NORTHWEST PIPELINE CORP - 10-Q Quarterly Report

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

FORM 10-Q

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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2003

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 Number 1-7414

NORTHWEST PIPELINE CORPORATION
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(Exact name of registrant as specified in its charter)

DELAWARE 87-0269236
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

295 Chipeta Way
Salt Lake City, Utah 84108
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(Address of principal executive offices and Zip Code)

(801) 583-8800
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(Registrant's telephone number, including area code)

No Change
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(Former name, former address and former fiscal year,
if changed since last report)

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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).

Yes No X
--- ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Outstanding at November 6, 2003
- ----------------------------- -------------------------------
Common stock, $1.00 par value 1,000 shares

The registrant meets the conditions set forth in General Instruction (H)(1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.

NORTHWEST PIPELINE CORPORATION
INDEX

Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although Northwest Pipeline Corporation
believes such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be reached. Such statements are
made in reliance on the "safe harbor" protections provided under the Private
Securities Litigation Reform Act of 1995. Additional information about issues
that could lead to material changes in performance is contained in Northwest
Pipeline Corporation's 2002 Annual Report on Form 10-K and 2003 first and second
quarter reports on Form 10-Q.

1

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

NORTHWEST PIPELINE CORPORATION
CONDENSED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)

================================================================================

See accompanying notes.

2

NORTHWEST PIPELINE CORPORATION
CONDENSED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)

================================================================================

See accompanying notes.

3

NORTHWEST PIPELINE CORPORATION
CONDENSED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)

================================================================================

See accompanying notes.

4

NORTHWEST PIPELINE CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)

See accompanying notes.

5

NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CORPORATE STRUCTURE AND CONTROL

Northwest Pipeline Corporation ("Pipeline") is a wholly-owned
subsidiary of Williams Gas Pipeline Company LLC ("WGP"). WGP is a wholly-owned
subsidiary of The Williams Companies, Inc. ("Williams").

BASIS OF PRESENTATION

Pipeline's 1983 acquisition by Williams has been accounted for using the
purchase method of accounting. Accordingly, an allocation of the purchase price
was assigned to the assets and liabilities of Pipeline, based on their estimated
fair values at the time of the acquisition. Williams has not pushed down the
purchase price allocation (amounts in excess of original cost) of $85.9 million,
as of September 30, 2003, to Pipeline as current Federal Energy Regulatory
Commission ("FERC") policy does not permit Pipeline to recover through its rates
amounts in excess of original cost. The accompanying financial statements
reflect Pipeline's original basis in its assets and liabilities.

The condensed financial statements have been prepared from the books and
records of Pipeline. Certain information and disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. The condensed
unaudited financial statements include all adjustments both normal recurring and
others which, in the opinion of Pipeline's management, are necessary to present
fairly its financial position at September 30, 2003, results of operations for
the three and nine month periods ended September 30, 2003 and 2002, and cash
flows for the nine month periods ended September 30, 2003 and 2002. These
condensed financial statements should be read in conjunction with the financial
statements and the notes thereto included in Pipeline's 2002 Annual Report on
Form 10-K and 2003 first and second quarter reports on Form 10-Q.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the condensed
financial statements and accompanying notes. Actual results could differ from
those estimates.

NEW ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2003, Williams and its subsidiaries, including
Pipeline, adopted Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations." The statement requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made, and that the associated asset retirement costs be capitalized as part of
the carrying amount of the long-lived asset. Pipeline has not recorded asset
retirement liabilities for its pipeline transmission assets, since a reasonable
estimate of the fair value of the retirement obligations for these assets cannot
be made, as the remaining life of these assets is not currently determinable.
Accordingly, the impact of adopting SFAS No. 143 did not have a material effect
on Pipeline's financial position or results of operations. Had SFAS No. 143 been
adopted at the beginning of 2002, the impact to Pipeline's operating income and
net income would have been immaterial.

In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities." The
Interpretation defines a variable interest entity ("VIE") as an entity in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The investments or other interests that will absorb portions of the VIE's
expected losses if they occur or receive portions of the VIE's expected residual
returns if they occur are called variable interests. Variable interests may
include, but are not limited to, equity interests, debt instruments, beneficial
interests, derivative instruments and guarantees. The Interpretation requires an
entity to consolidate a VIE if that entity will absorb a majority of the VIE's
expected losses if they occur, receive a majority of the VIE's expected residual
returns if they occur, or both. If no party will absorb a majority of the
expected losses or expected residual returns, no party will consolidate the VIE.
The Interpretation also requires disclosure of significant variable interests in
unconsolidated VIE's. The Interpretation is effective for all new VIE's created
or acquired after January 31, 2003. For VIE's created or acquired prior to
February 1, 2003, the provisions of the Interpretation were initially to be
effective for the first interim or annual period beginning after June 15, 2003.
However, in October 2003, the FASB delayed the effective date of the
Interpretation on the entities to the first period beginning after December 15,
2003. Pipeline does not have any VIE's as defined by the Interpretation.

