-----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, CMaiWkoua0aSn20eESidV368wC0fpj9yZrq+lYKsV5lLPrE5wpEHqOkjfsCxp8bD swIoGTMfVQd4OpAOTXPjPw== 0000764044-96-000004.txt : 19960401 0000764044-96-000004.hdr.sgml : 19960401 ACCESSION NUMBER: 0000764044-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NONE 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: 1934 Act SEC FILE NUMBER: 000-14147 FILM NUMBER: 96541052 BUSINESS ADDRESS: STREET 1: 79 S STATE ST STREET 2: P O BOX 11450 CITY: SALT LAKE CITY STATE: UT ZIP: 84147 BUSINESS PHONE: 8015302400 MAIL ADDRESS: STREET 1: 79 SOUTH STATE STREET STREET 2: P O BOX 11150 CITY: SALT LAKE CITY STATE: UT ZIP: 84147 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, 1995 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.) 79 South State Street, P.O. Box 11450, Salt Lake City, Utah 84147 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code:(801) 530-2400 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 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 No State the aggregate market value of the voting stock held by nonaffili- ates of the registrant as of March 22, 1996. $0. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 22, 1996. 6,550,843 shares of Common Stock, $1.00 par value. (All shares are owned by Questar Corporation.) Registrant meets the conditions set forth in General Instruction (J)(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 Gathering Storage Processing 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, 1995 PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES General Questar Pipeline Company (Questar Pipeline or the Company) is an interstate pipeline company that is engaged in the gathering, processing, transportation and storage of natural gas in the Rocky Mountain states of Utah, Wyoming, and Colorado. During 1995, the Company completed the expansion of its base-load storage project at Clay Basin, sought regulatory approval to spin down its gathering assets and activities to a subsidiary, filed a general rate case, completed the construction of the Blacks Fork plant through a joint venture, and pursued a salt cavern gas storage project. In 1995, Questar Pipeline was also forced to withdraw from the proposed acquisition of a one-half interest in the Kern River pipeline when the Federal Trade Commission determined to oppose the transaction on anticompetitive grounds. Questar Pipeline is a wholly owned subsidiary of Questar Corporation (Questar). 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, and certain other federal legislation. As an open-access pipeline, Questar Pipeline transports gas for affiliated and unaffiliated customers and also gathers gas for such 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 three partnerships, Blacks Fork Gas Processing Plant (Blacks Fork), Overthrust Pipeline Company (Overthrust), and TransColorado Gas Transmission Company (TransColorado). The Company has significant business relationships with its affiliates, particularly Mountain Fuel. Mountain Fuel, a regulated local distribution company that serves over 592,700 customers in Utah, southwestern Wyoming, and southeastern Idaho, has reserved approximately 800,000 decatherms (Dth) per day of firm capacity on the Company's transmission system. (A Dth is an amount of heat energy equal to 10 therms or one million British thermal units (Btu). In the Company's system, each thousand cubic feet of gas (Mcf) equals approximately 1.07 Dth.) Questar Pipeline transports natural gas owned by Mountain Fuel and produced from properties operated by Wexpro Company (Wexpro), another affiliate, as well as some natural gas volumes purchased directly by Mountain Fuel from field producers and other suppliers. The Company also transports volumes that are marketed by Universal Resources Corporation (Universal Resources), another affiliated entity. The following diagram sets forth the corporate structure of the Company and certain affiliates: Questar Corporation Entrada Industries Celsius Energy Company Wexpro Company Universal Resources Questar Pipeline Company Questar TransColorado, Inc. Questar Gas Management Company Mountain Fuel Supply Company Questar InfoComm, Inc. The major activities of Questar Pipeline are described in more detail below: Transmission System The Company's 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); Northwest Pipeline Corporation (Northwest Pipeline); Williams Natural Gas Company (Williams); and Kern River Gas Transmission Company (Kern River). These connections have opened markets outside Mountain Fuel's service area and allow the Company to transport gas for others. The Company's transmission system includes 1,754 miles of transmission lines that interconnect with other pipelines and that link various producers of natural gas with Mountain Fuel'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 Mountain Fuel.) 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 an 18 percent interest and is the operating partner in Overthrust, a general partnership that was organized in 1979 to construct, own, and operate the Overthrust segment of Trailblazer. 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. Since gas production from the Overthrust area is generally shipped on the Kern River pipeline to California, the Overthrust segment is currently underutilized. Columbia Gas Transmission Corporation, formerly one of the three primary shippers on Overthrust, was permitted to pay an exit fee during 1995 in order to terminate its obligation to pay demand costs. The settlement agreement specifying the exit fee was approved by the FERC and the bankruptcy court. Questar Pipeline and its partners have explored several alternatives to enhance the value of the Overthrust line. 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 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. The Company and its partners are continuing to pursue a project announced in 1990 to build and operate the proposed TransColorado pipeline. (Questar TransColorado, Inc., the Company's wholly owned subsidiary, is the named partner.) Questar Pipeline's partners are affiliates of El Paso Natural Gas Company (replacing Public Service Company of Colorado) and KN Energy, Inc. The proposed pipeline is 292 miles in length and would extend from the Piceance Basin in western Colorado to northwestern New Mexico, where it would interconnect with other major pipeline systems. As designed, the pipeline could transport up to 300 million cubic feet (MMcf) of gas per day from western Colorado and other producing basins in Wyoming and Utah to California and midwestern and southwestern markets. This project has received the necessary environmental clearance and regulatory approvals. The project, which was originally developed prior to the adoption of Order No. 636 and was delayed by regulatory and environmental approval processes, needs additional support from customers before construction will begin. The Kern River pipeline, which was originally a joint project between Tenneco, Inc. and The Williams Companies Inc., became operational in late February of 1992. Built to transport gas from Wyoming to the enhanced oil recovery projects in Kern County, California, this line runs through the major population areas of Utah. A tap--the Hunter Park tap--has been installed on the Kern River line in Salt Lake County. This tap makes it possible for Mountain Fuel and its transportation customers