Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q

(801) 324-2400
(Registrant's telephone number, including area code)

#

Questar Pipeline Company

Form 10-Q for the Quarterly Period Ended September 30, 2004

TABLE OF CONTENTS

PART I.

FINANCIAL INFORMATION

Page #

Item 1.

Financial Statements.

Consolidated Statements of Income for the three- and nine-months

ended September 30, 2004 and 2003.

Condensed Consolidated Balance Sheets at September 30, 2004

and December 31, 2003.

Condensed Consolidated Statements of Cash Flows for the nine-months

ended September 30, 2004 and 2003.

Notes Accompanying Consolidated Financial Statements.

Item 2.

Management’s Discussion and Analysis of Financial Condition and

Results of Operations.

Item 4.

Controls and Procedures.

PART II.

OTHER INFORMATION

Item 6.

Exhibits and Reports on Form 8-K

Signatures

#

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 Questar Pipeline Company (“Questar Pipeline” or “the Company”) expected performance at the time, actual results may vary from management's stated expectations and projections due to a variety of factors.

Transmission operations are subject to regulation which can directly impact earnings primarily through a regulated return on rate base.  The Company monitors the allowed rate of return, its effectiveness in earning such a rate and initiates rate proceedings or operating changes as needed.  In addition in the normal course of the regulatory environment, assets may be placed in service and historical test periods may need to be established before rate cases can be filed.  Once rate cases are filed, regulatory bodies have the authority to suspend implementation of the new rates while studying the cases.  Because of this process, Questar Pipeline may temporarily suffer the negative financial effects of having placed assets in service without the benefit of rate relief.

Increased regulatory requirements relating to the integrity of pipelines will require Questar Pipeline to spend additional money to comply with these requirements.  Questar Pipeline’s system is subject to extensive laws and regulations related to pipeline integrity.  For example recent federal legislation signed into law in December 2002 includes new guidelines for the U.S. Department of Transportation (“DOT”) and pipeline companies in the areas of testing, education, training and communication.  Compliance with existing and recently executed regulations requires significant expenditures. Additional laws and regulations that may be enacted in the future could significantly increase the amount of these expenditures.

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; changes in gas and oil prices and estimated quantities of gas and oil reserves; changes in rate-regulatory policies; availability of gas and oil properties for sale or exploration and land-access issues; creditworthiness of counterparties; rate of inflation and interest rates; assumptions used in business combinations; weather and natural disasters; the effect of environmental and other regulation; effects of endangered or threatened species regulations; changes in customers' credit ratings; competition from other forms of energy, other pipelines and storage facilities; the effect of accounting policies issued periodically by accounting standard-setting bodies; terrorist attacks or acts of war; changes in the business or financial condition of the Company; and changes in credit ratings.

#

PART I  FINANCIAL INFORMATION

Item 1.  Financial Statements.

QUESTAR PIPELINE COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See notes accompanying consolidated financial statements

#

#

#

QUESTAR PIPELINE COMPANY

NOTE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

Note 1 – Basis of Presentation of Interim Consolidated Financial Statements

The accompanying interim consolidated financial statements of Questar Pipeline, with the exception of the condensed consolidated balance sheet at December 31, 2003, have not been audited by independent public accountants. The unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The interim consolidated financial statements reflect all normal, recurring adjustments and accruals that are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods presented. The preparation of consolidated financial statements and notes in conformity with GAAP requires that management make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from estimates. All significant intercompany accounts and transactions were eliminated in consolidation. Certain reclassifications were made to the 2003 financial statements to conform with the 2004 presentation.

The results of operations for the three- and nine-month periods ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004, due to the risk factors listed in the Forward-Looking Statements section of this report.  Interim consolidated financial statements do not include all of the information and notes required by GAAP for audited annual consolidated financial statements. For further information please refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

#

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

September 30, 2004

(Unaudited)

Results of Operations

Questar Pipeline is a wholly-owned subsidiary of Questar Corporation (“Questar”).  Questar Pipeline provides Federal Energy Regulatory Commission (“FERC”) regulated interstate natural gas transmission and storage, and non-jurisdictional processing and gathering services. Following is a summary of financial results and operating information.

Questar Pipeline’s net income was $8.0 million in the third quarter of 2004 and $23.4 million in the first nine months of 2004 compared with $7.9 million in the third quarter of 2003 and $23.1 million in the first nine months of 2003.  The 2004 results reflect new firm-transmission contracts and higher natural gas liquid revenues offset by higher operating costs.

Questar Pipeline’s revenues grew 7% in the third quarter of 2004 and 5% in the first nine months ended September 30, 2004, compared with the year-earlier periods. Gas transportation volumes declined in the 2004 periods due to reduced demand for electric generation and lower interruptible transportation. These reductions were partially offset by increased volumes transported for Questar Gas due to colder weather. Following is a summary of major changes in Questar Pipeline’s revenues for the three months and nine months ended September 30, 2004, compared with the same periods of 2003.  

#

Questar Pipeline has expanded its transportation system in response to growing regional natural gas production and transportation demand. Questar Pipeline added new transportation contracts in 2003 for deliveries to the Kern River Pipeline at Roberson Creek and for increased deliveries to Questar Gas.

