-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WkcVmLSMz0YG7PZJVNsRo98Ad3jGUwypshKQkdesKttkwC2LkVlQQEdsRar+azW2 UYn+UldX680BTj7cYL+pHw== 0000764044-00-000002.txt : 20000331 0000764044-00-000002.hdr.sgml : 20000331 ACCESSION NUMBER: 0000764044-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUESTAR PIPELINE CO CENTRAL INDEX KEY: 0000764044 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 870307414 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14147 FILM NUMBER: 584187 BUSINESS ADDRESS: STREET 1: 180 E 100 SOUTH STREET STREET 2: P O BOX 45360 CITY: SALT LAKE CITY STATE: UT ZIP: 84145 BUSINESS PHONE: 8013242400 MAIL ADDRESS: STREET 1: 180 EAST 100 SOUTH STREET STREET 2: P O BOX 45360 CITY: SALT LAKE CITY STATE: UT ZIP: 84145 FORMER COMPANY: FORMER CONFORMED NAME: MOUNTAIN FUEL RESOURCES INC DATE OF NAME CHANGE: 19880331 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission File No. 0-14147 QUESTAR PIPELINE COMPANY (Exact name of registrant as specified in its charter) State of Utah 87-0307414 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 180 East 100 South, P.O. Box 45360, Salt Lake City, Utah 84145-0360 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (801) 324-5555 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933: 9 7/8% Debentures due 2020 9 3/8% Debentures due 2021 Medium Term Notes, Series A, 5.85% to 7.55% due 2008 to 2019 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 State the aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 1, 2000. $0. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 1, 2000. 6,550,843 shares of Common Stock, $1.00 par value. (All shares are owned by Questar Regulated Services Company.) Registrant meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K Report with the reduced disclosure format. TABLE OF CONTENTS Heading Page PART I Items 1. and 2. BUSINESS AND PROPERTIES General Transmission System Transportation Service Storage/Processing New Projects Regulatory Environment Competition Employees Relationships with Affiliates Item 3. LEGAL PROCEEDINGS Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Item 6. (Omitted) Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III Items 10-13. (Omitted) PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K SIGNATURES FORM 10-K ANNUAL REPORT, 1999 PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES General Questar Pipeline Company ("Questar Pipeline" or the "Company") is an interstate pipeline company that transports natural gas in the Rocky Mountain states of Utah, Wyoming, and Colorado, and provides storage services in Utah and Wyoming. The Company is an affiliate of Questar Corporation ("Questar"), a diversified natural gas holding company. As a "natural gas company," the Company is subject to regulation by the Federal Energy Regulatory Commission (the "FERC") pursuant to the Natural Gas Act of 1938, as amended. Questar Pipeline, as an open-access pipeline, transports gas for affiliated and unaffiliated customers. It also owns and operates the Clay Basin storage facility, which is a large underground storage project in northeastern Utah, and other underground storage operations in Utah and Wyoming. The Company is involved in two partnerships, Overthrust Pipeline Company ("Overthrust"), and TransColorado Gas Transmission Company ("TransColorado"). Questar Pipeline is a wholly-owned subsidiary of Questar Regulated Services Company ("Regulated Services"), which is a subholding company under Questar. Other entities within the Regulated Services group include Questar Gas Company ("Questar Gas"), a local distribution company, and Questar Energy Services, Inc. ("QES"), an entity created to market additional services to utility customers. All Regulated Services companies are managed by a common group of officers, which increases administrative efficiency. The Company has significant business relationships with its affiliates, particularly Questar Gas. To serve the needs of its 686,300 customers in Utah, southwestern Wyoming, and southeastern Idaho, Questar Gas has reserved approximately 800,000 decatherms ("Dth") per day of firm transportation capacity on Questar Pipeline's transmission system. (A Dth is the amount of heat energy equal to 10 therms or one million British thermal units ("Btu")). Questar Gas has also contracted for firm storage capacity available at Clay Basin and has storage contracts at the smaller peaking storage reservoirs operated by Questar Pipeline. Through a subsidiary, Questar Pipeline has a processing plant that extracts carbon dioxide from gas volumes delivered to Questar Gas. Questar Pipeline transports natural gas owned by Questar Gas and produced from properties operated by Wexpro Company ("Wexpro"), another affiliate, as well as natural gas volumes purchased directly by Questar Gas from field producers and other suppliers. The Company also transports volumes that are marketed by Questar Energy Trading Company ("Questar Energy Trading"), another affiliated entity. The following diagram sets forth the corporate structure of the Company and certain affiliates: Questar Corporation Questar Market Resources, Inc. Wexpro Company Questar Exploration and Production Company Questar Energy Trading Company Questar Gas Management Company Questar Regulated Services Company Questar Gas Company Questar Pipeline Company Questar Line 90 Company Questar Transportation Services Company Questar Southern Trails Pipeline Company Questar TransColorado, Inc. Questar Energy Services,Inc. Questar InfoComm, Inc. The major activities of Questar Pipeline are described in more detail below: Transmission System The Company's core transmission system is strategically located in the Rocky Mountains near large reserves of natural gas. It is referred to as a "hub and spoke" system, rather than a "long-line" pipeline, because of its physical configuration, multiple interconnections to other interstate pipeline systems, and access to major producing areas. Questar Pipeline's transmission system has connections with the pipeline systems of Colorado Interstate Gas Company ("CIG"); the middle segment of the Trailblazer Pipeline System ("Trailblazer") owned by Wyoming Interstate Company, Ltd. ("WIC"); The Williams Companies Inc. ("Williams"), including Kern River Gas Transmission Company ("Kern River"); TransColorado; and Overthrust. These connections have opened markets outside Questar Gas's service area and allow the Company to transport gas for others. The Company's transmission system includes 1,734 miles of transmission lines that interconnect with other pipelines and that link various producers of natural gas with Questar Gas's distribution facilities in Utah and Wyoming. (This total transmission mileage includes pipelines associated with the Company's storage fields and tap lines used to serve Questar Gas.) The system includes two major segments, often referred to as the northern and southern systems, which are linked together. The northern segment extends from northwestern Colorado through southwestern Wyoming into northern Utah; the southern segment of the transmission system extends from western Colorado to Payson, in central Utah. The Company's pipelines, compressor stations, regulator stations, and other transmission-related facilities are constructed on properties held under long-term easements, rights of way, or fee interests sufficient for the conduct of its business activities. In addition to the transmission system described above, Questar Pipeline has a 72 percent interest in and is the operating partner of Overthrust, a general partnership that was organized in 1979 to construct, own, and operate the Overthrust segment of Trailblazer. (Its percentage increased from 54 percent to 72 percent effective January 1, 2000, when it purchased the 18 percent owned by Enron Overthrust Pipeline Company.) Trailblazer is a major 800-mile pipeline that transports gas from producing areas in the Rocky Mountains to the Midwest. The 88-mile Overthrust segment is the western-most of Trailblazer's three segments. Although the Overthrust segment is currently underutilized, the Company and its remaining partners are reviewing opportunities, including backhauling, to increase its value. The Overthrust partnership agreement requires unanimous consent of all partners on major operating and financial issues. At year-end 1999, the Company recorded a writedown of $49.7 million ($31.3 million on an after-tax basis) of its interest in the TransColorado pipeline project. Questar TransColorado, Inc., which is a subsidiary of Questar Pipeline, and a subsidiary of Kinder Morgan, Inc. (formerly KN Energy) each have a 50 percent interest in the project. This pipeline, which commenced operations March 31, 1999, was built to transport gas from the Rocky Mountain area that was traditionally priced lower than other gas supplies, e.g., San Juan, to California and Midwestern markets through interconnections with major pipeline systems. Constructed at an approximate cost of $310 million, the pipeline originates at a point on Questar Pipeline's system 25 miles east of Rangely in northwestern Colorado and extends 292 miles to the Blanco hub in northwestern New Mexico. In its first nine months of operation, TransColorado incurred significant losses because basis differentials, which reflect gas prices in different producing basins, were not sufficient to encourage producers and market aggregators to transport volumes on the line. The