $560,731
======== ======== ========
</Table>
See notes to consolidated financial statements
3
<Page>
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
9 Months Ended
September 30,
2001 2000
--------- ---------
(In Thousands)
OPERATING ACTIVITIES
Net income $ 21,701 $ 20,766
Depreciation 12,988 12,233
Deferred income taxes 5,890 2,875
(Income) loss from unconsolidated
affiliates, net of cash distributions 1,521 720
--------- ---------
42,100 36,594
Change in operating assets and
liabilities 9,862 21,971
--------- ---------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 51,962 58,565
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (86,127) (23,261)
Investment in unconsolidated affiliates (4,700) (9,024)
--------- ---------
Total capital expenditures (90,827) (32,285)
Costs of disposition of
property, plant and equipment (807) (1,388)
--------- ---------
NET CASH USED IN INVESTING
ACTIVITIES (91,634) (33,673)
FINANCING ACTIVITIES
Issuance of long-term debt 180,000
Repayment of long-term debt (115,000)
Change in notes receivable from Questar Corp. (9,400) (7,300)
Change in notes payable to Questar Corp. (33,000)
Equity investment 30,000
Payment of dividends (16,875) (16,125)
--------- ---------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES 38,725 (26,425)
--------- ---------
Decrease in cash and cash equivalents (947) (1,533)
Beginning cash and cash equivalents 1,855 2,387
--------- ---------
Ending cash and cash equivalents $ 908 $ 854
========= =========
</Table>
See notes to consolidated financial statements
4
<Page>
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(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 of
operations for the interim periods presented. All such adjustments are of a
normal recurring nature. The results of operations for the three-, nine- and
twelve-month periods ended September 30, 2001, are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001. 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, 2000.
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.
<Table>
<Caption>
9 Months Ended
September 30,
2001 2000
-------- --------
(In Thousands)
Revenues $ 11,850 $ 9,113
Operating loss (1,049) (4,978)
Loss before income taxes (9,546) (14,532)
</Table>
Note 3 - Financing Activities
On March 30, 2001, Questar Pipeline redeemed $30 million of its 9 7/8%
debentures. The redemption price was equal to 104.67% of the principal amount
plus interest from December 1, 2000. On June 25, 2001, the Company redeemed $85
million of its 9 3/8% debentures. The redemption price was equal to 104.51% of
the principal amount plus twenty-four days of interest.
On May 11, 2001, Questar Pipeline filed a Form S-3 with the Securities and
Exchange Commission to issue up to $250 million of medium-term notes, Series B,
with maturities of nine months to 30 years. On May 29, 2001, Questar Pipeline
issued $100 million of 10-year notes with a 7.09% coupon rate. On September 26,
Questar Pipeline issued $80 million of 10-year medium-term notes with a coupon
rate of 6.57%. Additional proceeds from the sale of notes will likely be used to
finance a portion of capital expenditures and partnership investments, estimated
at $270 million in 2001.
On October 12, 2001, Questar Pipeline borrowed $100 million for a 12-month
period. The proceeds were used to repay, through a wholly-owned subsidiary,
Questar TransColorado, Inc. (QTC), one-half of the outstanding and currently
maturing debt owed by TransColorado Gas Transmission Company (TransColorado).
QTC and KN TransColorado, Inc., a subsidiary of Kinder Morgan, each own 50% of
TransColorado. KN TransColorado also repaid 50% of TransColorado's debt.