to take deliveries from the Kern River line. At the current time, however, no deliveries have been made from the Kern River line to industrial customers in the Wasatch Front area of Utah. In September of 1995, the Company announced an agreement to purchase Kern River Corporation, which was one of two equal partners in the Kern River Gas Transmission Company, the partnership that owned and operated the Kern River pipeline. Questar Pipeline was forced to withdraw its acquisition proposal in late December when the Federal Trade Commission determined to oppose the transaction based on antitrust concerns. Transportation Service Questar Pipeline's largest transportation customer is Mountain Fuel. During 1995, the Company transported 79,872 thousand decatherms (Mdth) for Mountain Fuel, compared to 75,941 Mdth in 1994. These transportation volumes include Mountain Fuel's cost-of-service gas produced by Wexpro, as well as some volumes purchased by Mountain Fuel directly from field producers and other suppliers. Prior to September 1, 1993, the Company purchased gas for resale to Mountain Fuel, its only sale-for-resale customer. As of such date, Questar Pipeline discontinued sales-for-resale service, and Mountain Fuel converted its firm sales capacity to firm transportation capacity. Mountain Fuel has reserved capacity of about 800,000 Dth per day, or approximately 79 percent of Questar Pipeline's reserved daily capacity. Mountain Fuel paid an annual demand charge of approximately $49.4 million to the Company in 1995, which includes demand charges attributable to firm transportation and "no-notice" transportation. Mountain Fuel only needs its total reserved capacity during peak-demand situations. When it is not fully utilizing its capacity, Mountain Fuel releases the capacity to others, primarily industrial transportation customers and marketing entities, and receives revenue credits from the Company, which were approximately $13.0 million during the 12-month period ending August 31, 1995. Questar Pipeline recovers approximately 96 percent of its transmission cost of service through demand charges from firm transportation customers. In other words, these customers pay for access to transportation capacity, rather than for the volumes actually transported. Consequently, the Company's throughput volumes do not have a significant impact 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 total system throughput increased from 250,284 Mdth in 1994 to 270,654 Mdth in 1995. As previously noted, some of this increase was attributable to increased transportation volumes for Mountain Fuel. The total throughput increase was also attributable to increased volumes for nonaffiliated customers (from 129,250 Mdth in 1994 to 151,943 Mdth in 1995). Universal Resources transported volumes on Questar Pipeline's system, but these volumes decreased from 45,093 Mdth in 1994 to 38,839 Mdth in 1995. Questar Pipeline's transmission system is an open-access system and has been since September of 1988. The FERC's Order No. 636 and 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 service. It, however, is currently obligated, on an annual basis, to credit 90 percent of the revenues, net of variable costs, obtained from such service to firm customers after it recovers $1.5 million in revenues associated with interruptible transportation service. (See "Regulatory Environment" for a description of the proposed settlement agreement in the Company's general rate case that includes a new allocation of revenues for interruptible transportation service.) In order to comply with Order No. 636, Questar Pipeline installed additional metering that permits "real time" measurement of gas transported on its system and an electronic bulletin board that allows interested parties to request capacity on such system. Questar Pipeline spent approximately $4.7 million on such equipment and expects to recover the costs of this equipment when the settlement agreement in its general rate case is approved. Questar Pipeline will continue to develop and build new lines and related facilities that will allow it to meet customer needs or to improve transportation services. During 1995, the Company conducted a two-part, $10 million project to increase gas deliverability from west Colorado's Piceance Basin by upgrading its Main Line 68 and the Fidlar Compressor Station south of Vernal, in eastern Utah. Gathering During 1995, the Company provided gathering services for Mountain Fuel and other customers, but the volumes associated with this activity decreased as Rocky Mountain producers responded to low wellhead prices by shutting in production. Questar Pipeline's gathering volumes decreased from 83,983 Mdth in 1994 to 76,668 Mdth in 1995. On March 1, 1996, the Company transferred its gathering assets and activities to Questar Gas Management Company (Questar Gas Management) once both parties obtained the necessary regulatory approvals from the FERC. Gathering services for Mountain Fuel are performed under an agreement that was filed with and accepted by the FERC during 1994. Questar Gas Management is obligated to gather gas volumes produced from Mountain Fuel's cost-of-service properties for the life of such properties; the contract to gather Mountain Fuel's field-purchased gas volumes expires in 1997. Questar Pipeline spun down its gathering activities and assets to Questar Gas Management, a nonregulated company, in order to remove such activities from possible regulation by the FERC and to follow the example set by other interstate pipelines. Questar Gas Management is also the named partner in the Blacks Fork processing plant and will continue to seek new opportunities to expand its gathering activities and to conduct other nonregulated services such as natural gas processing, balancing and aggregation services for producers, marketers, distribution companies, and other end users. Questar Gas Management owns 799 miles of gathering lines in addition to field dehydration plants, compressor facilities, and other facilities. Storage Questar Pipeline operates a major storage facility at Clay Basin in northeastern Utah. This storage reservoir has been operational since 1977; open-access storage service has been available at Clay Basin since June of 1991. 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 the approval of the FERC. In 1995, the Company completed a three-year project to expand the capacity of Clay Basin. The reservoir currently is certificated for 46.3 billion cubic feet (Bcf) of working gas capacity and a total capacity of 110 Bcf. (Working gas is gas that is injected and withdrawn. Cushion gas is gas in the formation that is necessary to maintain pressure and is not withdrawn under normal operating conditions.) As a result of this expansion, Clay Basin's maximum deliverability increased from 500 million cubic feet of gas (MMcf) per day to 765 MMcf per day. Clay Basin's firm storage capacity is fully subscribed by customers under long-term agreements. Mountain Fuel currently has 12.5 Bcf of working gas capacity at Clay Basin. Other large customers include Northwest Pipeline; Washington Natural Gas Company, a distribution utility in Washington; and BC Gas Inc., a distribution utility in British Columbia. Storage service is increasingly important to distribution companies that need to match annual gas purchases with fluctuating customer demand, improve service reliability, and avoid imbalance