Company determined that the situation was not temporary in nature. Questar Pipeline has a contractual right to put its 50 percent interest in TransColorado to its partner during a one-year period commencing March 31, 2001. Questar Pipeline owns and operates a major compressor complex near Rock Springs, Wyoming, that compresses volumes of gas from the Company's transmission system for delivery to the WIC segment of the Trailblazer system and to CIG. The complex has become a major delivery point on Questar Pipeline's system. Five of the Company's major natural gas lines are connected to the system at the complex. In addition, both of CIG's Wyoming pipelines and the WIC segment are connected to the complex. Transportation Service Questar Pipeline's largest single transportation customer is its affiliate, Questar Gas. During 1999, the Company transported 105.5 million decatherms ("MMDth") for Questar Gas, compared to 107.5 MMDth in 1998. These transportation volumes include Questar Gas's cost-of-service gas produced by Wexpro and volumes purchased by Questar Gas directly from field producers and other suppliers. Questar Gas has reserved capacity of about 800,000 Dth per day, or 72 percent of Questar Pipeline's reserved daily capacity. The Company's transportation agreement with Questar Gas was extended in 1999 for three years and expires June 30, 2002. Questar Gas paid an annual reservation charge of approximately $50.7 million to the Company in 1999, which includes reservation charges attributable to firm and "no-notice" transportation. Questar Gas only needs its total reserved capacity during design-day or peak-demand situations. When it is not fully utilizing its capacity, Questar Gas releases the capacity to others, primarily industrial transportation customers and marketing entities. The Company recovers approximately 95 percent of its transmission cost of service through reservation charges from firm transportation customers. In other words, these customers pay primarily for access to transportation capacity. Consequently, the Company's throughput volumes do not have a significant effect on its short-term operating results. Questar Pipeline's transportation revenues are not significantly affected by fluctuating demand based on the vagaries of weather or gas prices. The Company's revenues may be adversely affected if the FERC changes its basic regulatory scheme of "straight fixed-variable" rates. The Company's total system throughput decreased from 255.1 MMDth in 1998 to 253.5 MMDth in 1999. This decrease was primarily attributable to lower transportation volumes for affiliated customers other than Questar Gas, which declined from 26.9 MMDth in 1998 to 12.2 MMDth in 1999. Questar Pipeline's overall decrease in volumes resulted in a one percent decrease in revenues associated with transportation service, or $69.9 million 1999 compared to $70.8 million in 1998. Questar Pipeline's transmission system is an open-access system and has been since September of 1988. The Company's tariff provisions require it to transport gas on a nondiscriminatory basis when it has available transportation capacity. The Company does have limited opportunities for interruptible transportation services. Storage/Processing Questar Pipeline's Clay Basin storage facility in northeastern Utah is the largest underground storage reservoir in the Rocky Mountains. The facility has a total capacity of 117.5 Bcf. Clay Basin has been operational since 1977 and has been successfully expanded several times. Clay Basin's firm storage capacity is fully subscribed by customers under long-term agreements. Questar Gas currently has 13.3 Bcf of working gas capacity at Clay Basin. Other large customers include Williams; Washington Natural Gas Company, a distribution utility in the state of Washington; and BC Gas Utility Ltd., a distribution utility in British Columbia, Canada. Storage service is important to distribution companies that need to match annual gas purchases with fluctuating customer demand, improve service reliability, and avoid imbalance penalties. Questar Pipeline offers interruptible storage service at Clay Basin and also allows firm storage service customers the right to release their injection and withdrawal rights to other parties. The Company also owns and operates three smaller storage reservoirs. These projects were developed specifically to serve Questar Gas's needs, and Questar Gas reserves 100 percent of their working gas capacity. These small reservoirs are used primarily to supplement Questar Gas's gas supply needs on peak-demand days. The Company's storage facilities are certificated by the FERC, and its rates for storage service (based on operating costs and investment in plant plus an allowed rate of return) are subject to approval by the FERC. Through its subsidiary--Questar Transportation Services Company--Questar Pipeline also owns a processing plant near Price, Utah, that removes carbon dioxide from coalbed methane gas in order to raise the Btu content enough to be safely and efficiently used in appliances in Questar Gas's service area. New Projects During 1999, the Company received a favorable decision from the FERC for its proposed conversion of an oil pipeline to natural gas. (The line is currently owned by one subsidiary, Questar Line 90 Company, but will eventually be owned and operated by another subsidiary, Questar Southern Trails Company.) The 700-mile pipeline, which Questar Pipeline named the Southern Trails line after acquiring it in 1998, extends from the Four Corners area of Utah, Colorado, New Mexico, and Arizona to Long Beach, California. The FERC made a preliminary decision that a certificate of public convenience and necessity should be issued to Southern Trails under the optional certificate procedure and dismissed as "speculative" allegations made by intervening parties that the line would result in idle capacity and unrecovered costs on other systems. Final regulatory approval is dependent on the completion of a favorable environmental review. Questar Pipeline has delayed its original plan to complete the conversion and install the necessary compressors during 2000. The Company, in conjunction with potential customers and other interested parties, has urged the California Public Utilities Commission to modify tariff provisions that protect a local distribution company in California from competition by Southern Trails. Questar Pipeline is optimistic that California regulators will take action to allow more competition, which will facilitate its efforts to market capacity to California customers. The Company will not convert the line to natural gas service until it receives the FERC certificate, regulatory issues restricting its ability to compete for transportation customers in California are resolved, and rights-of-way are obtained. Questar Pipeline has a pending application before the FERC to construct and operate a new line, identified as Main Line 104, that is 75.6 miles long and 24 inches in diameter and extends from Price, Utah, near the Ferron area of coalbed methane gas, to the Company's system at Payson, Utah, and the Kern River line near Elberta, Utah. CIG is a 50 percent partner in the project, which is currently estimated to cost $81 million and will provide approximately 272,000 Dth per day of additional transportation capacity. Questar Gas has contracted with the Company for approximately 22 percent of the additional capacity on the line, which is scheduled to be in service before the winter heating season of 2001-02. Regulatory Environment The Company is a natural gas company under the Natural Gas Act and is subject to the jurisdiction of the FERC as to rates and charges for storage and transportation of gas in interstate commerce, construction of new storage and transmission facilities, extensions or abandonments of service and facilities, accounts and records, and depreciation and amortization policies. Questar Pipeline holds certificates of public convenience and necessity granted by the FERC for the transportation and underground storage of natural gas in interstate commerce and for the facilities required to perform such operations. Questar Pipeline does not currently plan to file a general rate case in 2000. It however, will continue to review its revenues and costs as it adds new facilities that are not included in its rate base and makes expenditures to comply with regulatory mandates. The Company has a proceeding before the FERC involving an increase in its fuel gas reimbursement percentage ("FGRP"), which is a tariff provision for recovery of gas used in operating the system and "lost and unaccounted for" gas. The FGRP increase was implemented effective January 1, 2000, subject to refund. Under the Natural Gas Pipeline Safety Act of 1968, as amended, the Company is subject to the jurisdiction of the Department of Transportation ("DOT") with respect to safety requirements in the design, construction, operation and maintenance of its transmission and storage facilities. The Company also complies with the DOT's drug and alcohol testing regulations. In addition to the regulations discussed above, Questar Pipeline's activities in connection with the operation and construction of pipelines and other facilities for transporting or storing natural gas are subject to extensive environmental regulation by state and federal authorities, including state air quality control boards, the Bureau of Land