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QUESTAR PIPELINE CO - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

April 30, 2014

The following information updates the discussion of Questar's financial condition provided in its 2013 Form 10-K and analyzes the changes in the results of operations between the three and 12 months ended March 31, 2014 and 2013. For definitions of commonly used terms found in this Quarterly Report on Form 10-Q, please refer to the "Glossary of Commonly Used Terms" provided in Questar's 2013 Form 10-K. RESULTS OF OPERATIONS



Following are comparisons of net income (loss) by line of business:

3 Months Ended Mar. 31, 12 Months Ended Mar. 31, 2014 2013 Change 2014 2013 Change (in millions, except per-share amounts) Questar Gas $ 39.6$ 37.0$ 2.6$ 55.4$ 49.2$ 6.2 Wexpro 31.8 26.3 5.5 116.1 105.9 10.2 Questar Pipeline(1) 15.7 15.8 (0.1 ) 8.1 63.9 (55.8 ) Corporate and other (2.0 ) (6.2 ) 4.2 (6.2 ) (9.3 ) 3.1 Net income $ 85.1$ 72.9$ 12.2$ 173.4$ 209.7$ (36.3 ) Add: after-tax asset impairment charge(1) - - - 52.4 - 52.4 Adjusted earnings $ 85.1$ 72.9$ 12.2$ 225.8$ 209.7$ 16.1 Earnings per share - diluted $ 0.48$ 0.41$ 0.07$ 0.98$ 1.19$ (0.21 ) Add: diluted loss per share attributable to impairment(1) - - - 0.29 - 0.29



Adjusted earnings per share - diluted $ 0.48$ 0.41$ 0.07

$ 1.27$ 1.19$ 0.08

Weighted-average diluted shares 176.1 176.1 -



176.1 176.5 (0.4 )

(1) Impairment of the eastern segment of Questar Pipeline's Southern Trails Pipeline.

Management believes that the above non-GAAP financial measures, indicated by the word "Adjusted" in their captions, provide an indication of the Company's ongoing results of operations due to the one-time nature of the impairment (see Note 11). QUESTAR GASQuestar Gas net income was $39.6 million in the first quarter of 2014 compared to $37.0 million in the first quarter of 2013. Net income was $55.4 million in the 12 months ended March 31, 2014, compared to $49.2 million in the year-earlier period. Questar Gas, because of the seasonal nature of its business, typically reports income in the first and fourth quarters of the year and losses in the second and third quarters of the year.



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Following is a summary of Questar Gas financial and operating results:

3 Months Ended Mar. 31, 12 Months Ended Mar. 31, 2014 2013 Change 2014 2013 Change (in millions) Net Income Revenues Residential and commercial sales $ 376.4$ 399.9$ (23.5 )$ 886.8$ 841.0$ 45.8 Industrial sales 6.7 6.7 - 28.1 27.3 0.8 Transportation for industrial customers 4.3 3.5 0.8 15.2 12.6 2.6 Service 1.5 1.4 0.1 4.9 4.4 0.5 Other 7.4 7.1 0.3 28.5 28.7 (0.2 ) Total Revenues 396.3 418.6 (22.3 ) 963.5 914.0 49.5 Cost of natural gas sold 254.6 290.6 (36.0 ) 614.6 587.7 26.9 Margin 141.7 128.0 13.7 348.9 326.3 22.6 Other Operating Expenses Operating and maintenance 39.8 33.7 6.1 119.2 111.8 7.4 General and administrative 13.8 12.7 1.1 53.6 52.2 1.4 Retirement incentive - - - - 2.4 (2.4 ) Depreciation and amortization 13.2 12.1 1.1 50.8 47.5 3.3 Other taxes 5.1 5.2 (0.1 ) 17.9 17.0 0.9 Total Other Operating Expenses 71.9 63.7 8.2 241.5 230.9 10.6 OPERATING INCOME 69.8 64.3 5.5 107.4 95.4 12.0 Interest and other income 1.3 1.2 0.1 5.2 5.5 (0.3 ) Interest expense (7.1 ) (5.8 ) (1.3 ) (23.6 ) (23.1 ) (0.5 ) Income taxes (24.4 ) (22.7 ) (1.7 ) (33.6 ) (28.6 ) (5.0 ) NET INCOME $ 39.6$ 37.0$ 2.6$ 55.4$ 49.2$ 6.2 Operating Statistics Natural gas volumes (MMdth) Residential and commercial sales 43.9 53.1 (9.2 ) 105.7 105.7 - Industrial sales 1.1 1.2 (0.1 ) 4.3 4.7 (0.4 ) Transportation for industrial customers 20.5 16.9 3.6 68.1 63.3 4.8 Total industrial 21.6 18.1 3.5 72.4 68.0 4.4 Total deliveries 65.5 71.2 (5.7 ) 178.1 173.7 4.4 Natural gas revenue (per dth) Residential and commercial sales $ 8.57$ 7.53$ 1.04$ 8.39$ 7.95$ 0.44 Industrial sales 6.63 5.85 0.78 6.67 5.85 0.82 Transportation for industrial customers 0.21 0.21 - 0.22 0.20 0.02 Colder (warmer) than normal temperatures (16%) 18% (34%) (8%) (2%) (6%) Temperature-adjusted usage per customer (dth) 50.0 47.6 2.4 110.4 105.5 4.9 Customers at March 31, (in thousands) 953 937 16 Margin Analysis Questar Gas margin (revenues minus gas costs) increased $13.7 million in the first quarter of 2014 compared to the first quarter of 2013, and increased $22.6 million in the 12 months ended March 31, 2014, compared to the 12 months ended March 31, 2013. Questar 2014 Form 10-Q 25