6

NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------

PROPERTY, PLANT AND EQUIPMENT

Subsequent to the implementation of a service delivery system at
Transcontinental Gas Pipe Line Corporation ("Transco"), a subsidiary of WGP, in
the second quarter of 2003 and a determination of the unique and additional
programming requirements that would be needed to complete the system at
Pipeline, management determined that the system would not be implemented at
Pipeline. This resulted in the write-off to expense of $25.6 million of
capitalized software development costs, primarily recorded during the second
quarter of 2003, as reflected in the accompanying statements.

OTHER

Cash payments for interest were $21.3 million and $12.8 million, net of
interest capitalized, for the nine-month periods ended September 30, 2003 and
2002, respectively.

Cash payments of $11.2 million and $21.1 million were made to Williams
for income taxes for the nine-month periods ended September 30, 2003 and 2002,
respectively.

2. CONTINGENT LIABILITIES AND COMMITMENTS

RATE AND REGULATORY MATTERS

NOTICE OF PROPOSED RULEMAKING (DOCKET NO. RM01-10-000)

On September 27, 2001, the FERC issued a Notice of Proposed Rulemaking
("NOPR") proposing to adopt uniform standards of conduct for transmission
providers. The proposed rules define transmission providers as interstate
natural gas pipelines and public utilities that own, operate or control electric
transmission facilities. The proposed standards would regulate the conduct of
transmission providers with their energy affiliates. The FERC proposed to define
energy affiliates broadly to include any transmission provider affiliate that
engages in or is involved in transmission (gas or electric) transactions, or
manages or controls transmission capacity, or buys, sells, trades or administers
natural gas or electric energy or engages in financial transactions relating to
the sale or transmission of natural gas or electricity. Current rules regulate
the conduct of Pipeline and its natural gas marketing affiliates. The FERC
invited interested parties to comment on the NOPR. On April 25, 2002, the FERC
issued its staff analysis of the NOPR and the comments received. The staff
analysis proposes redefining the definition of energy affiliates to exclude
affiliated transmission providers. On May 21, 2002, the FERC held a public
conference concerning the NOPR and the FERC invited the submission of additional
comments. If adopted, these new standards would require the adoption of new
compliance measures by Pipeline, which could result in increased costs to
Pipeline.

FINAL RULE (ORDER NOS. 634 AND 634-A, DOCKET NO. RM02-14-000)

On August 1, 2002, the FERC issued a NOPR that proposed restrictions on
various types of cash management programs employed by companies in the energy
industry such as Williams and its subsidiaries, including Pipeline. In addition
to stricter guidelines regarding the accounting for and documentation of cash
management or cash pooling programs, the FERC proposal, if made final, would
have precluded public utilities, natural gas companies and oil pipeline
companies from participating in such programs unless the parent company and its
FERC-regulated affiliate maintained investment-grade credit ratings and the
FERC-regulated affiliate maintained stockholder's equity of at least 30 percent
of total capitalization. Williams' and Pipeline's current credit ratings are not
investment grade. Pipeline participated in comments filed in this proceeding on
August 28, 2002 by the Interstate Natural Gas Association of America. On
September 25, 2002, the FERC convened a technical conference to discuss issues
raised in the comments filed by parties in this proceeding. On June 26, 2003,
the FERC issued an Interim Rule (Order No. 634), which replaces the earlier NOPR
on cash management described above. The Interim Rule requires FERC-regulated
entities to have their cash management programs in writing and to have all such
programs specify: (i) the duties and responsibilities of administrators and
participants, (ii) the methods for calculating interest and for allocating
interest and expenses, and (iii) restrictions on borrowing from the programs.
The Interim Rule was effective on August 7, 2003. The Interim Rule also sought
industry comment on new reporting requirements that would require FERC-regulated

7

NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------

entities to file their cash management programs with the FERC and to notify the
FERC when their proprietary capital ratio drops below 30 percent of total
capitalization and when it subsequently returns to or exceeds 30 percent. On
October 23, 2003, the FERC issued its Final Rule (Order No. 634-A), which
adopted the filing and reporting requirements proposed in the Interim Rule, with
certain modifications. Under the Final Rule, a FERC-regulated entity must file
its cash management program with the FERC for informational purposes, and must
compute its proprietary capital ratio quarterly and notify the FERC within 45
days after the end of each calendar quarter if its proprietary capital ratio
drops below or subsequently exceeds 30 percent.