Management, the Forest Service, the Corps of Engineers, and the Environmental Protection Agency. These compliance activities increase the cost of planning, designing, installing and operating facilities. Competition Questar Pipeline extended its footprint to other parts of the western United States by participating in the TransColorado pipeline project and purchasing the Southern Trails line. There are market risks associated with these projects, as evidenced by Questar Pipeline's decision to write down its investment in TransColorado. Questar Pipeline's efforts to make the Southern Trails line successful are affected by its ability to address regulatory constraints and to compete with a local distribution company in southern California. Competition for Questar Pipeline's transportation and storage services has intensified in recent years. Regulatory changes have significantly increased customer flexibility. The Company actively competes with other interstate pipelines for transportation volumes throughout the Rocky Mountain region. The Company has two key assets that contribute to its continued success. It has a strategically located and integrated transmission system with interconnections to major pipeline systems and with access to major producing areas and markets. Questar Pipeline also has the Clay Basin storage facility, a storage reservoir that has been successfully operated since 1977, has been expanded in response to interest from customers, and is fully subscribed by firm-service customers under contracts that are generally long-term in nature. Questar Pipeline intends to take advantage of these assets by increasing its "intra hub" capacity or its ability to quickly and reliably move gas volumes between receipt and delivery points and by continuing to review opportunities to increase its storage capacity and services. The Company is currently reviewing the feasibility of a salt cavern storage project in southwestern Wyoming. Employees As of December 31, 1999, the Company and its subsidiaries had 129 employees, compared to the 122 employees it had as of year-end 1998. None of these employees is represented under collective bargaining agreements. The Company participates in the comprehensive benefit plans of Questar and pays the share of costs attributable to its employees covered by such plans. Questar Pipeline's employee relations are generally deemed to be satisfactory. Relationships with Affiliates There are significant business relationships between the Company and its affiliates, particularly Questar Gas. Some of these relationships are described above. See Note 8 to the financial statements for additional information concerning transactions between the Company and its affiliates. The Company obtains data processing and communication services from an affiliate, Questar InfoComm Inc.. Regulated Services, the Company's parent, has employees who perform administrative, engineering, accounting, marketing, budget, tax, regulatory affairs, and legal services for all entities within it, including Questar Pipeline. Questar also provides certain administrative services--governmental affairs, financial, and audit--to the Company and other members of the consolidated group. A proportionate share of the costs associated with such services is directly billed or allocated to Questar Pipeline. ITEM 3. LEGAL PROCEEDINGS Questar Pipeline is involved in various legal and regulatory proceedings. While it is not currently possible to predict or determine the outcome of these proceedings, it is the opinion of management that the outcome will not have a material adverse effect on the Company's financial position or liquidity. Questar Pipeline and some affiliates are involved in several cases filed by an independent producer, Jack Grynberg. In the first case, the Company is the named party, even though Questar Gas, as a result of acquiring Questar Pipeline's gas purchase contracts, is liable for the judgment. This case resulted in an adverse jury verdict in 1994, but the presiding federal district court judge in Wyoming entered a judgment as a matter of law that vacated most portions of the original jury verdict. The Tenth Circuit Court of Appeals, in January of 2000, reinstated some portions of the original jury verdict. Grynberg filed a second case before the same federal district court in 1997, alleging new claims against Questar Pipeline and affiliated defendants. He alleged antitrust and fraud claims in addition to the same claims raised in the initial litigation for a later period of time. This case has been stayed pending the outcome of the Tenth Circuit appeal, although the district court ruled favorably on the Questar parties' motion for a partial summary judgment. Questar affiliates, including Questar Pipeline, are also named defendants in a lawsuit filed by Grynberg under the Federal False Claims Act. This case and the 75 substantially similar cases filed by Grynberg against pipelines and their affiliates have been consolidated for discovery and pre-trial rulings in Wyoming's federal district court. The cases involve allegations of industry-wide mismanagement of the value of gas on which royalty payments are due the federal government. The complaint also seeks treble damages and imposition of civil penalties. Finally, Grynberg has filed a case against Questar Pipeline in Utah state district court, alleging mismeasurement of gas volumes attributable to his working ownership interest in a specified property. Grynberg cites mismanagement to support claims for breach of contract, negligent misrepresentation, fraud, breach of fiduciary responsibilities, etc. It is too early to estimate the outcome of the various cases, with the exception of the first case that has been resolved by the Tenth Circuit, filed by Grynberg against Questar Pipeline and its affiliates. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company, as the wholly owned subsidiary of a reporting person, is entitled to omit the information requested in this Item. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's outstanding shares of common stock, $1.00 par value, are currently owned by Regulated Services. Information concerning the dividends paid on such stock and the Company's ability to pay dividends is reported in the Statements of Shareholder's Equity and Notes to Financial Statements included in Item 8. ITEM 6. SELECTED FINANCIAL DATA The Company, as the wholly owned subsidiary of a reporting person, is entitled to omit the information requested in this Item. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Natural Gas Transmission - Questar Pipeline conducts natural gas transmission and storage operations. Following is a summary of financial results and operating information:
Year Ended December 31, 1999 1998 1997 (Dollars In Thousands) OPERATING INCOME Revenues Transportation $69,885 $70,824 $68,837 Storage 37,647 36,463 34,410 Processing 3,570 Other 1,058 1,270 2,190 Total revenues 112,160 108,557 105,437 Operating expenses Operating and maintenance 38,534 38,832 37,334 Depreciation and amortization 16,743 13,927 14,797 Other taxes 2,488 2,600 2,816 Total expenses 57,765 55,359 54,947 Operating income $54,395 $53,198 $50,490 OPERATING STATISTICS Natural gas transportation volumes (in MDth) For unaffiliated customers 135,886 120,747 116,215 For Questar Gas 105,499 107,501 110,311 For other affiliated customers 12,153 26,878 37,797 Total transportation 253,538 255,126 264,323 Transportation revenue (per Dth) $0.28 $0.28 $0.26 Clay Basin storage, working gas- capacity (in Bcf) 51.3 51.3 46.3
Questar Pipeline's operating income increased 2% in 1999 due primarily to the addition of gas- processing operations. A subsidiary of Questar Pipeline removes carbon dioxide from certain gas supplies to make them suitable for Questar Gas' system. A $20 million plant was completed and initiated operations mid-year 1999. Revenues from storage operations increased 3% in 1999 as a result of expanding firm-storage capacity at the company's Clay Basin facility. Storage capacity was enlarged in May 1998 and is 100% subscribed under long-term contracts. A majority of the capacity is subscribed under long-term contracts. Questar Gas has contracted for 26% of firm-storage capacity for at least eight years. Transportation revenues decreased 1% in 1999 due to the decrease in gas volumes transported for affiliated companies. As of December 31, 1999, approximately 76% of Questar Pipeline's transportation system was reserved by firm-transportation customers under contracts with varying terms and lengths. Questar Gas has reserved transportation capacity from Questar Pipeline of approximately 800,000 dth per day, representing 76% of the total reserved daily-transportation capacity at December 31, 1999. This contract, which accounts for 83% of the demand charges collected by Questar Pipeline, was amended in 1999 extending the term to June 2002. Questar Pipeline's operating and maintenance expenses decreased 1% in 1999 compared with 1998 due primarily to labor-cost savings from a reduction in the number of employees in the third quarter of 1998. Depreciation expense increased 20% in 1999 resulting from capital investment in facilities and information-technology systems. Questar Pipeline recorded a $49.7 million pre-tax write-down of its investment in a partnership in 1999. A subsidiary of Questar Pipeline is a 50% partner, along with a Kinder Morgan Inc. subsidiary, in the TransColorado