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Following is a summary of major changes in Questar Gas margin:

3 Months 12 Months 2014 vs. 2013 2014 vs. 2013 (in millions) Customer growth $ 1.7 $ 4.2 Customers switching from sales to transportation service 0.8 2.2 Change in rates 2.8 3.1 Infrastructure-replacement cost recovery 0.7 5.2 Demand-side management cost recovery 7.8 8.9 Recovery of gas-cost portion of bad-debt costs (0.2 ) (1.0 ) Other 0.1 - Increase $ 13.7$ 22.6



At March 31, 2014, Questar Gas served 952,516 customers, up 1.6% from 937,447 at March 31, 2013. Customer growth increased the margin by $1.7 million in the first quarter of 2014 and $4.2 million in the 12 months ended March 31, 2014.

Effective March 1, 2014, Questar Gas increased its rates in Utah by $7.6 million as a result of a general rate case filed in Utah in July 2013. The order in this rate case authorized an allowed return on equity of 9.85%. Questar Gas benefits from a conservation enabling (revenue decoupling) tariff. Under this tariff, Questar Gas is allowed to earn a specified revenue for each general service customer per month. Differences between the allowed revenue and the amount billed to customers are recovered from customers or refunded to customers through future rate changes. Because of this tariff, changes in usage per customer do not impact the company's margin. In addition, a weather-normalization adjustment of customer bills offsets the revenue impact of temperature variations. Questar Gas has an infrastructure cost-tracking mechanism that allows the company to place into rate base and earn on capital expenditures associated with a multi-year natural gas infrastructure-replacement program, and do it upon the completion of each project. Questar Gas recognized $0.7 million of increased margin due to the infrastructure cost-tracking mechanism in the first quarter of 2014 and $5.2 million in the 12 months ended March 31, 2014. Higher recovery of demand-side management (DSM) costs increased Questar Gas margin during the three- and 12-month periods ended March 31, 2014. DSM costs are incurred to promote energy conservation by customers. Changes in the margin contribution from DSM recovery revenues are offset by equivalent changes in program expenses. Cost of Natural Gas Sold Cost of natural gas sold decreased 12% in the first quarter of 2014, and increased 5% in the 12 months ended March 31, 2014, compared to the same periods of 2013. The decrease in the first quarter 2014 was primarily due to lower volumes resulting from warmer weather. The increase for the 12 months ended March 31, 2014 was due to higher gas prices and higher volumes resulting from customer growth. Questar Gas accounts for purchased-gas costs in accordance with procedures authorized by the Public Service Commission of Utah (PSCU) and the Wyoming Public Service Commission (PSCW). Purchased-gas costs that are different from those provided for in present rates are accumulated and recovered or credited through future rate changes. As of March 31, 2014, Questar Gas had a $1.9 million over-collected balance in the purchased-gas adjustment account representing amounts recovered from customers in excess of costs incurred. Other Expenses Operating and maintenance expenses increased 18% in the first quarter of 2014, and increased 7% in the 12 months ended March 31, 2014, compared to the same periods of 2013. These increases included higher DSM costs of $7.8 million, and $8.9 million for the three- and 12-month periods, respectively. The DSM costs are for the company's energy efficiency program and are recovered from customers through periodic rate changes. Excluding DSM costs, operating and maintenance expenses decreased 7% in the first quarter of 2014 and decreased 2% in the 12 months ended March 31, 2014, compared to the 2013 periods. General and administrative expenses increased 9% and 3% in the three and 12 months ended March 31, 2014, respectively, compared to the prior year periods due to higher corporate allocated costs. Operating, maintenance, general and administrative expenses per customer, exclusive of DSM costs, were $142 in the 12 months ended March 31, 2014, compared to $144 in the 12 months ended March 31, 2013.