LEGAL PROCEEDINGS

In 1998, the United States Department of Justice ("DOJ") informed
Williams that Jack Grynberg, an individual, had filed claims in the United
States District Court for the District of Colorado under the False Claims Act
against Williams and certain of its wholly-owned subsidiaries including
Pipeline. Mr. Grynberg had also filed claims against approximately 300 other
energy companies and alleged that the defendants violated the False Claims Act
in connection with the measurement, royalty valuation and purchase of
hydrocarbons. The relief sought was an unspecified amount of royalties allegedly
not paid to the federal government, treble damages, a civil penalty, attorneys'
fees and costs. On April 9, 1999, the DOJ announced that it was declining to
intervene in any of the Grynberg qui tam cases; including the action filed
against the Williams entities in the United States District Court for the
District of Colorado. On October 21, 1999, the Panel on Multi-District
Litigation transferred all of the Grynberg qui tam cases, including those filed
against Williams to the United States District Court for the District of Wyoming
for pre-trial purposes. On October 9, 2002, the court granted a motion to
dismiss Grynberg's royalty valuation claims. Grynberg's measurement claims
remain pending against Williams and the other defendants.

On June 8, 2001, fourteen Williams entities, including Pipeline, were
named as defendants in a nationwide class action lawsuit which has been pending
against other defendants, generally pipeline and gathering companies, for more
than one year. The plaintiffs allege that the defendants, including the Williams
defendants, have engaged in mismeasurement techniques that distort the heating
content of natural gas, resulting in an alleged underpayment of royalties to the
class of producer plaintiffs. On September 17, 2002, the plaintiffs filed a
motion for class certification. The Williams entities joined with other
defendants in contesting certification of the class. On April 10, 2003, the
court denied the plaintiffs' motion for class certification. The motion to
dismiss for lack of personal jurisdiction remains pending. On May 13, 2003, the
plaintiffs filed a motion for leave to file a 4th Amended Petition. On July 29,
2003, the court granted the plaintiffs' motion to file the 4th Amended Petition.
All pipeline defendants, including Pipeline, are removed from the case by virtue
of the 4th Amended Petition, although a formal dismissal was not filed.

ENVIRONMENTAL MATTERS

Pipeline is subject to the National Environmental Policy Act and other
federal and state legislation regulating the environmental aspects of its
business. Management believes that Pipeline is in substantial compliance with
existing environmental requirements. Pipeline believes that, with respect to any
capital expenditures required to meet applicable standards and regulations, the
FERC would grant the requisite rate relief so that, for the most part, such
expenditures and a return thereon would be permitted to be recovered. Pipeline
believes that compliance with applicable environmental requirements is not
likely to have a material effect upon Pipeline's earnings or financial position.

SAFETY MATTERS

PROPOSED PIPELINE INTEGRITY REGULATIONS In January 2003, the United
States Department of Transportation Office of Pipeline Safety issued a NOPR
entitled "Pipeline Integrity Management in High Consequence Areas". The proposed
rule incorporates the requirements of the Pipeline Safety Improvement Act of
2002 that was enacted in December 2002. It would require gas pipeline operators
to develop integrity management programs for transmission pipelines that could
affect high consequence areas in the event of pipeline failure, including a
baseline assessment and periodic reassessments to be completed within specified
timeframes. The final rule is expected to be issued in late 2003. Currently,
Pipeline estimates that the cost to perform required assessments and repairs
will be between $75 million and $100 million over the 2003 to 2012 period.
Developing and implementing the required public education program, including a
process for measuring and evaluating the effectiveness of safety information
distributed to various stakeholder groups, is expected to cost less than $1
million. These cost estimates may change depending on the content of the final
rule. Pipeline

8

NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------

considers the costs associated with compliance with the proposed
rule to be prudent costs incurred in the ordinary course of business and,
therefore, recoverable through its rates.

OTHER MATTERS

In addition to the foregoing, various other proceedings are pending
against Pipeline incidental to its operations.