Pipeline. With continuing low volumes due to unfavorable regional transportation economics, the Company experienced an other-than-temporary decline in its partnership investment and recorded a write-down. The write-down resulted in a $31.3 million after-tax reduction in net income. The TransColorado Pipeline extends 292 miles from northwestern Colorado to a northern New Mexico pipeline hub and cost approximately $310 million. Questar Pipeline has a contractual option to put its 50% ownership of the pipeline interest to its partner, beginning April 1, 2001. The option has a one-year life. Questar's share of TransColorado's operating losses in 1999 averaged $900,000 before income taxes per month for its nine months of operations. The Company had reported TransColorado's operating results in losses from unconsolidated affiliates. Questar Pipeline's share of the loss reported by TransColorado Pipeline amounted to $5.9 million, which comprised an operating loss of $8.2 million reduced by capitalized financing charges (AFUDC) of $2.3 million. Earnings from unconsolidated affiliates were lower in 1998 when compared with 1997 due to lower amounts of AFUDC. Debt expense was higher in 1999 compared with 1998 because of additional long-term borrowings. Questar Pipeline borrowed $42 million in October 1999 through a medium-term note program. The notes have a 10-year life and a weighted- average coupon rate of 7.48%. In 1998, the Company borrowed $88.4 million under its medium-term note program with a weighted average coupon rate of 6.14% and a weighted average maturity of 12.6 years. A subsidiary of Questar Pipeline, Questar Line 90 Company, purchased an oil pipeline for $38 million in 1998. The line extends from the Paradox producing basin of northwestern New Mexico to Long Beach, California. The Company intends to convert this line, named Questar Southern Trails Pipeline, to transport natural gas to customers along its route and in the Los Angeles basin. Environmental and regulatory review processes are continuing. The FERC has given preliminary approval for conversion of the pipeline. A certificate could be granted late in 2000. Because of the time necessary to obtain regulatory approval, meet construction schedules and gauge current market conditions, Questar Pipeline does not expect to have the line in service before mid-2001. LIQUIDITY AND CAPITAL RESOURCES Operating Activities Net cash provided from operating activities of $11,006,000 in 1999 declined $49,291,000 from the amount reported in 1998 due primarily to a reduction in accounts payable. Accounts payable balances were unusually high at the end of 1998 because of construction projects that have since been completed. Investing Activities Following is a summary of capital expenditures for 1999, 1998 and a forecast of 2000 expenditures:
2000 Forecast 1999 1998 (In Thousands) Transmission system $17,932 $11,936 $21,395 Storage 3,492 1,571 6,284 Partnerships 24,046 14,414 26,000 Southern Trails Pipeline 10,000 14,639 39,471 Processing plant - carbon dioxide removal 1,000 2,912 16,259 General 6,901 4,952 4,909 $63,371 $50,424 $114,318
Capital spending included equity investment in a partnership to complete construction of the TransColorado Pipeline, costs of a crude-oil pipeline which will be converted to transport gas in the future, expansion of the traditional gas-transmission network and completion of a gas-processing plant. Financing Activities Questar Pipeline funded 1999 capital expenditures primarily with the proceeds from issuing debt under its medium-term note program and net cash provided from operating activities. Questar Pipeline borrowed $42 million in October 1999 and $88.4 million in 1998 under its medium-term note program. The Company retired $20 million of its 9 7/8% debt in May of 1998 for a cash payment of $23,386,000, which included a premium payment and interest due. Forecasted 2000 capital expenditures are expected to be financed from net cash flow provided from operations and additional borrowings under the medium-term note program and from Questar. Questar makes loans to Questar Pipeline under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $42.5 million with an interest rate of 6.61% at December 31, 1999 and $38 million with an interest rate of 5.71% at December 31, 1998. Questar Pipeline's capital structure at year-end 1999 was 59% long-term debt and 41% common shareholder's equity. Moody's and Standard and Poor's have rated the Company's long-term debt A1 and A+, respectively. Year 2000 Questar Corporation established a team to address the issue of computer programs and embedded computer chips being unable to distinguish between the year 1900 and the year 2000 (Y2K). The team identified 55 projects among Questar and its affiliated companies that were assessed, remediated, tested and determined to be completed. In the process, Questar employees contacted more than 8,000 vendors and suppliers to assess their readiness to meet obligations to Questar. The cost of the Y2K project was approximately $5.1 million and Questar Pipeline's portion was $1.0 million. Questar did not experience a disruption of operations because of Y2K. Preparation for Y2K provided several benefits. Questar completed an inventory of its primary systems and a testing laboratory. Systems were tested and remediated where necessary. The testing laboratory will become an important part of information-technology management. In response to the Y2K challenge, business contingency plans were revised and successfully tested. Forward-Looking Statements The Form 10-K contains forward-looking statements about future operations, capital spending, regulatory matters and expectations of Questar Pipeline. According to management, these statements are made in good faith and are reasonable representations of the Company's expected performance at the time. Actual results may vary from management's stated expectations and projections due to a variety of factors. Important assumptions and other significant factors that could cause actual results to differ materially from those discussed in forward-looking statements include changes in general economic conditions, gas prices and availability of gas supplies, competition, regulatory issues, weather conditions and other factors beyond the control of the Company. These other factors include the rate of inflation, and adverse changes in the business or financial condition of the Company. These factors are not necessarily all of the important factors that could cause actual results to differ significantly from those expressed in any forward-looking statements. Other unknown or unpredictable factors could also have a significant adverse effect on future results. The Company does not undertake an obligation to update forward-looking information contained herein or elsewhere to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's financial statements are included in Part IV, Item 14, herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has not changed its independent auditors or had any disagreements with them concerning accounting matters and financial statement disclosures within the last 24 months. PART III The Company, as the wholly owned subsidiary of a reporting person, is entitled to omit all information requested in Part III (Items 10-13). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1)(2) Financial Statements and Financial Statement Schedules. The financial statements identified on the List of Financial Statements are filed as part of this Report. (a)(3) Exhibits. The following is a list of exhibits required to be filed as a part of this Report in Item 14(c). Exhibit No. Exhibit 2.*1 Agreement of Transfer among Mountain Fuel Supply Company, Entrada Industries, Inc. and Mountain Fuel Resources, Inc., dated July 1, 1984. (Exhibit No. 2. to Registration Statement No. 2-96102 filed February 27, 1985.) 3.* Restated Articles of Incorporation dated November 17, 1995. (Exhibit No. 3. to Form 10-K Annual Report for 1995.) 3.3.* Bylaws (as amended on August 11, 1992). (Exhibit No. 3. to Form 10-Q Report for quarter ended June 30, 1992.) 4.1.*2 Indenture dated June 1, 1990, for 9-7/8% Debentures due 2020, with Morgan Guaranty Trust Company of New York as Trustee. (Exhibit No. 4. to Form 10-Q Report for quarter ended June 30, 1990.) 4.2.*2 Indenture dated as of June 1, 1991, for 9-3/8% Debentures due June 1, 2021, with Morgan Guaranty Trust Company of New York as Trustee. (Exhibit No. 4. to Form 10-Q Report for quarter ended June 30, 1991.) 4.3.* Indenture dated as of August 17, 1998, with First Security Bank, N.A., as Trustee, for Debt Securities. (Exhibit No. 4.01. to Registration Statement on Form S-3 (No. 333-61621) filed August 17, 1998.) 10.1.*1,3 Overthrust Pipeline Company General Partnership Agreement dated September 20, 1979, as amended and restated as of October 11, 1982, and as amended August 21, 1991, among CIG Overthrust, Inc., Columbia Gulf Transmission Company; Mountain Fuel Resources, Inc.; NGPL-Overthrust Inc.; Northern Overthrust Pipeline Company; and Tennessee Overthrust Gas Company. (Exhibit No. 10.4. to Form 10-K Annual Report for 1985, except that the amendment dated August 21, 1991, is included as Exhibit No. 10.4. to Form 10-K Annual Report for 1992.) 10.2.*4 Joint Annual Management Incentive Plan adopted by Questar Pipeline Company, Questar Gas Company, and Questar Regulated Services Company, as amended and restated effective May 18, 1999. (Exhibit No. 10.1. to Form 10-Q Report for quarter ended June 30, 1999.) 