Questar 2014 Form 10-Q 26

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Other taxes were essentially flat in the first quarter of 2014 and increased 5% in the 12 months ended March 31, 2014, compared to year-earlier periods due to increased property taxes. Depreciation and amortization expense increased 9% in the first quarter of 2014 and 7% for the 12 months ended March 31, 2014, compared to the 2013 periods. The higher expense was caused by plant additions driven by customer growth and infrastructure replacements.



WEXPRO

Wexpro reported net income of $31.8 million in the first quarter of 2014, compared to $26.3 million in the first quarter of 2013, a 21% increase. Wexpro earned $116.1 million for the 12 months ended March 31, 2014, compared to $105.9 million for the year-earlier period. Following is a summary of Wexpro financial and operating results: 3 Months Ended Mar. 31, 12 Months Ended Mar. 31, 2014 2013 Change 2014 2013 Change (in millions) Net Income Revenues Operator service fee $ 89.6$ 72.6$ 17.0$ 311.0$ 280.0$ 31.0 Oil and NGL sales 9.8 10.4 (0.6 ) 40.3 38.2 2.1 Natural gas sales and other 2.0 0.1 1.9 6.9 0.2 6.7 Total Revenues 101.4 83.1 18.3 358.2 318.4 39.8 Operating Expenses Operating and maintenance 7.3 7.1 0.2 28.0 26.7 1.3 Gathering and other handling 0.4 - 0.4 1.2 - 1.2 General and administrative 7.8 7.3 0.5 29.2 27.8 1.4 Retirement incentive - - - - 0.2 (0.2 ) Production and other taxes 10.1 7.2 2.9 31.2 21.1 10.1 Depreciation, depletion and amortization 27.3 21.4 5.9 91.7 80.1 11.6 Oil and NGL income sharing - 0.3 (0.3 ) 0.3 2.0 (1.7 ) Total Operating Expenses 52.9 43.3 9.6 181.6 157.9 23.7 Net gain (loss) from asset sales - - - (0.2 ) 0.2 (0.4 ) OPERATING INCOME 48.5 39.8 8.7 176.4 160.7 15.7 Interest and other income 0.3 1.2 (0.9 ) 4.1 3.2 0.9 Interest expense - - - (0.1 ) - (0.1 ) Income taxes (17.0 ) (14.7 ) (2.3 ) (64.3 ) (58.0 ) (6.3 ) NET INCOME $ 31.8$ 26.3$ 5.5$ 116.1$ 105.9$ 10.2 Operating Statistics Production volumes Natural gas - cost-of-service deliveries (Bcf) 18.5 15.4 3.1 62.3 57.9 4.4 Natural gas - sales (Bcf) 0.4 - 0.4 1.8 - 1.8 Oil and NGL (Mbbl) 166 165 1 618 674 (56 ) Natural gas average sales price (per Mcf) $ 4.68 $ - $ 4.68$ 3.97 $ - $ 3.97 Oil and NGL average sales price (per bbl) $ 84.60$ 83.22$ 1.38$ 85.58$ 79.60$ 5.98 Investment base at March 31, (in millions) $ 687.7$ 526.8$ 160.9 Revenues Wexpro earned a 19.3% after-tax return on its average investment base for the 12 months ended March 31, 2014. Wexpro 2014 operating results benefited from a higher average investment base compared to the prior year periods. Pursuant to the terms of the Wexpro Agreement, Wexpro recovers its costs and receives an after-tax return on its investment base. Wexpro's investment base includes its costs of acquired properties and commercial wells and related facilities adjusted for working capital and