SUMMARY

Litigation, arbitration, regulatory matters and environmental and safety
matters are subject to inherent uncertainties. Were an unfavorable ruling to
occur, there exists the possibility of a material adverse impact on the net
income of the period in which the ruling occurs. Management, including internal
counsel, currently believes that the ultimate resolution of the foregoing
matters, taken as a whole and after consideration of amounts accrued, insurance
coverage, recovery from customers or other indemnification arrangements, will
not have a materially adverse effect upon Pipeline's future financial position.

3. DEBT AND FINANCING ARRANGEMENTS

LONG-TERM DEBT

On March 4, 2003, Pipeline issued $175 million of 8.125 percent senior
notes due 2010. Pipeline is using the proceeds for general corporate purposes,
including the funding of capital expenditures.

On June 6, 2003, Williams entered into a two-year $800 million revolving
credit facility, primarily for the purpose of issuing letters of credit.
Williams, Pipeline and Transco, a subsidiary of WGP, have access to all
unborrowed amounts. The facility must be secured by cash and/or acceptable
government securities with a market value of at least 105 percent of the then
outstanding aggregate amount available for drawing under all letters of credit,
plus the aggregate amount of all loans then outstanding. The new credit facility
replaces a $1.1 billion credit line entered into in July 2002 that was comprised
of a $700 million secured revolving credit facility and a $400 million secured
letter of credit facility. The previous agreements were secured by substantially
all of Williams' Midstream Gas and Liquids assets. The new agreement releases
these assets as collateral. The interest rate on the new agreement is variable
at the London Interbank Offered Rate ("LIBOR") plus 0.75 percent. At September
30, 2003, letters of credit totaling $422 million have been issued by the
participating financial institutions under this facility and no revolving credit
loans were outstanding. At September 30, 2003, the amount of restricted
investments securing this facility was $443.7 million, which collateralized the
facility at 105.14 percent.

4. STOCK-BASED COMPENSATION

Williams' employee stock-based awards are accounted for under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Williams' fixed plan common stock
options generally do not result in compensation expense, because the exercise
price of the stock options equals the market price of the underlying stock on
the date of grant. The following table illustrates the effect on Pipeline's net
income if Pipeline had applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation."

9

NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------

Pro forma amounts for 2003 include compensation expense from Williams
awards made in 2003, 2002 and 2001.Pro forma amounts for 2002 include
compensation expense from certain awards made in 1999 and compensation expense
from awards made in 2002 and 2001.

Since compensation expense from stock options is recognized over the
future years' vesting period for pro forma disclosure purposes and additional
awards are generally made each year, pro forma amounts may not be representative
of future years' amounts.

On May 15, 2003, Williams' shareholders approved a stock option exchange
program. Under this exchange program, eligible Williams employees were given a
one-time opportunity to exchange certain outstanding options for a
proportionately lesser number of options at an exercise price to be determined
at the grant date of the new options. Surrendered options were cancelled June
26, 2003, and replacement options will be granted no earlier than six months and
one day after the cancellation date of each surrendered option. Under APB 25,
Pipeline will not recognize any expense pursuant to the stock option exchange.
However, for purposes of pro forma disclosures, Pipeline will recognize
additional expense related to these new options and the remaining expense on the
cancelled options.

10

ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

GENERAL

The following discussion and analysis of results of operations,
financial condition and liquidity should be read in conjunction with the
financial statements, notes and management's narrative analysis of the results
of operations contained in Items 7 and 8 of Pipeline's 2002 Annual Report on
Form 10-K and with the condensed financial statements and notes thereto and Item
2 contained in Pipeline's 2003 first and second quarter reports on Form 10-Q and
within this report.