penalties. Questar Pipeline also owns and operates three smaller storage reservoirs. These projects were developed to serve Mountain Fuel's needs, and Mountain Fuel reserves 100 percent of their working gas capacity. These small reservoirs are used to supplement Mountain Fuel's gas supply needs on peak-days. Questar Pipeline has located a salt formation in southwestern Wyoming and has drilled a well to test the feasibility of utilizing it for a new salt cavern gas storage project. Working gas can be cycled more frequently in a salt cavern than in a depleted gas reservoir. Because of its location near several pipelines, this project should help satisfy growing customer demand for "quick-cycle" storage and load-balancing activities. Questar Pipeline is soliciting customer interest in the project. Processing In mid-1995, the Blacks Fork processing plant became operational. This project, which is located in southwestern Wyoming, was built and is operated as a joint venture between Questar Gas Management and an affiliate of Coastal Corporation. The plant has a capacity of 84 MMcf per day and was processing more than 60 MMcf per day at year-end. Natural gas liquids--ethane, propane, butane, and gasoline--are extracted from the natural gas volumes delivered to the plant. The new plant and the expanded gathering system built in 1994 provide producers more options for gathering and processing their gas volumes. Once the liquids are stripped, the natural gas can be transported by pipeline to end-use markets. The processing plant is not subject to the jurisdiction of the FERC. Questar Gas Management intends to pursue additional field processing opportunities. 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, in common with other interstate pipelines, chose to terminate its sale-for-resale function when it implemented FERC Order No. 636. To comply with Order No. 636, as amended, the Company restructured its tariff provisions to provide for firm and interruptible transportation and storage service, no-notice transportation service, a capacity release mechanism for shippers and a straight fixed-variable (SFV) rate methodology. It was also required to discontinue use of firm upstream capacity in its own name, to provide flexible receipt and delivery points for firm transportation customers, and to provide an interactive electronic bulletin board to assist with the administration of the new provisions. On July 31, 1995, the Company filed a general rate case application with the FERC. In its application, Questar Pipeline requested regulatory approval to increase its rates to collect an additional $23.3 million in annualized revenues and to reflect a return on equity of 14.5 percent. The Company's requested revenue increase included transition costs associated with Order No. 636, postemployment (retiree medical and long-term disability) costs, increased labor costs, and the costs of facilities added since the Company's last general rate case. Questar Pipeline began collecting the requested rates, subject to refund, on February 1, 1996. On March 8, 1996, the Company filed a proposed settlement agreement with the FERC that had been accepted by the FERC staff and most intervenors. The terms of the proposed settlement include an annualized revenue increase of $8.3 million, a return on equity of 11.75 percent, and a new sharing allocation for interruptible transportation revenues. The new allocation provision would permit Questar Pipeline, to the extent it is successful in marketing interruptible transportation services, to retain the first $800,000 in revenues associated with such service. In addition, it would be allowed to retain 50 percent of the revenues between $800,000 and $1.2 million and 25 percent of the revenues in excess of $1.2 million. The Company's settlement rates would be effective February 1, 1996. On March 15, 1996, the Gas Industry Standards Board, a group representing pipelines, distributors, end users, marketers, and service providers, filed a set of proposed standards with the FERC. The proposed standards, which are designed to facilitate the seamless transportation of gas volumes on pipeline systems, deal with such issues as nominating, capacity release, electronic delivery, and invoicing processes. The standards, when adopted by the FERC (in a proposed or modified version), may increase the costs for Questar Pipeline and all other pipeline systems, but should result in more efficient service for pipeline customers. The FERC recently relaxed its "at-risk" policy on pipeline projects. It established specific criteria for determining when "rolled-in" rates (rather than incremental rates) are appropriate. (The FERC's original at-risk policy meant that shareholders, not customers, would absorb any underrecovery of costs if incremental revenues for a new project did not cover the costs of such project.) Under the FERC's new policy, rolled-in rates will generally be approved if rates to existing customers will not increase by more than five percent and if specified system-wide operational and financial benefits can be demonstrated. The FERC, however, could still impose at-risk conditions on new projects even if it approved rolled-in rate treatment for them. 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, plants, and other facilities for transporting, processing, or storing natural gas and other products are subject to extensive environmental regulation by state and federal authorities, including state air quality control boards and the Environmental Protection Agency. These compliance activities increase the cost of planning, designing, installing and operating facilities. Competition Competition for Questar Pipeline's transportation, storage, and gathering services has intensified in recent years. Regulatory changes have significantly increased customer flexibility and customer responsibility to directly manage their gas supplies. The Company and Questar Gas Management actively compete with other interstate pipelines, intrastate pipelines, and gathering companies to gather and transport gas volumes throughout the Rocky Mountain region. In common with Questar Pipeline, other pipeline companies are interested in expanding their non-regulated (or less-regulated) activities and are focusing attention on gathering and field service activities. Other gathering entities and marketing groups are encroaching on the Company's historic service territory and competing with Questar Gas Management for gathering. It is not uncommon for wells to have connections with more than one gathering system or for producers to insist that gathering systems be tied to more than one pipeline. As a result, Questar Pipeline's customers have access to a larger universe of service options and providers. The Company, to provide better service and more flexibility, is improving its accounting processes and electronic communications; implementing strategies to develop balancing and pooling arrangements; and working with other parties to develop some standard rules within the new environment. The national pipeline grid has become more integrated, even as competition among the pipelines has become more aggressive. The Company has several 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 has the Clay Basin storage facility, a storage reservoir that has been successfully operated since 1977, that has been expanded in response to interest from customers, and that is fully subscribed by firm-service customers under long-term contracts. Questar Gas Management also has an extensive gathering system developed to collect gas volumes from producing wells as well as expertise in extracting hydrocarbon liquids from natural gas. As the operator of the new Blacks Fork processing plant, Questar Gas Management is expanding its activities and expertise. Questar Pipeline has consistently established partnerships with other players to acquire expertise, share risks, and expand opportunities. The Overthrust pipeline, proposed TransColorado pipeline, and Blacks Fork plant projects all involve partners. Employees As of December 31, 1995, the Company had 467 employees, compared to 478 as of the end of 1994. 