Questar 2014 Form 10-Q 27

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reduced for deferred income taxes and accumulated depreciation, depletion and amortization. The investment base grew by 31% in the 12 months ended March 31, 2014. The increase was due to investment in commercial wells and the addition of the Trail acquisition properties to the investment base in the first quarter of 2014, partially offset by additional deferred income taxes. Following is a summary of changes in the Wexpro investment base: 12 Months Ended Mar. 31, 2014 2013 (in millions) Beginning investment base $ 526.8$ 492.5 Property acquisitions 103.7 - Successful development wells 161.8 126.1 Depreciation, depletion and amortization (86.1 ) (75.7 ) Change in deferred income taxes (18.5 ) (16.1 ) Ending investment base $ 687.7$ 526.8Wexpro produced 18.5 Bcf of cost-of-service natural gas for Questar Gas during the first quarter of 2014, up 20% from the first quarter of 2013. Wexpro produced 62.3 Bcf of cost-of-service gas in the 12 months ended March 31, 2014, compared to 57.9 Bcf in the 12 months ended March 31, 2013. Wexpro natural gas production provides about 60% of Questar Gas's annual supply requirements. Revenues from oil and natural gas liquids (NGL) sales decreased 6% in the first quarter of 2014 compared to the first quarter of 2013, and were up 5% in the 12 months ended March 31, 2014 over the year-earlier period. The decrease for the quarter was due to lower volumes of oil and NGL for which income is shared with Questar Gas customers pursuant to the Wexpro Agreement. The 12-month increase was due to higher prices of shared oil and NGL. Revenues from natural gas sales were primarily attributable to production from the Trail acquisition prior to its February 1, 2014 inclusion in the Wexpro II Agreement. See below and Note 12.



Expenses

Operating and maintenance expenses were up 3% in the first quarter of 2014, and 5% in the 12-month period ended March 31, 2014, compared to prior year periods. The increases were due largely to higher production. Lease operating expense per Mcfe was $0.37 in the first quarter of 2014 compared to $0.43 in the first quarter of 2013. General and administrative expenses were higher in the three- and 12-month periods ended March 31, 2014, compared to prior year periods. The increases were due to higher employee and corporate allocated costs. Production and other taxes were higher in the three and 12 months ended March 31, 2014, compared to prior year periods. The variability in production and other taxes is due to changes in the production volumes and the prices of natural gas, oil and NGL.



Depreciation, depletion and amortization expense increased 28% in the first quarter of 2014 and increased 14% in the 12 months ended March 31, 2014, compared to the 2013 periods. The increases were due to higher production volumes and investment in natural gas properties, wells and facilities.

Wexpro II Wexpro and Questar Gas have received approval of the PSCU and PSCW (the Commissions) for a Wexpro II Agreement to add properties under the cost-of-service pricing methodology for the benefit of Questar Gas customers. The agreement is modeled after the terms of the original Wexpro Agreement. Under the Wexpro II Agreement, Wexpro may acquire gas development properties and Questar Gas may submit an application to the Commissions to treat these properties similar to the original Wexpro properties. If the Commissions approve the applications, the gas will be developed for the benefit of Questar Gas customers. Wexpro will be entitled to a return on the acquisition costs based on Questar Gas's approved cost of capital. Future development investment will earn returns consistent with the original Wexpro Agreement. Acquisition of Producing Properties and Inclusion in Wexpro II On September 4, 2013, Wexpro completed the transaction announced in July 2013 to acquire an additional interest in natural gas-producing properties in the Trail Unit of southwestern Wyoming'sVermillion Basin for $104.3 million, after post-closing adjustments. In January 2014, the Commissions approved a stipulation for inclusion of these properties in the Wexpro II Agreement, effective February 1, 2014. As part of this stipulation, Wexpro agreed to a provision to manage the combined production from the original Wexpro properties and the Trail acquisition to 65% of Questar Gas's annual forecasted demand. Beginning in June 2015 through May 2016 and for each subsequent 12-month period, if the combined annual production



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exceeds 65% of the forecasted demand and the cost-of-service price is greater than the Questar Gas purchased-gas price, an amount equal to the excess production times the excess price will be credited back to Questar Gas customers. Wexpro may also sell production to manage the 65% level and credit back to Questar Gas customers the higher of market price or the cost-of-service price times the sales volumes. QUESTAR PIPELINEQuestar Pipeline reported first quarter 2014 net income of $15.7 million compared with $15.8 million in the first quarter of 2013. Questar Pipeline earned $8.1 million in the 12 months ended March 31, 2014, compared to $63.9 million in the 12 months ended March 31, 2013. The primary driver of the significant decrease in earnings for the 12 months ended March 31, 2014 was a $52.4 million after-tax write-down of the eastern segment of Southern Trails Pipeline in the third quarter of 2013.