2003 PIPELINE BREAK NEAR AUBURN, WASHINGTON

On May 1, 2003, a line break occurred on Pipeline's 26-inch gas
transmission line near Auburn, Washington. There were no injuries and no
ignition. An independent consultant, performing a metallurgical investigation,
has concluded the cause of the line break was stress corrosion cracking. On May
2, 2003, the Department of Transportation issued a Corrective Action Order in
response to the line break. The Order requires that Pipeline maintain an
operating pressure in the 26-inch line between Sumas and Washougal not to exceed
80 percent of the maximum allowable operating pressure ("MAOP") until further
written order of the Director, Western Region, Office of Pipeline Safety
("OPS"). Pipeline complied with the Corrective Action Order and is working with
the OPS to eliminate the pressure limitation. However, the pressure limitation
may continue into 2004. The 26-inch line is looped with a 30-inch line between
Sumas and Washougal enabling Pipeline to currently meet all of its contractual
obligations to customers despite the pressure limitation. Under certain
conditions of high demand for gas sourced at Sumas, Washington, Pipeline's
ability to meet its firm service obligations in the future may be negatively
impacted. Pipeline has developed a plan, subject to final approval of the OPS,
to ensure the integrity of the line and restore it to full service. Based on
that plan, Pipeline has prepared a preliminary capital cost estimate of
approximately $9.7 million for testing and internal inspections of portions of
the line. Pipeline has incurred approximately $3.6 million to date for
inspection and remediation activities. Costs for additional inspections and
remediation are not yet known and will be determined based on analysis of the
results from the internal inspections.

WILLIAMS' RECENT EVENTS

As discussed in Pipeline's Form 10-K for the year ended December 31,
2002, events in 2002 and the last half of 2001 significantly impacted Williams'
operations, both past and future. On February 20, 2003, Williams outlined its
planned business strategy for the next several years which management believes
to be a comprehensive response to the events which have impacted the energy
sector and Williams during 2002. The plan focuses on retaining a strong, but
smaller, portfolio of natural gas businesses and bolstering Williams' liquidity
through additional asset sales, strategic levels of financing at the Williams
and subsidiary levels and additional reductions in its operating costs. The plan
is designed to provide Williams with a clear strategy to address near-term and
medium-term liquidity issues and further de-leverage the company with the
objective of returning to investment grade status and developing a balance sheet
capable of supporting retained businesses with favorable returns and
opportunities for growth in the future. As part of this plan, Williams expects
to generate proceeds, net of related debt, of approximately $4.0 billion during
2003 and 2004, primarily from asset sales as well as the contribution of
proceeds from the sale and/or termination of certain contracts within its
marketing and trading portfolio. Through September 30, 2003, Williams received
approximately $3.1 billion in net proceeds from the sale of assets and
businesses and the sale and/or termination of certain marketing and trading
contracts.Of this amount, $2.8 billion was realized from the sale of assets and
businesses. As previously announced, Williams intends to reduce its commitment
to its power business, which may be realized by entering into a joint venture
with a third party or through the sale of a portion or all of the marketing and
trading portfolio. Additionally, through the nine month period ended September
30, 2003, Williams Power Company (formerly named Williams Energy Marketing and
Trading Company) has sold or entered into agreements to terminate certain
contracts for cash proceeds totaling approximately $315 million.

As of September 30, 2003, Williams has notes payable and long-term debt
maturing through first-quarter 2004 totaling approximately $1.6 billion,
consisting largely of $1.4 billion of Williams' senior unsecured 9.25 percent
notes. In the third quarter of 2003, Williams' Board of Directors authorized
Williams to retire or otherwise prepay up to $1.8 billion of debt, including
$1.4 billion designated for Williams' 9.25 percent notes due March 15, 2004. On
October 7, 2003, Williams announced a cash tender offer for any and all of these
$1.4 billion notes as well as cash tender offers and consent solicitations for
approximately $241 million of additional

11

outstanding notes and debentures. Williams will use available cash to fund the
purchase of any notes accepted under the tender offers. As of October 31, 2003,
approximately $720 million of the 9.25 percent notes had been accepted for
purchase. Additionally, Williams received tenders of notes and deliveries of
related consents from holders of approximately $230 million of the other notes.
The tender offers are scheduled to expire on November 6, 2003. Williams
anticipates that cash on hand, proceeds from additional asset sales and cash
flows from retained businesses will enable Williams to meet its liquidity needs.

RESULTS OF OPERATIONS

ANALYSIS OF FINANCIAL RESULTS

This analysis discusses financial results of Pipeline's operations for
the nine-month periods ended September 30, 2003 and 2002. Variances due to
changes in price and volume have little impact on revenues, because under
Pipeline's rate design methodology, the majority of overall cost of service is
recovered through firm capacity reservation charges in its transportation rates.

NINE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2002

Operating revenues increased $22.5 million, or 10 percent, due primarily
to increased facility charge revenues of $14.7 million from incremental projects
placed in service in late 2002 and higher short term firm and interruptible
transportation revenues of $6.3 million primarily due to the execution of
several maximum rate contracts during the second quarter of 2003 with primary
terms that extend through July 2003, October 2003 and April 2004.