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 Mountain Fuel and Universal Resources. These relationships are described above. See Note G to the financial statements for additional information concerning transactions between the Company and its affiliates. The Company obtains data processing and communication services from another affiliate, Questar InfoComm, Inc., under the terms of a written agreement. Questar InfoComm worked closely with the Company to develop the electronic bulletin board that is currently being used by Questar Pipeline and its customers. Questar, the Company's parent, provides certain administrative services--personnel, legal, public relations, financial, audit, and tax--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. 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 Questar. 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 OPERATION. RESULTS OF OPERATIONS Following is a summary of operating income and operating information for the Company's operations:
Year Ended December 31, 1995 1994 1993 (Dollars In Thousands) OPERATING INCOME Revenues Transportation $61,749 $61,844 $51,590 Gathering 21,644 23,641 20,386 Storage 31,276 27,620 14,698 Sales for resale 81,813 Other 2,686 2,503 3,141 Total revenues 117,355 115,608 171,628 Operating expenses Natural gas purchases 56,022 Operating and maintenance 44,634 42,778 48,356 Depreciation and amortization 16,614 15,453 14,084 Other taxes 4,170 4,499 3,915 Total expenses 65,418 62,730 122,377 Operating income $51,937 $52,878 $49,251 OPERATING STATISTICS Natural gas volumes (in Mdth) Transportation For unaffiliated customers 151,943 129,250 113,589 For Mountain Fuel 79,872 75,941 65,061 For other affiliated customers 38,839 45,093 35,599 Total transportation 270,654 250,284 214,249 Sales for resale to Mountain Fuel 24,337 Total system throughput 270,654 250,284 238,586 Gathering For unaffiliated customers 39,028 39,800 34,348 For Mountain Fuel 31,691 32,098 44,432 For other affiliated customers 5,949 12,085 13,988 Total gathering 76,668 83,983 92,768 Clay Basin storage working gas- volumes (in Bcf) 46.3 41.8 31.0 Natural gas revenue (per dth) Transportation $0.23 $0.25 $0.24 Gathering 0.28 0.28 0.22 Sales for resale 3.36 Natural gas purchase cost (per dth) 2.28
Revenues were 2% higher in 1995 compared with 1994 after decreasing 33% from 1993 to 1994. The 1995 rise was the result of increased storage activities at Questar Pipeline's Clay Basin storage reservoir. Questar Pipeline began a program in 1993 to expand firm-storage service offered at its Clay Basin storage facility and completed the program in May 1995 with the signing of contracts for an additional 4.5 Bcf of firm-storage capacity. Working-gas storage capacity increased from 31 Bcf in 1993 to 46.3 Bcf in May 1995. Storage capacity at year-end 1995 was 100% subscribed with contractual terms extending up to 29 years. Storage revenues increased $3,656,000 in 1995 and $12,922,000 in 1994. Increased capacity and the associated service at Clay Basin were responsible for all of the 1995 increase in revenues and $3,400,000 of the 1994 increase. The remaining 1994 change in storage revenues was a result of unbundling and reclassifying peaking-storage service from sales-for-resale revenues. Peaking storage is designed to meet peak daily demand requirements of Mountain Fuel. Lower revenues from gas gathering and interruptible transmission activities partially offset the higher storage revenues in 1995 as compared with 1994. Weak gas prices in the Rocky Mountain region caused producers to reduce gas production. Gas gathering revenues decreased 8% in 1995 after increasing 16% in 1994. Questar Pipeline has expanded its gas gathering operations in the past several years in the Birch Creek, Bruff and Henry areas of southwestern Wyoming. The primary cause of a $56,020,000 decrease in Questar Pipeline's revenues reported in 1994 compared with 1993 was the termination of sales-for-resale activities under the regulations of FERC Order No. 636. This order unbundled the components of sales-for-resale, transmission, gathering and storage into separate activities. Also as a result of Order No. 636, short-term changes in firm-transportation volumes do not have a significant impact on current operating results because about 96% of the cost of service is recovered equally each month in the reservation component of rates. Most of Questar Pipeline's transportation capacity has been reserved by firm-transportation customers. Roughly 84% of firm-transportation capacity is reserved for at least three years. Firm-transportation customers can release that capacity to third parties when it is not required for their own needs. Mountain Fuel has reserved transportation capacity from Questar Pipeline of approximately 800,000 decatherms per day, or about 79% of the total reserved daily transportation capacity. Interruptible-transportation revenues in 1995 decreased as a result of a shift by customers from interruptible-transportation service to a higher priority capacity-release service. Questar Pipeline filed a general rate case with the FERC on July 31, 1995, seeking an increase in jurisdictional revenues. The request for additional revenues was intended to recover the costs of enhanced service to customers, meet regulatory requirements and collect costs associated with employee postretirement benefits. By order issued August 31, 1995, Questar Pipeline's rate filing was accepted with an effective date of February 1, 1996, subject to refund. Questar Pipeline has submitted a settlement to the presiding administrative law judge. The settlement would avoid a lengthy hearing process if approved by the FERC. Questar Pipeline concurrently filed a plan with the FERC to transfer about $53 million of gathering assets, net of accumulated depreciation, to Questar Gas Management Company, a wholly-owned subsidiary. The FERC approved the transfer February 28, 1996. In December 1995, Questar Pipeline announced it would not complete the purchase of Tennessee Gas Pipeline Company's 50% interest in the Kern River Gas Transmission Company following a Federal Trade Commission decision to oppose the transaction. The $1.2 million cost of the unsuccessful bid was expensed in 1995 and included in other expense. Questar Pipeline, through a partnership, is a 50% owner of a gas processing plant in southwestern Wyoming. The Blacks Fork Processing plant, which cost $20 million to build, began operations in the second quarter of 1995 and Questar Pipeline's share of earnings before taxes was $314,000. Questar Pipeline operating results also include its 18% share or $1.2 million of earnings before income taxes reported by Overthrust Pipeline Company. A significant portion of Overthrust Pipeline's 1995 earnings was due to a shipper's buyout of a transportation contract. The Company did not purchase gas for resale after August 31, 1993. Operating and maintenance expenses increased 4% in 1995 when compared with 1994 primarily due to the costs associated with increased transportation volumes. Operating and maintenance expenses decreased 12% in 1994 because of eliminating volume and fuel usage costs associated with the resale of natural gas. Depreciation expense was 8% higher in 1995 when compared to 1994 and 10% higher in 1994 when compared to 1993 as a result of Questar Pipeline's capital expenditures. Other expense in 1995, 1994 and 1993 includes the reduction in value of certain investments. The effective income tax rate was 35.3% in 1995, 33.6% in 1994 and 35.6% in 1993. A 1994 reversal of $1,245,000 of income tax expense previously expensed resulted in a lower effective income tax rate in 1994. The adjustment resulted from the exclusion from taxable income of the transportation revenues recorded on cushion gas transported into storage. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, that becomes effective for the Company January 1, 1996. Statement No. 121 requires the Company to review for impairment, assets that are held and used whenever events or changes in circumstances indicate that an asset's carrying value may not be recoverable. If impairment is indicated, the Company must reduce the carrying value of the asset in question. The Company will adopt Statement No. 121 in 1996 and does not expect a significant effect to either operating results or financial position. LIQUIDITY AND CAPITAL RESOURCES Operating Activities Net cash provided from operating activities increased 15% in 1995 after decreasing 42% in 1994. Net cash provided from operating activities was $45,650,000 in 1995, $39,675,000 in 1994 and $68,548,000 in 1993. The increase in 1995 compared with 1994 was due primarily to collection of receivables. The decrease in cash flow in 1994 compared with 1993 was due largely to changes in business as a result of adopting FERC Order No. 636. Balances in receivables and payables decreased, and gas stored underground was transferred to Mountain Fuel. Investing Activities Following is a summary of capital expenditures for 1995, 1994 and a forecast of 1996 expenditures:
1996 Estimated 1995 1994 (In Thousands) Transmission lines $22,400 $15,216 $1,878 Gathering facilities 6,200 3,050 9,392 Clay Basin cushion gas and expansion 1,300 2,500 42,196 Partnerships 4,800 2,082 614 General and other 6,200 4,924 4,147 $40,900 $27,772 $58,227
Questar Pipeline's 1995 capital expenditures included replacement of sections of gas mainlines, completion of the Clay Basin storage project and cushion-gas injection, and expansion of the gathering system. Financing Activities The Company funded its 1995 capital expenditures primarily with cash provided from operations and borrowings from Questar. Forecasted 1996 capital expenditures of $40.9 million are expected to financed with cash provided from operations and borrowings from Questar. The Company has a short-term line-of-credit arrangement with a bank under which it may borrow up to $200,000. The line has interest rates below the prime interest rate and is renewable on an annual basis. No amounts were borrowed under this arrangement at either December 31, 1995 or 1994. Questar loans funds to the Company under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $15,200,000 with an interest rate of 6.01% at December 31, 1995 and $14,600,000 with an interest rate of 6.11% at December 31, 1994. Questar Pipeline's capital structure was 37% long-term debt and 63% common shareholder's equity. Moody's and Standard and Poor's have rated the Company's long-term debt A-1 and A+. 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. 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.* 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.* 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.) 10.1.*1 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.*1 Data Processing Services Agreement effective July 1, 1985, between Questar Service Corporation and Mountain Fuel Resources, Inc. (Exhibit No. 10.11. to Form 10-K Annual Report for 1988.) 10.3.2 Questar Pipeline Company Annual Management Incentive Plan, as amended February 13, 1996. 10.4. Partnership Agreement for the TransColorado Gas Transmission Company dated June 30, 1990 and as amended and restated September 25, 1995, between KN TransColorado, Inc., El Paso TransColorado, Inc., and Questar TransColorado, Inc. 10.5.*3 Firm Transportation Service Agreement with Mountain Fuel Supply Company under Rate Schedule T-1 dated August 10, 1993, for a term from November 2, 1993 to June 30, 1999. (Exhibit No. 10.5. to Form 10-K Annual Report for 1993.) 10.6.*3 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, to August 31, 2008. (Exhibit No. 10.6. to Form 10-K Annual Report for 1993.) 10.7.*3 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, to August 31, 2013. (Exhibit No. 10.7. to Form 10-K Annual Report for 1993.) 10.83 Storage Service Agreement with Mountain Fuel Supply Company under Rate Schedule FSS, for 5.0 Bcf of working gas capacity at Clay Basin, with a term from May 15, 1994 to May 14, 2019. 10.9.* Gas Gathering Agreement between Mountain Fuel Supply Company and Questar Pipeline Company effective September 1, 1993. (Exhibit No. 10.9 to Form 10-K Annual Report for 1994.) 10.102 Questar Pipeline Company Deferred Compensation Plan for Directors, as amended and restated February 13, 1996. 22. Subsidiary Information. 25. 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. 1 The 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. 2 Exhibit so marked is management contract or compensation plan or arrangement. 3 Agreement 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) Questar Pipeline filed a Current Report on Form 8-K dated December 27, 1995, during the last quarter of 1995 to report that it would not complete the purchase of Kern River Corporation. 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, 1995 QUESTAR PIPELINE COMPANY SALT LAKE CITY, UTAH FORM 10-K -- ITEM 14 (a) (1) AND (2) QUESTAR PIPELINE COMPANY LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following financial statements of Questar Pipeline Company are included in Item 8: Statements of income -- Years ended December 31, 1995, 1994 and 1993 Balance sheets -- December 31, 1995 and 1994 Statements of cash flows -- Years ended December 31, 1995, 1994 and 1993 Statements of shareholder's equity -- Years ended December 31, 1995, 1994 and 1993 Notes to 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 balance sheets of Questar Pipeline Company as of December 31, 1995 and 1994, and the related statements of income, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1995. 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 generally accepted auditing standards. 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, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note F to the financial statements, Questar Pipeline Company changed its method of accounting for postemployment benefits in 1994. Ernst & Young LLP Salt Lake City, Utah February 9, 1996 QUESTAR PIPELINE COMPANY STATEMENTS OF INCOME