Questar 2014 Form 10-Q 29

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Following is a summary of Questar Pipeline financial and operating results:

3 Months Ended Mar. 31, 12 Months Ended Mar. 31, 2014 2013 Change 2014 2013 Change (in millions) Net Income Revenues Transportation $ 49.4$ 49.2$ 0.2$ 194.8$ 195.2$ (0.4 ) Storage 9.6 9.7 (0.1 ) 37.2 38.4 (1.2 ) NGL sales - transportation 2.0 2.0 - 7.7 7.0 0.7 NGL sales - field services - 0.9 (0.9 ) 1.0 6.8 (5.8 ) Energy services 2.8 3.0 (0.2 ) 12.5 14.5 (2.0 ) Natural gas sales 1.5 0.8 0.7 4.5 5.2 (0.7 ) Other 2.0 2.2 (0.2 ) 8.0 9.2 (1.2 ) Total Revenues 67.3 67.8 (0.5 ) 265.7 276.3 (10.6 ) Operating Expenses Operating and maintenance 8.1 7.4 0.7 33.2 34.0 (0.8 ) General and administrative 11.5 12.4 (0.9 ) 45.8 50.3 (4.5 ) Retirement incentive - - - - 0.9 (0.9 ) Depreciation and amortization 13.6 14.1 (0.5 ) 55.0 54.9 0.1 Asset impairment - - - 80.6 - 80.6 Other taxes 2.3 2.5 (0.2 ) 9.1 9.1 - Cost of sales 1.7 1.2 0.5 6.6 7.4 (0.8 ) Total Operating Expenses 37.2 37.6 (0.4 ) 230.3 156.6 73.7 Net gain from asset sales - - - - 2.7 (2.7 ) OPERATING INCOME 30.1 30.2 (0.1 ) 35.4 122.4 (87.0 ) Interest and other income 0.3 0.3 - 1.8 0.9 0.9 Income from unconsolidated affiliate 0.9 0.9 - 3.7 3.7 - Interest expense (6.5 ) (6.5 ) - (25.8 ) (26.2 ) 0.4 Income taxes (9.1 ) (9.1 ) - (7.0 ) (36.9 ) 29.9 NET INCOME $ 15.7$ 15.8$ (0.1 )$ 8.1$ 63.9$ (55.8 ) Operating Statistics Natural gas transportation volumes (MMdth) For unaffiliated customers 169.7 181.8 (12.1 ) 741.3 783.3 (42.0 ) For Questar Gas 46.2 51.9 (5.7 ) 113.8 115.8 (2.0 ) Total transportation 215.9 233.7 (17.8 ) 855.1 899.1 (44.0 ) Transportation revenue (per dth) $ 0.23$ 0.21$ 0.02$ 0.23$ 0.22$ 0.01 Net firm-daily transportation demand at March 31, (in Mdth) 5,068 5,119 (51 ) Natural gas processing NGL sales (Mbbl) 32 47 (15 ) 148 238 (90 ) NGL average sales price (per bbl) $ 62.18$ 62.64$ (0.46 )$ 58.53$ 58.23$ 0.30 Revenues As of March 31, 2014, Questar Pipeline had net firm transportation contracts of 5,068 Mdth per day, including 1,020 Mdth per day from Questar Pipeline's 50% ownership of White River Hub, compared with 5,119 Mdth per day as of March 31, 2013. Questar Pipeline earns more revenue from Questar Gas than from any other single customer, with contracts for 916 Mdth per day during the heating season and 841 Mdth per day during off-peak months. The majority of Questar Gas transportation contracts extend through mid-2017. Rockies Express Pipeline has leased capacity on the Questar Overthrust Pipeline for 625