Pipeline's transportation service accounted for 94 percent and 95
percent of operating revenues for the nine-month periods ended September 30,
2003 and 2002, respectively. Additionally, 3 percent of operating revenues
represented gas storage service in each of the nine-month periods ended
September 30, 2003 and 2002.

Operating expenses increased $27.9 million, or 24 percent, due primarily
to a $25.6 million charge related to the write-off of capitalized software
development costs associated with a service delivery system for which a decision
was made not to implement. Subsequent to the implementation of this system at
Transco, a subsidiary of WGP, in the second quarter of 2003 and a determination
of the unique and additional programming requirements that would be needed to
complete the system at Pipeline, management determined that the system would not
be implemented. Depreciation increased $4.4 million due primarily to the
increase in property resulting from completion of recent construction projects.
Taxes, other than income taxes increased $3.8 million due to increased property
taxes. These increases were partially offset by a $5.5 million reduction in
pension expense, due primarily to an accrual in 2002 for an enhanced-benefit
early retirement option offered to certain Williams employee groups.

Interest on long-term debt increased $8.2 million due to the March 4,
2003, $175 million debt issuance of 8.125 percent senior notes due 2010.

12

The following table summarizes volumes and capacity for the periods
indicated:

- -------------
(1) Consists primarily of additional capacity created from time to time
through the installation of new receipt or delivery points or the
segmentation of existing mainline capacity. Such capacity is generally
marketed on a short-term firm basis, because it does not involve the
construction of additional mainline capacity.

CAPITAL RESOURCES AND LIQUIDITY

METHOD OF FINANCING

Pipeline funds its capital requirements with cash flows from operating
activities, by accessing capital markets, by repayments of funds advanced to WGP
and, if required, by borrowings under the Credit Agreement and advances from
WGP.

Pipeline has an effective registration statement on file with the
Securities and Exchange Commission. At September 30, 2003, approximately $150
million of shelf availability remains under this registration statement, which
may be used to issue debt securities. Interest rates and market conditions will
affect amounts borrowed, if any, under this arrangement. Pipeline believes any
additional financing arrangements, if required, can be obtained from the capital
markets on terms that are commensurate with its current credit ratings.

On March 4, 2003, Pipeline issued $175 million of 8.125 percent senior
notes due 2010. Pipeline is using the proceeds for general corporate purposes,
including the funding of capital expenditures.

On June 6, 2003, Williams entered into a two-year $800 million revolving
credit facility, primarily for the purpose of issuing letters of credit.
Williams, Pipeline and Transco, a subsidiary of WGP, have access to all
unborrowed amounts. The facility must be secured by cash and/or acceptable
government securities with a market value of at least 105 percent of the then
outstanding aggregate amount available for drawing under all letters of credit,
plus the aggregate amount of all loans then outstanding. The new credit facility
replaces a $1.1 billion credit line entered into in July 2002 that was comprised
of a $700 million secured revolving credit facility and a $400 million secured
letter of credit facility. The previous agreements were secured by substantially
all of Williams' Midstream Gas and Liquids assets. The new agreement releases
these assets as collateral. The interest rate on the new agreement is variable
at the London Interbank Offered Rate ("LIBOR") plus 0.75 percent. At September
30, 2003, letters of credit totaling $422 million have been issued by the
participating financial institutions under this facility and no revolving credit
loans were outstanding. At September 30, 2003, the amount of restricted
investments securing this facility was $443.7 million, which collateralized the
facility at 105.14 percent.

As a participant in Williams' cash management program, Pipeline makes
advances to and receives advances from Williams through Pipeline's parent
company, WGP. At September 30, 2003, the advances due Pipeline by WGP totaled
$71.2 million. The advances are represented by demand notes. Effective September
2003, the interest rate on intercompany demand notes is based upon the weighted
average cost of Williams' debt outstanding at the end of each quarter. Williams
has indicated that it currently believes that it will continue to have the
financial resources and liquidity to repay these advances made by WGP which in
turn allows WGP to repay Pipeline.