10.3.* Partnership Agreement for the TransColorado Gas Transmission Company dated July 1, 1997, between KN TransColorado, Inc. and Questar TransColorado, Inc. (Exhibit No. 10.4. to Form 10-K Annual Report for 1997.) 10.4.* Letter of Understanding dated July 13, 1998, on Issues Relating to Phase II of TransColorado between Questar TransColorado, Inc. and KN TransColorado, Inc. (Exhibit No. 10.1. to Form 10-Q Report for quarter ended June 30, 1998.) 10.5.5* Firm Transportation Service Agreement with Mountain Fuel Supply Company under Rate Schedule T-1 dated August 10, 1993. (Exhibit No. 10.5. to Form 10-K Annual Report for 1993.) 10.6.*5 Storage Service Agreement with Mountain Fuel Supply Company under Rate Schedule FSS, for 3.5 Bcf of working gas capacity at Clay Basin, with a term from September 1, 1993, through August 31, 2008. (Exhibit No. 10.6. to Form 10-K Annual Report for 1993.) 10.7.*5 Storage Service Agreement with Mountain Fuel Supply Company under Rate Schedules FSS, for 3.5 Bcf of working gas capacity at Clay Basin with a term from September 1, 1993, through August 31, 2013. (Exhibit No. 10.7. to Form 10-K Annual Report for 1993.) 10.8.*5 Storage Service Agreement with Mountain Fuel Supply Company under Rate Schedule FSS, for 5.5 Bcf of working gas capacity at Clay Basin, with a term from May 15, 1994 through May 14, 2019. (Exhibit No. 10.8. to Form 10-K Annual Report for 1995.) 10.9.*4 Questar Pipeline Company Deferred Compensation Plan for Directors, as amended and restated May 19, 1998. (Exhibit No. 10.3. to Form 10-Q Report for quarter ended June 30, 1998.) 10.10.* Agreement for the Transfer of Assets between Questar Pipeline Company and Questar Gas Management Company, as amended, effective March 1, 1996. (Exhibit No. 10.11. to Form 10-K Annual Report for 1996.) 10.11.* Asset Purchase Agreement dated October 23, 1998, between Questar Line 90 Company, a wholly-owned subsidiary, and ARCO Pipeline Company. (Exhibit No. 10.5. to Form 10-Q Report for quarter ended September 30, 1998.) 12. Ratio of Earnings to Fixed Charges. 21. Subsidiary Information. 23. Consent of Independent Auditors 24. Power of Attorney. 27. Financial Data Schedule. _______________ *Exhibits so marked have been filed with the Securities and Exchange Commission as part of the indicated filing and are incorporated herein by reference. 1The documents listed here have not been formally amended to refer to the Company's current name. They still refer to the Company as Mountain Fuel Resources, Inc. 2First Security Bank, N.A., serves as the successor trustee. 3The Overthrust Partnership Agreement has not been formally amended to delete the names of Columbia Gulf Transmission Company, Tennessee Overthrust Gas Company, and Northern Overthrust Pipeline Company as partners. 4Exhibit so marked is management contract or compensation plan or arrangement. 5Agreement incorporates specified terms and conditions of Questar Pipeline's FERC Gas Tariff, First Revised Volume No. 1. The tariff provisions are not filed as part of the exhibit, but are available upon request. (b) The Company did not file a Current Report on Form 8-K during the last quarter of 1999. ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a) (1) and (2), and (d) LIST OF FINANCIAL STATEMENTS FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA YEAR ENDED DECEMBER 31, 1999 QUESTAR PIPELINE COMPANY SALT LAKE CITY, UTAH FORM 10-K -- ITEM 14 (a) (1) AND (2) QUESTAR PIPELINE COMPANY AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following financial statements of Questar Pipeline Company are included in Item 8: Consolidated statements of income -- Years ended December 31, 1999, 1998 and 1997 Consolidated balance sheets -- December 31, 1999 and 1998 Consolidated statements of cash flows -- Years ended December 31, 1999, 1998 and 1997 Consolidated statements of shareholder's equity -- Years ended December 31, 1999, 1998 and 1997 Notes to consolidated financial statements All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Report of Independent Auditors Board of Directors Questar Pipeline Company We have audited the accompanying balance sheets of Questar Pipeline Company as of December 31, 1999 and 1998, and the related statements of income and common shareholder's equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Questar Pipeline Company at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/Ernst & Young Ernst & Young Salt Lake City, Utah February 7, 2000 QUESTAR PIPELINE COMPANY CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 1999 1998 1997 (In Thousands) REVENUES From unaffiliated customers $36,922 $37,156 $36,343 From affiliates 75,238 71,401 69,094 TOTAL REVENUES 112,160 108,557 105,437 OPERATING EXPENSES Operating and maintenance 38,534 38,832 37,334 Depreciation and amortization 16,743 13,927 14,797 Other taxes 2,488 2,600 2,816 TOTAL OPERATING EXPENSES 57,765 55,359 54,947 OPERATING INCOME 54,395 53,198 50,490 OTHER INCOME 4,229 78 1,323 OPERATIONS OF UNCONSOLIDATED AFFILIATES Income (loss) (5,109) 4,011 4,629 Write-down of investment in partnership (49,700) (54,809) 4,011 4,629 DEBT EXPENSE (17,466) (14,456) (13,536) INCOME (LOSS) BEFORE INCOME TAXES (13,651) 42,831 42,906 INCOME TAXES (CREDIT) (5,260) 14,940 16,338 NET INCOME (LOSS) ($8,391) $27,891 $26,568
See notes to consolidated financial statements. QUESTAR PIPELINE COMPANY CONSOLIDATED BALANCE SHEETS
ASSETS December 31, 1999 1998 CURRENT ASSETS Cash and short-term investments $2,387 $9,990 Note receivable from Questar 1,100 Accounts receivable 17,758 20,234 Accounts receivable from affiliates 3,946 1,070 Inventories, at lower of average cost or market 2,443 2,203 Prepaid expenses and deposits 1,782 1,714 TOTAL CURRENT ASSETS 29,416 35,211 PROPERTY, PLANT AND EQUIPMENT Transmission 332,271 323,953 Storage 218,513 221,220 Processing 20,493 General and intangible 44,372 44,428 Construction work in progress 82,587 80,855 698,236 670,456 Less allowances for depreciation 228,784 215,589 NET PROPERTY, PLANT AND EQUIPMENT 469,452 454,867 INVESTMENT IN UNCONSOLIDATED AFFILIATES 11,724 54,712 OTHER ASSETS Income taxes recoverable from customers 4,323 4,359 Unamortized costs of reacquired debt 4,398 4,717 Other 3,714 3,430 TOTAL OTHER ASSETS 12,435 12,506 $523,027 $557,296
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31, 1999 1998 CURRENT LIABILITIES Note payable to Questar $42,500 $38,000 Accounts payable and accrued expenses Accounts and other payable 7,145 42,882 Accounts payable to affiliates 3,409 3,744 Federal income taxes 1,560 383 Other taxes 1,471 3,039 Accrued interest 1,621 999 Total accounts payable and accrued expenses 15,206 51,047 TOTAL CURRENT LIABILITIES 57,706 89,047 LONG-TERM DEBT 245,001 202,991 OTHER LIABILITIES 3,118 4,546 DEFERRED INCOME TAXES 49,891 63,510 COMMITMENTS AND CONTINGENCIES - Note 6 COMMON SHAREHOLDER'S EQUITY Common stock - par value $1 per share; authorized 25,000,000 shares; issued and outstanding 6,550,843 shares 6,551 6,551 Additional paid-in capital 82,034 82,034 Retained earnings 78,726 108,617 TOTAL COMMON SHAREHOLDER'S EQUITY 167,311 197,202 $523,027 $557,296
See notes to consolidated financial statements. QUESTAR PIPELINE COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Additional Common Paid-in Retained Stock Capital Earnings (In Thousands) Balance at January 1, 1997 $6,551 $82,034 $95,908 1997 net income 26,568 Cash dividends (20,750) Balance at December 31, 1997 6,551 82,034 101,726 1998 net income 27,891 Cash dividends (21,000) Balance at December 31, 1998 6,551 82,034 108,617 1999 net loss (8,391) Cash dividends (21,500) Balance at December 31, 1999 $6,551 $82,034 $78,726
See notes to consolidated financial statements. QUESTAR PIPELINE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1999 1998 1997 (In Thousands) OPERATING ACTIVITIES Net income (loss) ($8,391) $27,891 $26,568 Depreciation and amortization 17,847 14,977 15,886 Deferred income taxes (13,619) 1,212 1,526 Write-down of investment in partnership 49,700 (Income) loss from unconsolidated affiliates, net of cash distributions 7,701 (1,735) (4,413) 53,238 42,345 39,567 Changes in operating assets and liabilities Accounts receivable (400) (10,453) (3,068) Federal income taxes 1,177 321 508 Prepaid expenses and deposits (68) 321 (97) Accounts payable and accrued expenses (37,018) 28,847 4,851 Other (1,586) (398) 1,475 NET CASH PROVIDED FROM OPERATING ACTIVITIES 15,343 60,983 43,236 INVESTING ACTIVITIES Capital expenditures Property, plant and equipment (36,010) (88,318) (26,382) Other investments (14,414) (26,000) (6,214) Total capital expenditures (50,424) (114,318) (32,596) Proceeds from (costs of) disposition of property, plant and equipment 3,578 (3,350) 635 NET CASH USED IN INVESTING ACTIVITIES (46,846) (117,668) (31,961) FINANCING ACTIVITIES Change in note receivable from Questar (1,100) Change in note payable to Questar 4,500 12,200 14,000 Long-term debt issued 42,000 88,400 Long-term debt repaid (20,000) Payment of dividends (21,500) (21,000) (20,750) NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES 23,900 59,600 (6,750) Change in cash and short-term investments (7,603) 2,915 4,525 Beginning cash and short-term investments 9,990 7,075 2,550 ENDING CASH AND SHORT-TERM INVESTMENTS $2,387 $9,990 $7,075