5
<Page>
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
QUESTAR PIPELINE COMPANY AND SUBSIDIARIES
September 30, 2001
(Unaudited)
Operating Results
Following is a summary of financial and operating information for the Company:
<Table>
<Caption>
3 Months Ended 9 Months Ended 12 Months Ended
September 30, September 30, September 30,
2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- --------- ---------
FINANCIAL RESULTS - (dollars in thousands)
Revenues
From unaffiliated customers $ 12,754 $ 10,454 $ 35,848 $ 30,355 $ 47,993 $ 39,639
From affiliates 17,710 17,733 56,563 57,097 76,042 77,427
--------- --------- --------- --------- --------- ---------
Total revenues $ 30,464 $ 28,187 $ 92,411 $ 87,452 $ 124,035 $ 117,066
========= ========= ========= ========= ========= =========
Operating income $ 14,052 $ 13,739 $ 43,992 $ 43,458 $ 57,387 $ 57,453
Net income (loss) 7,193 6,566 21,701 20,766 30,760 (6,087)
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 53,516 44,228 143,522 109,126 193,000 145,987
For Questar Gas 14,303 13,357 78,735 73,718 113,200 103,262
For other affiliated customers 1,981 2,436 3,986 5,437 6,919 8,126
--------- --------- --------- --------- --------- ---------
Total transportation 69,800 60,021 226,243 188,281 313,119 257,375
========= ========= ========= ========= ========= =========
Transportation revenue (per decatherm) $ 0.27 $ 0.28 $ 0.25 $ 0.28 $ 0.24 $ 0.28
</Table>
Revenues were higher in the 2001 periods compared with the 2000 periods due
primarily to increased revenues from transportation operations and gas
processing operations. Transportation revenues increased 5% in the third quarter
and first nine months of 2001 compared with the 2000 periods primarily from
increased demand for firm-transportation service. Firm-transportation volumes
reached 64.5 million decatherms (MMDth) in the third quarter of 2001, which was
20% higher than the third quarter of 2000. In the first nine months of 2001,
firm-transportation volumes were 212.9 MMDth or 23% higher when compared with
the prior-year period as a result of increased regional demand and power
generation. A refund of gas processing fees reduced third quarter 2000 revenues
by $1.3 million. Processing fees are determined on a cost-of-service basis and
the refund was a result of lower depreciation expense.
Operating and maintenance (O & M) expenses were higher in the 2001 periods when
compared with the 2000 periods reported primarily because of legal fees,
increased transportation activities accompanying the rise in gas volumes, gas
processing costs and expenses associated with Questar Southern Trails Pipeline
Company. The Company and its subsidiaries have incurred legal costs of $.8
million in the third quarter and $2.1 million in the nine-month period of 2001.
Fuel gas and other expenses of the gas processing activities increased $.7
million in the first nine months of 2001. Maintenance expenses for the Southern
Trails Pipeline were $.4 million higher in the 2001 period. These increases in
the first nine months of 2001 were partially offset by $1.8 million of reduced
costs resulting from an early retirement program effective October 31, 2000.
6
<Page>
Depreciation expense was higher in the 2001 periods compared with the 2000
periods as a result of an adjustment recorded in the third quarter 2000.
Interest and other income for the 2001 periods were higher than the 2000 periods
primarily from increased AFUDC (capitalized financing costs) associated with
Questar Pipeline's construction projects.
Earnings from unconsolidated affiliates includes the Company's share of
operating losses from the TransColorado Pipeline partnership of $.5 million in
the third quarter and $2.2 million for the first nine months of 2001.
Debt expense was lower in the 2001 periods compared with the 2000 periods
because of lower interest rates and reduced short-term debt levels in the 2001
periods. The Company refinanced $115 million of long-term debt carrying a
weighted average rate of 9.5% with debt having a weighted average interest rate
of 6.9%. Short-term debt balances were reduced after a $60 million equity
investment from the Company's parent company in 2000.
The effective income tax rate was 37% in the first nine months of 2001 and 2000.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities of $52.0 million in the first nine
months of 2001 was $6.6 million less than the amount reported for the same
period of 2000 due to changes in operating assets and liabilities. The decline
resulted primarily from a $5.2 million premium incurred to redeem debentures and
from a reduction in regulatory liabilities. This was partially offset by higher
deferred income taxes.
Investing Activities
Capital expenditures were $90.8 million in the first nine months of 2001
compared with $32.3 million in the corresponding 2000 period. The increase in
the 2001 period is primarily due to expenditures for transmission projects,
including Main Line 104 and the Southern Trails pipeline. Capital expenditures
for calendar year 2001 are estimated to be $278.5 million and include a $100
million equity investment in Questar TransColorado, which was used to retire
TransColorado debt.
Financing Activities
Questar Pipeline borrowed $180 million in 2001and used the proceeds along with
net cash provided from operating activities to refinance $115 million of more
expensive debt and fund investing activities. Questar Pipeline loaned its excess
cash to Questar. Remaining 2001 capital expenditures are expected to be financed
with net cash provided from operating activities, and from funds received from
the debt offering.
7
<Page>
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") 141, "Business Combinations," which
addresses financial accounting and reporting for business combinations. SFAS 141
is effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for under the pooling method initiated
before but completed after June 30, 2001. SFAS 141 does not have an impact on
the Company at the present time.