Year Ended December 31, 1995 1994 1993 (In Thousands) REVENUES From unaffiliated customers $43,316 $40,412 $41,354 From affiliates - Note G 74,039 75,196 130,274 TOTAL REVENUES 117,355 115,608 171,628 OPERATING EXPENSES Natural gas purchases - Note G 56,022 Operating and maintenance - Note G 44,634 42,778 48,356 Depreciation 16,614 15,453 14,084 Other taxes 4,170 4,499 3,915 TOTAL OPERATING EXPENSES 65,418 62,730 122,377 OPERATING INCOME 51,937 52,878 49,251 INCOME FROM UNCONSOLIDATED AFFILIATES 1,534 229 128 OTHER EXPENSE - NOTE G (1,886) (1,124) (139) DEBT EXPENSE (13,472) (13,107) (13,114) INCOME BEFORE INCOME TAXES 38,113 38,876 36,126 INCOME TAXES - Note D 13,465 13,047 12,851 NET INCOME $24,648 $25,829 $23,275
See notes to financial statements. QUESTAR PIPELINE COMPANY BALANCE SHEETS
ASSETS December 31, 1995 1994 (In Thousands) CURRENT ASSETS Cash and short-term investments - Note C $1,677 $1,448 Accounts receivable 7,671 13,234 Accounts receivable from affiliates 6,174 2,002 Federal income tax receivable 1,080 Inventories, at lower of average cost or market 2,858 2,583 Prepaid expenses and deposits 2,552 2,809 TOTAL CURRENT ASSETS 20,932 23,156 PROPERTY, PLANT AND EQUIPMENT Transmission 289,059 273,673 Storage 212,492 210,162 Gathering 81,292 80,605 General and intangible 39,118 39,061 Construction work in progress 10,432 11,812 632,393 615,313 Less allowances for depreciation 212,898 203,008 NET PROPERTY, PLANT AND EQUIPMENT 419,495 412,305 OTHER ASSETS Investment in unconsolidated affiliates 11,010 7,988 Income taxes recoverable from customers - Note D 3,948 3,666 Unamortized costs of reacquired debt 3,131 3,426 Other 4,834 4,502 22,923 19,582 $463,350 $455,043
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31, 1995 1994 (In Thousands) CURRENT LIABILITIES Notes payable to Questar - Notes B and C $15,200 $14,600 Accounts payable and accrued expenses Accounts payable 9,025 9,368 Accounts payable to affiliates 1,587 1,436 Federal income taxes 48 Other taxes 1,289 1,425 Accrued interest 1,076 1,076 Total accounts payable and accrued expenses 13,025 13,305 TOTAL CURRENT LIABILITIES 28,225 27,905 LONG-TERM DEBT - Notes B and C 134,525 134,506 DEFERRED CREDITS 5,346 4,861 DEFERRED INCOME TAXES - Note D 70,649 68,814 COMMITMENTS AND CONTINGENCIES - Note E 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 136,020 130,372 224,605 218,957 $463,350 $455,043
See notes to financial statements. QUESTAR PIPELINE COMPANY STATEMENTS OF SHAREHOLDER'S EQUITY
Additional Common Paid-in Retained Stock Capital Earnings (In Thousands) Balance at January 1, 1993 $6,551 $57,034 $115,268 1993 net income 23,275 Cash dividends (16,000) Balance at December 31, 1993 6,551 57,034 122,543 Capital contribution 25,000 1994 net income 25,829 Cash dividends (18,000) Balance at December 31, 1994 6,551 82,034 130,372 1995 net income 24,648 Cash dividends (19,000) Balance at December 31, 1995 $6,551 $82,034 $136,020
See notes to financial statements. QUESTAR PIPELINE COMPANY STATEMENTS OF CASH FLOWS
Year Ended December 31, 1995 1994 1993 (In Thousands) OPERATING ACTIVITIES Net income $24,648 $25,829 $23,275 Depreciation 18,250 17,078 15,979 Deferred income taxes 1,835 1,479 1,592 Income from unconsolidated affiliates (1,534) (229) (128) 43,199 44,157 40,718 Changes in operating assets and liabilities Accounts receivable 1,391 (4,045) 23,815 Federal income taxes 1,128 (1,322) (1,462) Inventories (275) (189) 25,539 Prepaid expenses and deposits 257 (541) (75) Accounts payable and accrued expenses (328) 879 (18,466) Purchased-gas adjustments (3,441) Other 278 736 1,920 NET CASH PROVIDED FROM OPERATING ACTIVITIES 45,650 39,675 68,548 INVESTING ACTIVITIES Capital expenditures Purchase of property, plant and equipment (25,690) (57,613) (47,216) Other investments (2,082) (614) (364) Total capital expenditures (27,772) (58,227) (47,580) Proceeds from (costs of) disposition of property, plant and equipment 751 59 (182) CASH USED IN INVESTING ACTIVITIES (27,021) (58,168) (47,762) FINANCING ACTIVITIES Capital contribution 25,000 Change in notes payable to Questar 600 11,600 (4,500) Payment of dividends (19,000) (18,000) (16,000) CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES (18,400) 18,600 (20,500) Change in cash and short-term investments 229 107 286 Beginning cash and short-term investments 1,448 1,341 1,055 ENDING CASH AND SHORT-TERM INVESTMENTS $1,677 $1,448 $1,341
See notes to financial statements. QUESTAR PIPELINE COMPANY NOTES TO FINANCIAL STATEMENTS Note A - Summary of Accounting Policies Business: Questar Pipeline Company (the Company or Questar Pipeline) is a wholly-owned subsidiary of Questar Corporation (Questar). The Company's primary activities are the transportation, gathering and storage of natural gas. Prior to September 1993, Questar Pipeline was also engaged in the sale for resale of natural gas. Significant accounting policies are presented below. Regulation: The Company 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 that it estimates may be refunded. Property, Plant and Equipment: Property, plant and equipment is stated at cost. The provision for depreciation is based upon rates, which will amortize 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 3.7% in 1995. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Company will adopt Statement No. 121 in 1996 and does not expect a significant effect to either operating results or financial position. Credit Risk: The Company's primary market area is the Rocky Mountain region of the United States. The Company's exposure to credit risk may be impacted by the concentration of customers in this region 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 and loss reserves have adequately provided for usual and customary credit-related losses. The carrying amount of trade receivables approximates fair value. Investment in Unconsolidated Affiliates: The Company has an 18% partnership interest in the Overthrust Pipeline Company, which is the operator of the Overthrust Segment of the Trailblazer Pipeline System. The Company is a one-third partner in the TransColorado Gas Transmission Company, which plans to construct a pipeline from the Piceance Basin in Colorado to connections with other pipelines in northern New Mexico. The Company owns 50% of the Blacks Fork Gas Processing Company in southwestern Wyoming that operates a plant which extracts ethane, propane, butane and gasoline from natural gas. The Company accounts for its investment in these partnerships using the equity method. 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-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. 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. Allowance for Funds Used During Construction: The Company capitalizes the cost of capital during the construction period of plant and equipment. This amounted to $330,000 in 1995, $976,000 in 1994 and $856,000 in 1993. Cash and Short-Term Investments: Short-term investments consist principally of Euro-time deposits and repurchase agreements with maturities of three months or less. Note B - Debt The Company has a short-term line-of-credit arrangement with a bank under which it may borrow up to $200,000. The line has interest rates below the prime interest rate and is renewable on an annual basis. No amounts were borrowed under this arrangement at either December 31, 1995 or 1994. Questar loans funds to the Company under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $15,200,000 with an interest rate of 6.01% at December 31, 1995 and $14,600,000 with an interest rate of 6.11% at December 31, 1994. Questar Pipeline guarantees $9 million of long-term debt borrowed by Blacks Fork Gas Processing Company. The details of long-term debt at December 31, were as follows:
1995 1994 (In Thousands) 9 3/8% debentures due 2021 $85,000 $85,000 9 7/8% debentures due 2020 50,000 50,000 Total long-term debt outstanding 135,000 135,000 Less unamortized debt discount 475 494 $134,525 $134,506
There are no maturities of long-term debt for the five years following December 31, 1995. Cash paid for interest on debt was $13,192,000 in 1995, $13,065,000 in 1994 and $13,018,000 in 1993. Note C - Financial Instruments The carrying amounts and estimated fair values of the Company's financial instruments at December 31, were as follows:
1995 1994 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (In Thousands) Financial assets Cash and short-term investments $1,677 $1,677 $1,448 $1,448 Financial liabilities Short-term loans 15,200 15,200 14,600 14,600 Long-term debt 134,525 158,256 134,506 134,429
The Company used the following methods and assumptions in estimating fair values: (1) Cash and short-term investments - the carrying amount approximates fair value; (2) Short-term loans - the carrying amount approximates fair value; (3) Long-term debt - the fair value of long-term debt is based on quoted market prices. Note D - Income Taxes The components of income taxes charged to income for years ended December 31, were as follows:
1995 1994 1993 (In Thousands) Federal Current $11,388 $10,571 $10,010 Deferred 1,413 1,436 1,512 State Current 601 997 1,249 Deferred 63 43 80 $13,465 $13,047 $12,851
The difference between income tax expense and the tax computed by applying the statutory federal income tax rate to income from continuing operations before income taxes is explained as follows:
1995 1994 1993 (In Thousands) Income before income taxes $38,113 $38,876 $36,126 Federal income taxes at statutory rate $13,340 $13,607 $12,644 State income taxes, net of federal income tax benefit 454 691 892 Prior years' tax settlement (178) (692) Tax adjustment on revenues from cushion gas transported into storage (1,245) Other (151) (6) 7 Income tax expense $13,465 $13,047 $12,851 Effective income tax rate 35.3% 33.6% 35.6%
Significant components of the Company's deferred tax liabilities and assets at December 31, were as follows:
1995 1994 (In Thousands) Deferred tax liabilities Property, plant and equipment $66,364 $64,002 Income taxes recoverable from customers 1,487 1,914 Unamortized debt reacquisition costs 1,159 1,267 Pension costs 519 535 Other 1,988 3,263 Total deferred tax liabilities 71,517 70,981 Deferred tax assets 868 2,167 Net deferred tax liabilities $70,649 $68,814
Cash paid for income taxes was $11,946,000 in 1995, $14,404,000 in 1994 and $12,404,000 in 1993. Note E - Rate Matters, Litigation and Commitments Questar Pipeline filed a general rate case with the FERC on July 31, 1995, seeking an increase in jurisdictional revenues. The request for additional revenues was intended to recover the costs of enhanced service to customers, meet regulatory requirements and collect costs associated with employee postretirement benefits. By order issued August 31, 1995, Questar Pipeline's rate filing was accepted with an effective date of February 1, 1996, subject to refund. Questar Pipeline has submitted a settlement to the presiding administrative law judge. The settlement would avoid a lengthy hearing process if approved by the FERC. Questar Pipeline concurrently filed a plan with the FERC to transfer about $53 million of gathering assets, net of accumulated depreciation, to Questar Gas Management Company, a wholly-owned subsidiary. The FERC approved the transfer February 28, 1996. There are various legal proceedings against the Company. 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 results of operations, financial position or liquidity. Note F - Employment Benefits Pension Plan: Substantially all Company employees are covered by Questar's defined benefit pension plan. Benefits are generally based on years of service and the employee's 36-month period 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. Pension cost was $1,123,000 in 1995, $1,201,000 in 1994 and $1,372,000 in 1993. 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, 1995, Questar's fair value of plan assets exceeded the accumulated benefit obligation. Postretirement Benefits Other Than Pensions: The Company pays a portion of the health-care costs and all the life insurance costs for employees who retired prior to January 1, 1993. The plan was changed for employees retiring after January 1, 1993, to link the health-care benefit to years of service and to limit the Company's monthly health-care contribution per individual to 170% of the 1992 contribution. Employees hired after December 31, 1996, will not qualify for benefits under this plan. The Company's policy is to fund amounts allowable for tax deduction under the Internal Revenue Code. Plan assets consist of equity securities, corporate and U.S. government debt obligations, and insurance company general accounts. The Company is amortizing the transition obligation over a 20-year period. Total costs of postretirement benefits other than pensions were $1,044,000 in 1995, $1,130,000 in 1994 and $1,059,000 in 1993. The Company expects to receive rate coverage of the jurisdictional portion of these costs in its current rate case and has recorded a regulatory asset of $1,730,000 at December 31, 1995. The FERC issued an order granting rate recovery methodology for SFAS No. 106 costs to the extent that the Company contributes the amounts to an external trust. The Company'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: The Company 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 expects to receive rate coverage of the jurisdictional portion of these costs as part of its current rate case. At December 31, 1995, the Company had a $539,000 regulatory asset for postemployment costs. Employee Investment Plan: The Company participates in Questar's Employee Investment Plan (ESOP), which allows eligible employees to purchase Questar Corporation common stock or other investments through payroll deduction. The Company makes contributions of Questar Corporation common stock to the ESOP of approximately 75% 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 $667,000 in 1995, $591,000 in 1994 and $571,000 in 1993. Note G - Related Party Transactions The Company receives a substantial portion of its revenues from Mountain Fuel Supply Company. Revenues received from Mountain Fuel amounted to $69,964,000 or 60% in 1995, $70,966,000 or 61% in 1994, and $124,807,000 or 73% in 1993. The Company also received revenues from other affiliated companies totaling $4,075,000 in 1995, $4,230,000 in 1994 and $5,072,000 in 1993. Natural gas purchases include $4,844,000 from affiliated companies in 1993. The Company did not purchase gas for resale after August 31, 1993. Questar performs certain administrative functions for the Company. The Company was charged for its allocated portion of these services which totaled $3,212,000 in 1995, $3,439,000 in 1994 and $3,408,000 in 1993. These costs are included in operating and maintenance expenses and are allocated based on each company's proportional share of revenues, net of gas costs; property, plant and equipment; and payroll. Management believes that the allocation method is reasonable. The Company terminated an operating service agreement on July 1, 1993, with Wexpro Company (Wexpro), a wholly-owned subsidiary of Questar. Under that agreement Wexpro operated certain gathering, compressor, measurement and other production-related facilities owned by the Company. Those functions were subsequently assumed by Company employees. The Company reimbursed Wexpro's expenses with respect to such services and paid a fee equal to 15% of such expenses. The Company paid Wexpro $3,443,000 in 1993 for such services. Questar InfoComm Inc. is an affiliated company that provides data processing and communication services to Questar Pipeline. The Company paid Questar InfoComm $7,542,000 in 1995, $7,036,000 in 1994 and $6,607,000 in 1993. The Company received interest income from affiliated companies of $22,000 in 1995, $225,000 in 1994 and $327,000 in 1993. The Company had debt expense to affiliated companies of $272,000 in 1995, $134,000 in 1994 and $21,000 in 1993. 