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Mdth per day through 2027. Wyoming Interstate Company has contracts on Questar Overthrust Pipeline for 544 Mdth per day with a weighted-average remaining life of 7.2 years. White River Hub's contracts have a weighted-average remaining life of 12.1 years. Questar Pipeline owns and operates the Clay Basin underground storage complex in eastern Utah. This facility is 100% subscribed under long-term contracts. In addition to Clay Basin, Questar Pipeline owns and operates three smaller aquifer gas storage facilities. Questar Gas has contracted for 26% of firm storage capacity at Clay Basin with contracts expiring in 2017, 2019 and 2020 and 100% of the firm storage capacity at the aquifer facilities with the contracts extending through 2018. Storage revenue was essentially flat in the first quarter of 2014 compared to the first quarter of 2013 and fell 3% for the 12 months ended March 31, 2014 relative to the 2013 period due to an expired park-and-loan contract. 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.



Questar Pipeline has three primary sources of NGL revenue. These sources include two major regulated processing facilities (transportation NGL sales) and an unregulated subsidiary that provides third-party processing services (field services NGL sales).

Regulated processing facilities at Clay Basin condition gas to meet pipeline gas-quality specifications. These facilities are part of an agreement that allows Questar Pipeline to recover any shortfall between the NGL revenues and the cost of service for conditioning the gas. Other processing facilities on Questar Pipeline's transmission system are not subject to the Clay Basin gas processing agreement. NGL sales for the regulated operations were flat in the first quarter of 2014 and increased 10% in the 12 months ended March 31, 2014, compared to the prior year periods. The increase in the 12-month period was primarily driven by an 11% increase in volumes. There were no NGL sales for the unregulated subsidiary in the first quarter of 2014 and sales decreased 85% in the 12 months ended March 31, 2014, compared to the prior year period due to upstream processing. Energy services revenue was 7% lower in the first quarter of 2014 compared to the first quarter of 2013 and was 14% lower in the 12 months ended March 31, 2014 when compared to 2013 due to lower demand for products and services driven by lower drilling activity in the Rockies.



Periodically, Questar Pipeline sells natural gas to settle gas imbalances. Generally, revenue received from the sale of natural gas approximates cost; however Questar Pipeline realized a $1.3 million gain on the sale of natural gas in the fourth quarter of 2012.

Expenses

Operating and maintenance expenses increased 9% in the first quarter of 2014, and decreased 2% in the 12 months ended March 31, 2014, compared to the corresponding 2013 periods. The increase for the quarter was largely driven by higher maintenance and communication expenses. The decrease in the 12-month period was driven by lower maintenance expense and lower processing product costs. General and administrative expenses decreased 7% in the first quarter of 2014, and decreased 9% in the 12 months ended March 31, 2014, compared to the 2013 periods. The first quarter decrease was due to lower employee costs. The 12-month decrease was primarily due to lower communication expense and consulting fees. Operating, maintenance, general and administrative expenses per dth transported were $0.09 in the first quarter of 2014 compared to $0.08 in the first quarter of 2013. Depreciation and amortization expense decreased 4% in the first quarter and remained unchanged for the 12 months ended March 31, 2014, compared to the 2013 periods. The modest decrease in the first quarter and the flat expense for the 12 months ended March 31, 2014 resulted from lower property, plant and equipment due to the impairment of the eastern segment of Southern Trails Pipeline. Questar Southern Trails Pipeline Questar Pipeline extended its agreement with an affiliate of Spectra Energy Corp through 2014 to evaluate and potentially recommission the western portion of its Southern Trails Pipeline to its original purpose as a crude oil transport pipeline and to develop a rail terminal to offload crude into the pipeline for transportation to refineries in Southern California. This project continues in the marketing and engineering phase and a decision whether or not to proceed with the development is expected later in 2014. If the decision is made to proceed, the line could be placed in service by late 2016. Questar Pipeline's net book Questar 2014 Form 10-Q 31



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value of the western segment of Southern Trails Pipeline is approximately $22 million. Questar Pipeline has evaluated this asset for impairment and does not believe that it is impaired. During the third quarter of 2013, Questar Pipeline updated its five-year forecast for the eastern segment of Southern Trails Pipeline, which resulted in revised projections of higher operating expenses including right-of-way and pipeline safety costs. Current and projected market rates for natural gas transportation between the San Juan Basin and California markets did not cover these increasing operating expenses over the forecast period. Because of changes in expected cash flows in the third quarter of 2013 and the lack of progress in selling or recontracting this pipeline, Questar Pipeline recorded a noncash impairment of its entire investment in the eastern segment of Southern Trails Pipeline of $80.6 million, or $52.4 million after income taxes.