13

FINAL RULE (ORDER NOS. 634 AND 634-A, DOCKET NO. RM02-14-000) On August
1, 2002, the FERC issued a NOPR that proposed restrictions on various types of
cash management programs employed by companies in the energy industry such as
Williams and its subsidiaries, including Pipeline. In addition to stricter
guidelines regarding the accounting for and documentation of cash management or
cash pooling programs, the FERC proposal, if made final, would have precluded
public utilities, natural gas companies and oil pipeline companies from
participating in such programs unless the parent company and its FERC-regulated
affiliate maintained investment-grade credit ratings and the FERC-regulated
affiliate maintained stockholder's equity of at least 30 percent of total
capitalization. Williams' and Pipeline's current credit ratings are not
investment grade. Pipeline participated in comments filed in this proceeding on
August 28, 2002 by the Interstate Natural Gas Association of America. On
September 25, 2002, the FERC convened a technical conference to discuss issues
raised in the comments filed by parties in this proceeding. On June 26, 2003,
the FERC issued an Interim Rule (Order No. 634), which replaces the earlier NOPR
on cash management described above. The Interim Rule requires FERC-regulated
entities to have their cash management programs in writing and to have all such
programs specify: (i) the duties and responsibilities of administrators and
participants, (ii) the methods for calculating interest and for allocating
interest and expenses, and (iii) restrictions on borrowing from the programs.
The Interim Rule was effective on August 7, 2003. The Interim Rule also sought
industry comment on new reporting requirements that would require FERC-regulated
entities to file their cash management programs with the FERC and to notify the
FERC when their proprietary capital ratio drops below 30 percent of total
capitalization and when it subsequently returns to or exceeds 30 percent. On
October 23, 2003, the FERC issued its Final Rule (Order No. 634-A), which
adopted the filing and reporting requirements proposed in the Interim Rule, with
certain modifications. Under the Final Rule, a FERC-regulated entity must file
its cash management program with the FERC for informational purposes, and must
compute its proprietary capital ratio quarterly and notify the FERC within 45
days after the end of each calendar quarter if its proprietary capital ratio
drops below or subsequently exceeds 30 percent.

CREDIT RATINGS

During 2003, Moody's Investors Services and Fitch Ratings raised
Pipeline's credit rating on its senior unsecured long-term debt as shown below.
The rating given by Standard and Poor's is B+ and has not changed during 2003.

Moody's Investors Services B3 to B1
Fitch Ratings BB- to BB

CAPITAL EXPENDITURES

Pipeline anticipates 2003 capital expenditures will total approximately
$327.1 million, of which approximately $58.2 million will be for maintenance
capital expenditures and other non-expansion related items. Through September
30, 2003, Pipeline has expended $250.9 million for capital additions.

EXPANSION PROJECTS

ROCKIES EXPANSION PROJECT On August 29, 2001, Pipeline filed an application with
the FERC to construct and operate an expansion of its pipeline system designed
to provide an additional 175,000 dekatherms ("Dth") per day of capacity to its
transmission system in Wyoming and Idaho in order to reduce reliance on
displacement capacity. The Rockies Expansion Project includes the installation
of 91 miles of pipeline loop and the upgrading or modification of six compressor
stations for a total increase of 26,057 horsepower. Pipeline reached a
settlement agreement with the majority of its firm shippers to support roll-in
of the expansion costs into its existing rates. The FERC issued a certificate in
September 2002 approving the project. Pipeline filed an application with the
FERC in February 2003 to amend the certificate to reflect minor facility scope
changes. The certificate amendment was issued by the FERC on May 7, 2003.
Construction started May 20, 2003, with a targeted in-service date of November
1, 2003. The current estimated cost of the expansion project is approximately
$140 million, of which approximately $16 million will be offset by settlement
funds to be received from a former customer in connection with a contract
restructuring. Most of the facilities associated with the Rockies Expansion will
be placed in-service on November 1, 2003, as planned. However some of the
facilities associated with the Muddy Creek Loop may not be ready to be placed
in-service until late November 2003. While this partial delay of some facilities
being placed in-service is not expected to limit Pipeline's ability to meet firm
transportation service obligations, depending on demand and market conditions,
it may require Pipeline to impose specific flow conditions on certain customers
to ensure that sufficient displacement is occurring on the system in order to
satisfy all firm transportation requests.

14

EVERGREEN EXPANSION PROJECT On October 3, 2001, Pipeline filed an application
with the FERC to construct and operate an expansion of its pipeline system
designed to provide 276,625 Dth per day of firm transportation service from
Sumas, Washington to Chehalis, Washington to serve new power generation demand
in western Washington. The Evergreen Expansion Project included installation of
28 miles of pipeline loop, upgrading, replacing or modifying five compressor
stations and adding a net total of 64,160 horsepower of compression. The FERC
issued a certificate on June 27, 2002 approving the expansion and the
incremental rates to be charged to our expansion customers. Pipeline filed an
application with the FERC in January 2003 to amend the certificate to reflect
minor facility scope and schedule changes. The certificate amendment was issued
by the FERC on May 7, 2003. The estimated cost of the expansion project is
approximately $198 million. The Evergreen Expansion customers have agreed to pay
for the cost of service of this expansion on an incremental basis. This
expansion is based on 15 and 25 year contracts and is expected to provide
approximately $42 million of operating revenues in its first 12 months of
operation. The Evergreen Expansion was completed on schedule and placed
in-service on October 1, 2003.