See notes to consolidated financial statements. QUESTAR PIPELINE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Accounting Policies Principles of Consolidation: The consolidated financial statements contain the accounts of Questar Pipeline Company and subsidiaries (the Company or Questar Pipeline). The Company is a wholly-owned subsidiary of Questar Regulated Services Company (Regulated Services). Regulated Services is a holding company and wholly-owned subsidiary of Questar Corporation (Questar). Regulated Services was organized in 1996 and provides administrative, accounting, engineering, legal and regulatory functions for its three subsidiaries, Questar Pipeline, Questar Gas Company (Questar Gas) and Questar Energy Services. Questar Pipeline provides storage and interstate transportation of natural gas. A subsidiary, Questar Transportation Services, operates a plant designed to remove carbon dioxide from a pipeline. A subsidiary, Questar Line 90 Company, has acquired an oil pipeline and another subsidiary, Questar Southern Trails Pipeline Company, will be the operator of the pipeline. All significant intercompany balances and transactions have been eliminated in consolidation. Investment in Unconsolidated Affiliates: Questar Pipeline increased its ownership in the Overthrust Pipeline partnership to 72%. The Company acquired an additional 18% interest from another partner effective January 1, 2000. Questar Pipeline is the operator of the Overthrust Segment of the Trailblazer Pipeline System. Approval of all partners is required for all substantive policy matters. Questar Pipeline, through a subsidiary, TransColorado Gas Transmission Company, owns 50% of the TransColorado Pipeline. Generally, the Company's investment in these affiliates equals the underlying equity in net assets, except for TransColorado where the investment was written down. The Company experienced an other-than-temporary decline in its partnership investment caused by low volumes resulting from unfavorable regional transportation economics. Regulation: Questar Pipeline is regulated by the Federal Energy Regulatory Commission (FERC) which establishes rates for the transportation and storage of natural gas. The FERC also regulates, among other things, the extension and enlargement or abandonment of jurisdictional natural gas facilities. Regulation is intended to permit the recovery, through rates, of the cost of service including a rate of return on investment. The financial statements are presented in accordance with regulatory requirements. Methods of allocating costs to time periods, in order to match revenues and expenses, may differ from those of nonregulated businesses because of cost allocation methods used in establishing rates. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent liabilities reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition: Revenues are recognized in the period that services are provided or products are delivered. Questar Pipeline periodically collects revenues subject to possible refunds pending final orders from the FERC. The Company establishes reserves for revenues collected subject to refund. Cash and Short-Term Investments: Short-term investments consist principally of repurchase agreements with maturities of three months or less. Property, Plant and Equipment: Property, plant and equipment is stated at cost. The provision for depreciation is based upon rates, which will systematically charge the costs of assets over their estimated useful lives. The costs of property, plant and equipment are depreciated in the financial statements using the straight-line method, ranging from 3% to 33% per year and averaging 3.4% in 1999. Allowance for Funds Used During Construction: The Company capitalized the cost of capital during the construction period of plant and equipment, which amounted to $4,337,000 in 1999, $686,000 in 1998, and $387,000 in 1997. Reacquisition of Debt: Gains and losses on the reacquisition of debt are deferred and amortized as debt expense over the remaining life of the issue in order to match regulatory treatment. Income Taxes: Questar Pipeline records cumulative increases in deferred taxes as income taxes recoverable from customers. The Company has adopted procedures with its regulatory commissions to include under-and over-provided deferred taxes in customer rates on a systematic basis. Questar Pipeline uses the deferral method to account for investment tax credits as required by the FERC. The Company's operations are consolidated with those of Questar and its subsidiaries for income tax purposes. The income tax arrangement between Questar Pipeline and Questar provides that amounts paid to or received from Questar are substantially the same as would be paid or received by the Company if it filed a separate return. Questar Pipeline also receives payment for tax benefits used in the consolidated tax return even if such benefits would not have been usable had the Company filed a separate return. Note 2 - Investment in Unconsolidated Affiliates Questar Pipeline, through its subsidiaries, has interests in partnerships accounted for on the equity basis. Transportation of natural gas is the primary business activity of these partnerships. Summarized information of the partnerships follow:
1999 1998 1997 (In Thousands) Year Ended December 31, Revenues $10,676 $7,958 $6,302 Operating income (loss) (3,315) 3,209 1,927 Income (loss) (10,014) 8,601 10,122 At December 31, Current assets $5,762 $12,933 $5,291 Total assets 325,371 293,034 75,370 Current liabilities 24,237 21,751 20,333 Total liabilities 248,503 181,967 20,504
Note 3 - Debt Questar makes loans to Questar Pipeline under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $42.5 million with an interest rate of 6.61% at December 31, 1999 and $38 million with an interest rate of 5.71% at December 31, 1998. Questar Pipeline also invests excess cash balances with Questar. The funds are centrally managed by Questar and earn an interest rate that is identical to the interest rate paid by the subsidiaries borrowing from Questar. Note receivable from Questar as of December 31, 1999 amounted to $1.1 million. Questar Pipeline filed a shelf-registration statement with the Securities and Exchange Commission for the issuance of up to $175 million in medium-term notes effective September 2, 1998. Questar Pipeline issued $42 million in 1999 and $88.4 million of medium-term notes in 1998. The details of long-term debt at December 31 were as follows:
1999 1998 (In Thousands) Medium-term notes 5.85% to 7.55%, due 2008 to 2019 $130,400 $88,400 9 3/8% debentures due 2021 85,000 85,000 9 7/8% debentures due 2020 30,000 30,000 Total long-term debt outstanding 245,400 203,400 Less unamortized debt discount 399 409 $245,001 $202,991
Yearly sinking fund redemptions of the 9 3/8% debt begin in 2002 in the amount of $4,250,000. There are no debt provisions restricting the payment of dividends. Cash paid for interest was $19,030,000 in 1999, $14,761,000 in 1998 and $13,351,000 in 1997. At December 31, 1999, Questar Pipeline guaranteed $100 million of long-term debt borrowed by TransColorado Gas Transmission Company. The partnership has borrowed $200 million under a three-year revolving-credit arrangement dated October 1998. Note 4 - Financial Instruments The carrying amounts and estimated fair values of the Company's financial instruments at December 31 were as follows:
1999 1998 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (In Thousands) Financial assets Cash and short-term investments $2,387 $2,387 $9,990 $9,990 Financial liabilities Short-term loans 42,500 42,500 38,000 38,000 Long-term debt 245,001 240,602 202,991 218,309
The Company used the following methods and assumptions in estimating fair values: (1) Cash and short-term investments and short-term loans - the carrying amount approximates fair value; (2) Long-term debt - the fair value of long-term debt is based on quoted market prices. Fair value is calculated at a point in time and does not represent the amount the Company would pay to retire the debt securities. Credit Risk: Questar Pipeline's primary market areas are the Rocky Mountain and southwestern regions of the United States. The Company's exposure to credit risk may be impacted by the concentration of customers in these regions due to changes in economic or other conditions. The Company's customers may be affected differently by changing conditions. Management believes that its credit-review procedures, loss reserves and collection procedures have adequately provided for usual and customary credit-related losses. Note 5 - Income Taxes The components of income taxes for years ended December 31 were as follows:
1999 1998 1997 (In Thousands) Federal Current $7,852 $12,341 $13,247 Deferred (13,466) 1,257 1,273 State Current 721 1,108 1,542 Deferred (367) 234 276 ($5,260) $14,940 $16,338
The difference between income tax expense and the tax computed by applying the statutory federal income tax rate of 35% to income (loss) before income taxes is explained as follows:
1999 1998 1997 (In Thousands) Income (loss) before income taxes ($13,651) $42,831 $42,906 Federal income taxes (credit) at statutory rate ($4,778) $14,991 $15,017 State income taxes, net of federal income tax benefit 230 872 1,204 Prior years' tax settlement (410) (388) 134 Other (302) (535) (17) Income taxes ($5,260) $14,940 $16,338 Effective income tax rate 38.5% 34.9% 38.1%
Significant components of the Company's deferred tax liabilities and assets at December 31 were as follows:
1999 1998 (In Thousands) Property, plant and equipment $66,008 $57,033 Other 7,173 6,879 Total deferred tax liabilities 73,181 63,912 Deferred tax assets Associated with write-down of investment in partnership 18,400 Capitalized A & G and other 4,890 402 Total deferred tax assets 23,290 402 Net deferred tax liabilities $49,891 $63,510
Cash paid for income taxes was $7,353,000 in 1999, $13,004,000 in 1998 and $13,844,000 in 1997. Note 6 - Rate Matters, Litigation and Commitments A subsidiary of Questar Pipeline, Questar Southern Trails Pipeline Company, filed an application with the FERC in January 1999 requesting permission to convert a 700-mile crude oil pipeline, extending from New Mexico to Long Beach, California, to carry natural gas. The application also seeks authority to install required compression equipment and to upgrade the system to carry 120 MMDth of gas per day on the western segment and up to 87.5 MMDth per day on the eastern segment. A preliminary determination on non-environmental issues was ordered by the FERC October 15, 1999 that provided a favorable outcome. The environmental process is continuing and the FERC will not grant a final certificate until the environmental review process is completed. A certificate could be granted in the late in 2000. Because of the time necessary to obtain regulatory approval, meet construction schedules and gauge current market conditions, Questar Pipeline does not expect to have the line in service before mid-2001. Overthrust Pipeline, a pipeline partnership operated by Questar Pipeline, filed a general rate case on October 1, 1999 requesting a $1 million increase in annual rates. Hearings before the FERC are scheduled for August 21, 2000. Overthrust is seeking a settlement with the FERC and shippers prior to the August 2000 hearing date. Questar Pipeline last filed a general rate case in 1995, and the FERC granted an 11.75% return on equity. Questar and its affiliates are involved in several cases filed by an independent producer, Jack Grynberg. The first case resulted in an adverse jury verdict in 1994; the presiding federal district court judge in Wyoming entered a judgment as a matter of law that vacated most portions of the original jury verdicts. The Tenth Circuit Court of Appeals, in January of 2000, reinstated some portions of the original jury verdict. Specifically, the appellate court reversed the trial court's judgment on take-or-pay, breach of contract, intentional interference with a contract, and price on deregulation claims. The Tenth Circuit upheld the district court's determination on duty to decontrol, working interest ownership, and stolen gas claims. The final judgment will be paid by Questar Gas, who assumed all of the Company's gas supply functions after the issuance of FERC Order 636. Questar Gas, as a result of acquiring Questar Pipeline's gas purchase contracts, is liable for the judgment, which it estimates at $5.1 million, when interest is added to the portions of the jury verdict that were reinstated on appeal. Questar Gas plans to include any amounts that it is required to pay to Grynberg in its gas purchase balancing account. Grynberg filed a second case before the same federal district court in 1997, alleging new claims, including antitrust and fraud, in addition to the same claims raised in the initial litigation for a later period of time. This case has been stayed pending the outcome of the Tenth Circuit appeal, although the district court did rule favorably on Questar's motion for a partial summary judgment. Questar affiliates are also named defendants in a lawsuit filed by Grynberg under the Federal False Claims Act. This case and the 75 substantially similar cases filed by Grynberg against pipelines and their affiliates have been consolidated for discovery and pre-trial rulings in Wyoming federal district court. The cases involve allegations of industry-wide mismanagement of the value of gas on which royalty payments are due the federal government. The complaint also seeks treble damages and imposition of civil penalties. It is too early to estimate the outcome of the various cases filed by Grynberg against Questar affiliates, with the exception of the first case that has been resolved by the Tenth Circuit. There are various other legal proceedings against Questar Pipeline. While it is not currently possible to predict or determine the outcomes of these proceedings, it is the opinion of management that the outcomes will not have a material adverse effect on the Company's results of operations, financial position or liquidity. Note 7 - Employment Benefits Pension Plan: Substantially all of Questar Pipeline's employees are covered by Questar's defined benefit pension plan. Benefits are generally based on years of service and the employee's 72-pay period interval of highest earnings during the ten years preceding retirement. It is Questar's policy to make contributions to the plan at least sufficient to meet the minimum funding requirements of applicable laws and regulations. Plan assets consist principally of equity securities and corporate and U.S. government debt obligations. Questar Pipeline's portion of plan assets and benefit obligations is not determinable because the plan assets are not segregated or restricted to meet the Company's pension obligations. If the Company were to withdraw from the pension plan, the pension obligation for the Company's employees would be retained by the pension plan. At December 31, 1999, Questar's fair value of plan assets exceeded the net benefit obligation. Eligible employees in Regulated Services were offered an early-retirement program that was effective July 31, 1998. Enhanced benefits were paid to 178 employees taking advantage of the offer. Costs associated with the early-retirement program are being amortized over a five-year period in accordance with anticipated regulatory treatment. Pension cost was $411,000 in 1999, $382,000 in 1998 and $520,000 in 1997. Postretirement Benefits Other Than Pensions: Generally postretirement health-care benefits and life insurance are provided only to employees hired before January 1, 1997. Questar Pipeline pays a portion of postretirement health-care costs as determined by an employee's years of service and limited to 170% of the 1992 contribution. The Company's policy is to fund amounts allowable for tax deduction under the Internal Revenue Code. Plan assets consist of equity securities, and corporate and U.S. government debt obligations. The Company is amortizing the transition obligation over a 20-year period, which began in 1992. The FERC allows rate-recovery of future postretirement benefits costs to the extent that contributions are made to an external trust. Questar Pipeline has recorded a $1.1 million regulatory liability as of December 31, 1999. As a result of returns earned on investments, the Company recorded a $223,000 expense reduction in 1999. Costs of postretirement benefits other than pensions were $69,000 in 1998 and $257,000 in 1997. Questar Pipeline's portion of plan assets and benefit obligations related to postretirement medical and life insurance benefits is not determinable because the plan assets are not segregated or restricted to meet the Company's obligations. Postemployment Benefits: Questar Pipeline recognizes the net present value of the liability for postemployment benefits, such as long-term disability benefits and health-care and life-insurance costs, when employees become eligible for such benefits. Postemployment benefits are paid to former employees after employment has been terminated but before retirement benefits are paid. The Company accrues both current and future costs. The Company has a regulatory asset amounting to $671,000 as of December 31, 1999. Employee Investment Plan: The Company participates in Questar's Employee Investment Plan (Plan), which allows eligible employees to purchase Questar common stock or other investments through payroll deduction. The Company makes matching contributions of Questar common stock to the Plan of approximately 75%, increasing to 80% in 1999, of the employees' purchases and contributes an additional $200 of common stock in the name of each eligible employee. The Company's expense and contribution to the plan was $281,000 in 1999, $302,000 in 1998 and $348,000 in 1997. Note 8 - Related-Party Transactions Regulated Services began providing administrative, technical and accounting support in 1997 and legal and regulatory support in 1998. Regulated Services charged Questar Pipeline $22,623,000 in 1999, $15,271,000 in 1998 and $12,895,000 in 1997. The majority of these costs are allocated and included in operating and maintenance expenses. The allocation methods are based on several methods dictated by the nature of the charges. Management believes that the allocation methods are reasonable. Questar Pipeline receives a substantial portion of its revenues from Questar Gas Company. Revenues received from Questar Gas amounted to $71,636,000 in 1999, $67,528,000 in 1998 and $64,924,000 in 1997. The Company also received revenues from other affiliated companies totaling $3,602,000 in 1999, $3,873,000 in 1998 and $4,170,000 in 1997. Questar performs certain administrative functions for Questar Pipeline. The Company was charged for its allocated portion of these services which totaled $2,424,000 in 1999, $2,173,000 in 1998 and $2,748,000 in 1997. These costs are included in operating and maintenance expenses