Other Consolidated Results

Questar Fueling Other consolidated results include losses from the start-up of Questar Fueling Company (Questar Fueling) operations of $0.3 million in the first quarter of 2014, $0.2 million in the first quarter of 2013, $0.9 million in the 12 months ended March 31, 2014, and $0.6 million in the 12 months ended March 31, 2013. Questar Fueling began its operation in mid-2012 to provide natural gas fueling infrastructure nationally, with specific focus on the medium- to heavy-duty vehicle market. Questar Fueling placed two facilities in service during 2013 and has contracts to develop several additional facilities.



Interest Expense Consolidated interest expense was 9% higher in the first quarter of 2014 compared to the first quarter of 2013 due to higher long-term debt balances.

Income Taxes Questar's effective combined federal and state income tax rate was 37.1% in the first quarter of 2014 compared to 39.7% in the first quarter of 2013. The higher rate in the first quarter of 2013 was due to adjustments to the 2013 state income taxes for the consolidated Questar return that were in excess of state income taxes calculated on a separate return basis for the operating companies. Retirement Incentive In 2012 Questar offered a retirement incentive to eligible employees of six months additional salary. Approximately 100 employees accepted this offer and retired in early 2013. The $4.9 million incentive cost was recognized in the fourth quarter of 2012.



LIQUIDITY AND CAPITAL RESOURCES

Operating Activities Net cash provided by operating activities increased 3% in the first quarter of 2014 compared to the first quarter of 2013 due primarily to higher net income. Net cash provided by operating activities is presented below: 3 Months Ended March 31, 2014 2013 Change (in millions) Net income $ 85.1$ 72.9$ 12.2 Noncash adjustments to net income 59.9 79.3 (19.4 ) Changes in operating assets and liabilities 67.9 53.8



14.1

Net cash provided by operating activities $ 212.9$ 206.0$ 6.9

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Investing Activities Capital expenditures for the first quarter of 2014 and 2013 and a forecast for calendar year 2014 are presented below: Forecast 12 Months Ending 3 Months Ended March 31, December 31, 2014 2013 2014 (in millions) Questar Gas $ 48.9$ 31.7 $ 190 Wexpro 6.9 37.8 100 Questar Pipeline 8.5 14.1 120 Corporate and other 5.4 0.4 30 Total capital expenditures $ 69.7$ 84.0 $ 440 Questar Gas's 2014 capital-spending forecast of about $190 million includes investments to provide service to approximately 16,300 additional customers, distribution-system upgrades and expansions, and infrastructure replacements of about $65 million. Wexpro expects to spend about $100 million in 2014 for developmental gas drilling and property acquisitions. Questar Pipeline's 2014 capital-spending forecast is about $120 million for system expansions and pipeline replacements. Financing Activities In the first quarter of 2014, the Company reduced short-term debt by $119.0 million from the excess of net cash provided by operating activities over net cash used in investing activities. Questar issues commercial paper to meet short-term financing requirements. The commercial-paper program is supported by a five-year revolving credit facility with various banks that provides back-up credit liquidity. Credit commitments under the revolving credit facility totaled $750.0 million at March 31, 2014, with no amounts borrowed. In April 2013, Questar increased the size of its revolving credit facility from $500.0 million to $750.0 million and extended its maturity to April 2018. Commercial paper outstanding amounted to $157.0 million at March 31, 2014, compared with $202.0 million a year earlier. In December 2013, Questar Gas issued $90 million of 30-year notes with an interest rate of 4.78% and $60 million of 35-year notes with an interest rate of 4.83%. Proceeds from the debt issuance were used to repay existing indebtedness and for general corporate purposes.



The Company believes current credit commitments are adequate for its working capital and short-term financing requirements during 2014. The Company also believes it will have adequate access to long-term capital based on current credit markets and its investment-grade credit ratings.

At March 31, 2014, combined short-term debt, long-term debt and capital lease obligation were 53% and equity was 47% of total capital. The Company does not expect the ratio of debt in the capital structure to materially change over the next several years, except for seasonal variation in short-term debt for working capital requirements. Questar has approval to repurchase up to 1 million shares of its common stock per year to offset share dilution from shares issued under Company incentive plans. Questar did not repurchase any shares under this program during the first quarter of 2014 or 2013.


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