COLUMBIA GORGE EXPANSION PROJECT Pipeline's October 3, 2001 application with
respect to the Evergreen Expansion Project, which was approved by the FERC on
June 27, 2002, also requested approvals to construct and operate an expansion of
its pipeline system designed to replace 56,000 Dth per day of northflow design
displacement capacity from Stanfield, Oregon to Washougal, Washington. The
Columbia Gorge Project includes upgrading, replacing or modifying five existing
compressor stations and adding a net total of 23,900 horsepower of compression.
Pipeline reached a settlement with the majority of its firm shippers to support
roll-in of approximately 84 percent of the expansion costs into the existing
rates with the remainder to be allocated to the incremental Evergreen Expansion
customers. Pipeline's January 2003 application to amend the certificate, which
was approved by the FERC on May 7, 2003, also reflected minor facility scope
changes for the Columbia Gorge Expansion Project. Pipeline started construction
on May 8, 2003, with a targeted in-service date of November 1, 2003. The project
was placed in-service on October 21, 2003. The estimated cost of the expansion
project is approximately $43 million.

OTHER

REGULATORY AND LEGAL PROCEEDINGS

Reference is made to Note 2 of the Notes to Financial Statements for
information about regulatory, judicial and business developments, which cause
operating and financial uncertainties.

CONCLUSION

Although no assurances can be given, Pipeline currently believes that
the aggregate of cash flows from operating activities, the recent issuance of
$175 million of senior notes on March 4, 2003, supplemented, when necessary, by
repayments of funds advanced to WGP, advances or capital contributions from
Williams and borrowings under the Credit Agreement will provide Pipeline with
sufficient liquidity to meet its capital requirements. When necessary, Pipeline
also expects to access public and private markets on terms commensurate with its
current credit ratings to finance its capital requirements.

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ITEM 4. CONTROLS AND PROCEDURES

An evaluation of the effectiveness of the design and operation of
Pipeline's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15(d)-(e) of the Securities Exchange Act) ("Disclosure Controls") was performed
as of the end of the period covered by this report. This evaluation was
performed under the supervision and with the participation of Pipeline's
management, including Pipeline's Senior Vice President and Vice President and
Treasurer. Based upon that evaluation, Pipeline's Senior Vice President and Vice
President and Treasurer concluded that, subject to the limitations noted below,
these Disclosure Controls and procedures are effective.

Pipeline's management, including its Principal Executive Officer and
Principal Financial Officer, does not expect that Pipeline's Disclosure Controls
or its internal controls over financial reporting ("Internal Controls") will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. Pipeline
monitors its Disclosure Controls and Internal Controls and makes modifications
as necessary; Pipeline's intent in this regard is that the Disclosure Controls
and the Internal Controls will be maintained as systems change and conditions
warrant.

There has been no change in Pipeline's Internal Controls that occurred
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, Pipeline's Internal Controls.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

See discussion in Note 2 of the Notes to Condensed Financial
Statements included herein.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

The following instruments are included as exhibits to this
report. Those exhibits below incorporated by reference herein
are indicated as such by the information supplied in the
parenthetical thereafter. If no parenthetical appears after
an exhibit, copies of the instrument have been included
herewith.

(31) Section 302 Certifications

- 1 Certification of Principal Executive
Officer pursuant to Rules 13a-14(a) and
15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended and Item
601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.

- 2 Certification of Principal Financial
Officer pursuant to Rules 13a-14(a) and
15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, and Item
601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.

(32) Section 906 Certification

- 1 Certification of Principal Executive
Officer and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

None.

17

SIGNATURE

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.

NORTHWEST PIPELINE CORPORATION
--------------------------------
Registrant

By: /s/ Jeffrey P. Heinrichs
--------------------------------
Jeffrey P. Heinrichs
Controller
(Duly Authorized Officer and
Principal Accounting Officer)

Date: November 6, 2003

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EXHIBIT INDEX