Questar Pipeline’s existing transportation system is nearly fully subscribed. As of September 30, 2004, Questar Pipeline had firm-transportation contracts of 1,644 Mdth per day compared with 1,655 Mdth per day as of December 31, 2003, and 1,614 Mdth per day as of September 30, 2003. The amounts include 80 Mdth per day capacity on the eastern segment of Southern Trails.  Questar Pipeline’s firm-transportation contracts had a weighted average remaining life of 9.1 years as of September 30, 2004.

Questar Gas is Questar Pipeline’s largest transportation customer with contracts for 951 Mdth per day, including 50 Mdth per day for winter-peaking service. The majority of Questar Gas’s transportation contracts extend to 2017.

Questar Pipeline’s primary storage facility is Clay Basin in eastern Utah. This facility is 100% subscribed under long-term contracts. In addition to Clay Basin Questar Pipeline also owns and operates three smaller aquifer gas storage facilities.  Questar Pipeline’s firm storage contracts had a weighted average remaining life of 7.4 years as of September 30, 2004.

Questar Gas has contracted for 26% of firm-storage capacity at Clay Basin for terms extending from four to 15 years and 100% of the firm-storage capacity at the aquifer facilities for terms extending for 15 years.

Questar Pipeline charges FERC-approved transportation and storage rates that are based on straight-fixed-variable rate design. Under this rate design all fixed costs of providing service including depreciation and return on investment are recovered through the demand charge. About 95% of Questar Pipeline costs are fixed and recovered through these demand charges.  Questar Pipeline’s earnings are driven primarily by demand revenues from firm shippers.  Operating costs that vary based on throughput are recovered through volumetric charges. Since demand charges are based on contract levels and volumetric charges are about 5%, period-to-period changes in firm-transportation volumes do not have a significant impact on earnings.

Operating and maintenance expenses increased 17% in the third quarter of 2004 and 9% in the first nine months of 2004 over the corresponding 2003 periods.  The increases for all periods presented were primarily for processing plant fuel gas, employee benefits, insurance and maintenance.  Operating and maintenance expenses per dth transported were $0.150 in the first nine months of 2004 compared with $0.128 in the first nine months of 2003.

Depreciation and property-tax expenses increased in the 2004 periods reflecting increased pipeline investment.

Questar Pipeline is investigating a potential discrepancy of up to 11 bcf between the book volume of cushion gas at Clay Basin and indicated volumes of cushion gas in the storage reservoir based on pressure survey data obtained in recent field tests. The current book volume of the cushion gas is 61.5 bcf with a book value of $99.7 million. The cause and significance of this discrepancy is unknown at this point. Possible explanations include errors in measurement, leaks in the storage reservoir or in wells that permit migration of gas outside of the reservoir, or physical changes in the character of the storage reservoir. Initial reviews of accounting and measurement data confirm the book volume.  Analysis to date has not revealed any leaks or gas migration. Additional tests and analysis, and reservoir modeling are underway to identify the cause and may continue for several years.  Pr essure survey tests were conducted during October 2004 to evaluate the reservoir when it was nearly full.  The results of these tests are being evaluated. Questar Pipeline at this time does not know if the volume of gas actually in the reservoir is less than book volume. Questar Pipeline will not know the financial impact, if any, until the cause of the disparity is determined.  Investigations indicate that storage service obligations will continue to be met.

Questar Pipeline confirmed that the disparity first occurred in the mid-1990s, when the working capacity of the reservoir was expanded.  The disparity may be due to gas being pushed into portions of the reservoir that are ineffective.  The gas may still be in the reservoir but not detectible with short-duration pressure surveys.

If Questar Pipeline determines that the discrepancy is due to changes in the physical conditions in the storage reservoir and not of loss of cushion gas, the financial impact may include some additional investment in cushion gas to meet service obligations.  If the discrepancy is due to lost-and-unaccounted-for-gas in the measurement process, Questar Pipeline would expense the cost of replacement gas and could file with the FERC to recover costs from customers.

During first quarter 2004 Questar Pipeline obtained long-term contracts to support a $54 million expansion of its central Utah transmission system. The expansion will add 102 Mdth per day of capacity from the Piceance and Uinta basins to the Kern River pipeline, a power-generation facility, and Questar Gas’s distribution system.  Questar Pipeline will start construction in the summer of 2005 for a late-2005 in-service date.  On October 12, 2004, Questar Pipeline filed an application with the FERC to construct the expansion.  Annual revenues from this expansion will be about $9.7 million and net income of $800,000 in 2005.

Questar Pipeline also obtained a long-term contract supporting a $14 million extension from the west end of its Mainline 104 near Goshen, Utah to a new power plant being built near Mona, Utah. This 190 Mdth line is under construction and is scheduled to be in-service by the end of 2004.  This extension is expected to generate about $2.5 million of revenues and $800,000 of net income in 2005.