and are allocated based on each affiliate's proportional share of revenues, net of gas costs; property, plant and equipment; and payroll. Management believes that the allocation method is reasonable. Questar InfoComm Inc is an affiliated company that provides data processing and communication services to Questar Pipeline. Direct charges paid by the Company to Questar InfoComm amounted to $8,345,000 in 1999, $10,548,000 in 1998 and $9,458,000 in 1997. Questar Pipeline has a 12-year lease with an option for renewal with an affiliate for some space in an office building located in Salt Lake City, Utah. The annual lease payment in 1999 and for the next four years is $580,000. The Company incurred debt expense payable to Questar of $2,087,000 in 1999, $2,420,000 in 1998 and $348,000 in 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on the 28th day of March, 2000. QUESTAR PIPELINE COMPANY (Registrant) By /s/ D. N. Rose D. N. Rose President & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ D. N. Rose President & Chief Executive Officer; D. N. Rose Director (Principal Executive Officer) /s/ S. E. Parks Vice President, Treasurer and Chief S. E. Parks Financial Officer (Principal Financial Officer) /s/ G. H. Robinson Vice President and Controller G. H. Robinson (Principal Accounting Officer) *R. D. Cash Chairman of the Board; Director *U. Edwin Garrison Director *Marilyn S. Kite Director *Scott S. Parker Director *D. N. Rose Director March 28, 2000 *By /s/ D. N. Rose Date D. N. Rose, Attorney in Fact EXHIBIT INDEX Exhibit Number Exhibit 2.*1 Agreement of Transfer among Mountain Fuel Supply Company, Entrada Industries, Inc. and Mountain Fuel Resources, Inc., dated July 1, 1984. (Exhibit No. 2. to Registration Statement No. 2-96102 filed February 27, 1985.) 3.* Restated Articles of Incorporation dated November 17, 1995. (Exhibit No. 3. to Form 10-K Annual Report for 1995.) 3.3.* Bylaws (as amended on August 11, 1992). (Exhibit No. 3. to Form 10-Q Report for quarter ended June 30, 1992.) 4.1.*2 Indenture dated June 1, 1990, for 9-7/8% Debentures due 2020, with Morgan Guaranty Trust Company of New York as Trustee. (Exhibit No. 4. to Form 10-Q Report for quarter ended June 30, 1990.) 4.2.*2 Indenture dated as of June 1, 1991, for 9-3/8% Debentures due June 1, 2021, with Morgan Guaranty Trust Company of New York as Trustee. (Exhibit No. 4. to Form 10-Q Report for quarter ended June 30, 1991.) 4.3.* Indenture dated as of August 17, 1998, with First Security Bank, N.A., as Trustee, for Debt Securities. (Exhibit No. 4.01. to Registration Statement on Form S-3 (No. 333-61621) filed August 17, 1998.) 10.1.*1,3 Overthrust Pipeline Company General Partnership Agreement dated September 20, 1979, as amended and restated as of October 11, 1982, and as amended August 21, 1991, among CIG Overthrust, Inc., Columbia Gulf Transmission Company; Mountain Fuel Resources, Inc.; NGPL-Overthrust Inc.; Northern Overthrust Pipeline Company; and Tennessee Overthrust Gas Company. (Exhibit No. 10.4. to Form 10-K Annual Report for 1985, except that the amendment dated August 21, 1991, is included as Exhibit No. 10.4. to Form 10-K Annual Report for 1992.) 10.2.*4 Joint Annual Management Incentive Plan adopted by Questar Pipeline Company, Questar Gas Company, and Questar Regulated Services Company, as amended and restated effective May 18, 1999. (Exhibit No. 10.1. to Form 10-Q Report for quarter ended June 30, 1999.) 10.3.* Partnership Agreement for the TransColorado Gas Transmission Company dated July 1, 1997, between KN TransColorado, Inc. and Questar TransColorado, Inc. (Exhibit No. 10.4. to Form 10-K Annual Report for 1997.) 10.4.* Letter of Understanding dated July 13, 1998, on Issues Relating to Phase II of TransColorado between Questar TransColorado, Inc. and KN TransColorado, Inc. (Exhibit No. 10.1. to Form 10-Q Report for quarter ended June 30, 1998.) 10.5.5* Firm Transportation Service Agreement with Mountain Fuel Supply Company under Rate Schedule T-1 dated August 10, 1993. (Exhibit No. 10.5. to Form 10-K Annual Report for 1993.) 10.6.*5 Storage Service Agreement with Mountain Fuel Supply Company under Rate Schedule FSS, for 3.5 Bcf of working gas capacity at Clay Basin, with a term from September 1, 1993, through August 31, 2008. (Exhibit No. 10.6. to Form 10-K Annual Report for 1993.) 10.7.*5 Storage Service Agreement with Mountain Fuel Supply Company under Rate Schedules FSS, for 3.5 Bcf of working gas capacity at Clay Basin with a term from September 1, 1993, through August 31, 2013. (Exhibit No. 10.7. to Form 10-K Annual Report for 1993.) 10.8.*5 Storage Service Agreement with Mountain Fuel Supply Company under Rate Schedule FSS, for 5.5 Bcf of working gas capacity at Clay Basin, with a term from May 15, 1994 through May 14, 2019. (Exhibit No. 10.8. to Form 10-K Annual Report for 1995.) 10.9.*4 Questar Pipeline Company Deferred Compensation Plan for Directors, as amended and restated May 19, 1998. (Exhibit No. 10.3. to Form 10-Q Report for quarter ended June 30, 1998.) 10.10.* Agreement for the Transfer of Assets between Questar Pipeline Company and Questar Gas Management Company, as amended, effective March 1, 1996. (Exhibit No. 10.11. to Form 10-K Annual Report for 1996.) 10.11.* Asset Purchase Agreement dated October 23, 1998, between Questar Line 90 Company, a wholly-owned subsidiary, and ARCO Pipeline Company. (Exhibit No. 10.5. to Form 10-Q Report for quarter ended September 30, 1998.) 12. Ratio of Earnings to Fixed Charges. 21. Subsidiary Information. 23. Consent of Independent Auditors 24. Power of Attorney. 27. Financial Data Schedule. _______________ *Exhibits so marked have been filed with the Securities and Exchange Commission as part of the indicated filing and are incorporated herein by reference. 1The documents listed here have not been formally amended to refer to the Company's current name. They still refer to the Company as Mountain Fuel Resources, Inc. 2First Security Bank, N.A., serves as the successor trustee. 3The Overthrust Partnership Agreement has not been formally amended to delete the names of Columbia Gulf Transmission Company, Tennessee Overthrust Gas Company, and Northern Overthrust Pipeline Company as partners. 4Exhibit so marked is management contract or compensation plan or arrangement. 5Agreement incorporates specified terms and conditions of Questar Pipeline's FERC Gas Tariff, First Revised Volume No. 1. The tariff provisions are not filed as part of the exhibit, but are available upon request. (b) The Company did not file a Current Report on Form 8-K during the last quarter of 1999. EX-12 2 Exhibit No. 12. Questar Pipeline Company and Subsidiaries Ratio of Earnings to Fixed Charges
12 months ended December 31, 1999 1998 1997 (Dollars in Thousands) Earnings Income (loss) before income taxes ($13,651) $42,831 $42,906 Plus debt expense 17,466 14,456 13,536 Plus allowance for borrowed funds used during construction 2,677 625 210 Plus interest portion of rental expense 173 342 261 $6,665 $58,254 $56,913 Fixed Charges Debt expense $17,466 $14,456 $13,536 Plus allowance for borrowed funds used during construction 2,677 625 210 Plus interest portion of rental expense 173 342 261 $20,316 $15,423 $14,007 Ratio of Earnings to Fixed Charges 0.33 3.78 4.06
EX-21 3 SUBSIDIARY INFORMATION Registrant Questar Pipeline Company has four subsidiaries: Questar TransColorado, Inc., Questar Line 90 Company, Questar Southern Trails Company, and Questar Transportation services Company, which are all Utah corporations. EX-23 4 Exhibit 23. Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-61621) of Questar Pipeline Company and in the related Prospectus of our report dated February 7, 2000, with respect to the consolidated financial statements of Questar Gas Company included in this annual Report (Form 10-K) for the year ended December 31, 1999. Salt Lake City, Utah March 28, 2000 EX-24 5 POWER OF ATTORNEY We, the undersigned directors of Questar Pipeline Company, hereby severally constitute D. N. Rose and S. E. Parks, and each of them acting alone, our true and lawful attorneys, with full power to them and each of them to sign for us, and in our names in the capacities indicated below, the Annual Report on Form 10-K for 1999 and any and all amendments to be filed with the Securities and Exchange Commission by Questar Pipeline Company, hereby ratifying and confirming our signatures as they may be signed by the attorneys appointed herein to the Annual Report on Form 10-K for 1999 and any and all amendments to such Report. Witness our hands on the respective dates set forth below. Signature Title Date /s/ R. D. Cash Chairman of the Board 2-8-00 R. D. Cash /s/ D. N. Rose President and Chief 2-8-00 D. N. Rose Executive Officer Director /s/ U. Edwin Garrison Director 2-8-00 U. Edwin Garrison /s/ Marilyn S. Kite Director 2-8-00 Marilyn S. Kite /s/ Scott S. Parker Director 2-8-00 Scott S. Parker EX-27 6
5 The following schedule contains summarized financial information extracted from the Questar Pipeline Company Consolidated Statements of Income and Balance Sheets for the period ended December 31, 1999, and is qualified in its entirety by reference to such audited financial statements. 1,000 YEAR DEC-31-1999 DEC-31-1999 2,387 0 22,804 0 2,443 29,416 698,236 228,784 523,027 57,706 245,001 0 0 6,551 160,760 523,027 0 112,160 0 38,534 19,231 0 17,466 (13,651) (5,260) (8,391) 0 0 0 (8,391) 0 0
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