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets,"
which addresses, among other things, the financial accounting and reporting for
goodwill subsequent to an acquisition. The new standard eliminates the
requirement to amortize acquired goodwill; instead, such goodwill shall be
reviewed at least annually for impairment. SFAS 142 is effective for fiscal
years beginning after December 15, 2001. The Company has not evaluated the
impact of the provisions of SFAS 142.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations," which addresses, among other things, the financial accounting and
reporting of the fair value of legal obligations associated with the retirement
of tangible long-lived assets. The new standard requires that retirement costs
be estimated at fair value, capitalized and depreciated over the life of the
assets. The new standard may affect the cost basis of rate-regulated assets.
SFAS 143 is effective for years beginning after June 15, 2002. The Company has
not evaluated the impact of SFAS 143.
In August 2001, the FASB issued SFAS 144, " Accounting for the Impairment or
Disposal of Long-Lived Assets." The new standard addresses financial accounting
and reporting for the impairment or disposal of long-lived assets, specifically,
for a segment of a business accounted for as a discontinued operation. The new
standard addresses financial accounting and reporting for the impairment or
disposal of long-lived assets, SFAS 144 is effective for years beginning after
December 15, 2001. The Company has not evaluated the impact of SFAS 144.
Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of Section
27(a) of the Securities Act of 1933, as amended, and Section 21(e) of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included or incorporated by reference in this
report, including, without limitation, statements regarding the Company's future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
In addition, forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may", "will", "could", "expect",
"intend", "project", "estimate", "anticipate", "believe", "forecast", or
"continue" or the negative thereof or variations thereon or similar terminology.
Although 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 expressed or implied in forward-looking
statements include changes in general economic conditions, gas prices and
supplies, competition, rate and regulatory issues, and other factors beyond the
control of the Company. These other factors include the rate of inflation, the
effect of natural phenomena, the effect of accounting policies issued
periodically by accounting standard-setting bodies, and adverse changes in the
business or financial condition of the Company.
8
<Page>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
a. On October 18, 2001, the Environmental Protection Agency (the "EPA")
formally allowed Region VIII of the EPA to withdraw a complaint, with prejudice,
that was originally filed against Questar Regulated Services Company, the parent
of Questar Pipeline Company ("Questar Pipeline" or the "Company"). See the
Company's Form 10-Q for the quarter ending March 31, 2001, ITEM 1. LEGAL
PROCEEDINGS, paragraph b. In its complaint, the EPA alleged violations of
regulations promulgated to enforce the Clean Air Act, as amended, in conjunction
with the installation and operation of a gas turbine at the Company's Fidlar
compressor station in eastern Utah and proposed a civil penalty of $471,568. As
a result of reviewing the information submitted by Questar Pipeline, which is
the real party in interest, the EPA determined that it was appropriate to
voluntarily dismiss the complaint without further adjudication.
b. The complex lawsuit involving the TransColorado pipeline project is
set for trial beginning April 4, 2002, before a judge in a Colorado state
district court. The basic question in the lawsuit filed by KN TransColorado Inc.
("KNTC") against Questar TransColorado, Inc. ("QTC") and other Questar
defendants, including the Company, is the validity of a contractual right
claimed by QTC to sell or "put" its 50 percent interest in the TransColorado
project to KNTC during the 12- month period beginning March 31, 2001. KNTC,
which is a wholly owned subsidiary of Kinder Morgan Inc., alleges that the
Company and its affiliates breached their fiduciary duties to KNTC and the
TransColorado Gas Transmission Company ("TC Partnership") by developing a plan
to construct and operate a new pipeline that would compete with the
TransColorado pipeline, rendering it economically unviable. This allegation is
the basis for KNTC's contention that its obligation to purchase QTC's interest
in the project be declared void and unenforceable. The Questar defendants have
filed a number of claims against KNTC and affiliates and continue to maintain
that QTC's right to sell its interest to KNTC is binding and enforceable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibit has been filed as part of this report.
<Table>
<Caption>
Exhibit No. Exhibit
----------- -------
12. Ratio of earnings to fixed charges.
</Table>
b. The Company did not file any Current Reports on Form 8-K during the
quarter.
9
<Page>
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, 2001 /s/ D. N. Rose
- ----------------- ------------------------------------
D. N. Rose
President and Chief Executive Officer
November 13, 2001 /s/ S. E. Parks
- ----------------- ------------------------------------
S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer
10
<Page>
EXHIBIT INDEX
<Table>
<Caption>
Exhibit
Number Exhibit
- ------- -------
12. Ratio of earnings to fixed charges.
</Table>
11