Questar Transportation Services, a subsidiary of Questar Pipeline, owns non-jurisdictional gathering lines and a processing plant near Price, Utah.  The plant was built in 1999 to process gas on behalf of Questar Gas. Questar Gas has contracted for 100% of the plant’s firm capacity and pays the cost of service for operating the plant.

The western segment of the Southern Trails Pipeline, which runs from the California-Arizona border to Long Beach, California, is currently not in service.  Questar Pipeline’s investment in this asset is approximately $51 million.  Questar Pipeline is actively seeking customers, including the Los Angeles Department of Water and Power (“LADWP”).  LADWP budgeted funds to acquire a gas pipeline and issued a request for proposal on October 21, 2004, for gas transportation service to a power-generation facility. Questar Pipeline believes the western segment is a unique solution for LADWP’s gas transportation needs and will file a response to the request for proposal by the end of November.  

FERC Order No. 2004, which defines standards of conduct for transmission providers, became effective on September 22, 2004.  These standards of conduct are designed to ensure that employees engaged in transmission system operations function independently from employees of marketing and energy affiliates.  In addition a transmission provider must treat all transmission customers on a non-discriminatory basis and must not operate its transmission system to preferentially benefit its marketing or energy affiliates.  Questar Pipeline has determined that Market Resources, Questar E&P, Energy Trading and Wexpro are marketing or energy affiliates.  Base on clarification from the FERC, Questar Pipeline believes that Questar Gas is not an energy affiliate.  Questar Pipeline and other Questar companies have adopted new procedures to comply with this order.

Questar Pipeline is required to comply with the Pipeline Safety Improvement Act of 2002 (the “Safety Act”).  This act and rules issued by the DOT require interstate pipelines and local distribution companies to implement a 10-year program of risk analysis, pipeline assessment and remedial repair for transmission pipelines located in high-consequence areas such as populated locations.  Questar Pipeline estimates that its annual cost to comply with the act will be approximately $1 million, not including costs of pipeline replacement, if necessary.

Questar Pipeline made an annual tracking filing with the FERC on November 28, 2003, to reflect an increase in its fuel-gas reimbursement percentage from 1.4% to 1.8%.  Several shippers intervened and protested the filing.  On December 31, 2003, the FERC accepted Questar Pipeline’s filing, effective January 1, 2004.  Subsequently several parties requested a rehearing of the December order.  The FERC held a technical rehearing conference on July 29, 2004, and allowed all parties to file comments.  The FERC will issue a decision on the rehearing requests, but there is no specific time frame for the decision.

Accounting change

On January 1, 2003 the Company adopted a new accounting standard, SFAS 143, “Accounting for Asset Retirement Obligations” and recorded a cumulative effect that reduced net income by $133,000.

Liquidity and Capital Resources

Operating Activities

Net cash provided from operating activities decreased 2% in the first nine months of 2004 compared with the same period of 2003 due to changes in operating assets and liabilities.

Investing Activities

Capital expenditures decreased 23% in 2004 compared with 2003. Questar Pipeline budgeted capital expenditures of $45.4 million in 2004 and $102.3 million in 2005.

Financing Activities

Net cash flow provided from operating activities was more than sufficient to fund capital expenditures and pay dividends in the first nine months of 2004. The remaining cash flow was used to repay debt. As a result total debt was 55% of total capital at September 30, 2004. The Company expects capital expenditures for 2004 will be funded from cash flow from operations.

Item 4. Controls and Procedures.

(a)  Evaluation of Disclosure Controls and Procedures.  The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”).  Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company, including consolidated subsidiaries, required to be included in the Company's reports filed or submitted under the Exchange Act.

(b)  Changes in Internal Controls.  Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls.

Part II

OTHER INFORMATION

Item 6.

Exhibits and Reports on Form 8-K.

a.

The following exhibits are filed as part of this report:

Exhibit No.

Exhibit

31.1.

Certification signed by Alan K. Allred, Questar Pipeline's Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2.

Certification signed by S. E. Parks, Questar Pipeline's Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

b.

Questar Pipeline did not file a Current Report on Form 8-K during the second quarter of 2004.

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, 2004

/s/A. K. Allred___________________________

Date

Alan K. Allred

President and Chief Executive Officer

November 10, 2004

/s/S. E. Parks_________________________

Date

S. E. Parks

Vice President and Chief Financial Officer

#

Exhibits List

Exhibit No.

Exhibit

31.1.

Certification signed by Alan K. Allred, Questar Pipeline's Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2.

Certification signed by S. E. Parks, Questar Pipeline's Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

#

Exhibit No. 31.1.

#

CERTIFICATION

I, Alan K. Allred, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Questar Pipeline Company.

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function);

a)

all significant deficiencies in the design or operation of internal controls that could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls;

6.

The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

November 10, 2004        

/s/Alan K. Allred_________________________

Date

Alan K. Allred

President and Chief Executive Officer

#

Exhibit No. 31.2.

CERTIFICATION

I, S. E. Parks, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Questar Pipeline Company.

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function);

a)

all significant deficiencies in the design or operation of internal controls that could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls;

6.

The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

November 10, 2004

/s/S. E. Parks_________________________

Date

S. E. Parks

Vice President and Chief Financial Officer

#