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, 1996. QUESTAR PIPELINE COMPANY (Registrant) By /s/ A. J. Marushack A. J. Marushack 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/ A. J. Marushack President & Chief Executive Officer; A. J. Marushack Director (Principal Executive Officer) /s/ S. E. Parks Vice President, Treasurer, and Chief S. E. Parks Financial Officer (Principal Financial Officer) /s/ R. P. Ord Controller & Assistant Treasurer R. P. Ord (Principal Accounting Officer) *R. D. Cash Chairman of the Board; Director *W. F. Edwards Director *U. Edwin Garrison Director *A. J. Marushack Director *Neal A. Maxwell Director *Mary Mead Director March 28, 1996 *By /s/ A. J. Marushack Date A. J. Marushack, Attorney in Fact Exhibit List 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. 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.* 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.* 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.) 10.1.*1 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.*1 Data Processing Services Agreement effective July 1, 1985, between Questar Service Corporation and Mountain Fuel Resources, Inc. (Exhibit No. 10.11. to Form 10-K Annual Report for 1988.) 10.3.2 Questar Pipeline Company Annual Management Incentive Plan, as amended February 13, 1996. 10.4. Partnership Agreement for the TransColorado Gas Transmission Company dated June 30, 1990 and as amended and restated September 25, 1995, between KN TransColorado, Inc., El Paso TransColorado, Inc., and Questar TransColorado, Inc. 10.5.*3 Firm Transportation Service Agreement with Mountain Fuel Supply Company under Rate Schedule T-1 dated August 10, 1993, for a term from November 2, 1993 to June 30, 1999. (Exhibit No. 10.5. to Form 10-K Annual Report for 1993.) 10.6.*3 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, to August 31, 2008. (Exhibit No. 10.6. to Form 10-K Annual Report for 1993.) 10.7.*3 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, to August 31, 2013. (Exhibit No. 10.7. to Form 10-K Annual Report for 1993.) 10.83 Storage Service Agreement with Mountain Fuel Supply Company under Rate Schedule FSS, for 5.0 Bcf of working gas capacity at Clay Basin, with a term from May 15, 1994 to May 14, 2019. 10.9.* Gas Gathering Agreement between Mountain Fuel Supply Company and Questar Pipeline Company effective September 1, 1993. (Exhibit No. 10.9 to Form 10-K Annual Report for 1994.) 10.102 Questar Pipeline Company Deferred Compensation Plan for Directors, as amended and restated February 13, 1996. 22. Subsidiary Information. 25. 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. 1 The 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. 2 Exhibit so marked is management contract or compensation plan or arrangement. 3 Agreement 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. EX-3 2 RESTATED ARTICLES OF INCORPORATION OF QUESTAR PIPELINE COMPANY In accordance with the provisions of the Utah Revised Business Corporation Act and pursuant to a resolution adopted by its Board of Directors that does not require shareholder approval, Questar Corporation hereby adopts the following Restated Articles of Incorporation: ARTICLE I. NAME The name of the Corporation is Questar Pipeline Company. ARTICLE II. DURATION The period of its duration is perpetual. ARTICLE III. PURPOSES The purposes for which the Corporation is organized are as follows: (a) To produce, purchase, gather, store, compress, distribute, sell and serve natural gas: (b) To produce, manufacture, generate, transmit, gather, store, purchase, distribute, sell and serve artificial gas and artificial gas by-products; (c) To engage in and carry on the business of purchasing, leasing or otherwise acquiring and holding, owning, controlling, operating, developing, selling oil and gas lands, rights in oil and gas lands, and leases and leaseholds, mining claims, and mineral rights, and working royalty and other interests in oil, gas and mineral properties, interests and rights; (d) To engage in and carry on the business of the exploration for, development and marketing of oil, natural gas, petroleum products, hydro-carbons, minerals, coal, steam, geothermal products, and all kinds of products and by-products derived from any of said substances; (e) Acquire, hold and own franchises, licenses, permits, certificates of convenience and necessity or to the rights or privileges from persons, corporations, states, cities, counties, towns or other public bodies, commissions or agencies necessary or convenient in carrying on the business of the Corporation; (f) Conduct, carry on or engage in any businesses or enterprises incidental to or useful in connection with the purposes above specified; (g) The Corporation shall have unlimited power to engage in and to do any lawful act concerning any lawful businesses for which corporations may be organized under the Utah Business Corporation Act, including but not limited to the entering into of any lawful arrangement for sharing profits, union of interests, reciprocal association or cooperative association with any corporation, association, partnership, individual or other legal entity for the carrying on of any business and to enter into any general or limited partnership for the carrying on of any business. ARTICLE IV. STOCK The Corporation shall have the authority to issue up to 25,000,000 shares of common stock having a par value of $1.00 per share and up to 5,000,000 shares of preferred stock without par value. Shares of preferred stock may be issued from time to time in one or more series having rights, terms and restrictions as may be determined by the Board of Directors. ARTICLE V. PREEMPTIVE RIGHTS A shareholder shall have no preemptive rights to acquire any securities of this Corporation. ARTICLE VI INITIAL CAPITALIZATION This Corporation will not commence business until consideration of a value of at least $1,000 has been received for the issuance of shares. ARTICLE VII. INITIAL OFFICE AND AGENT The address of this Corporation's initial registered office and the name of its initial registered agent at such address is: Mildred M. Jensen 180 East First South Street Salt Lake City, Utah 84111 ARTICLE VIII. DIRECTORS The number of directors of this Corporation shall be fixed, from time to time, by the bylaws but shall not be less than three. The number of directors constituting the initial Board of Directors shall be six and the names and addresses of the persons who are to serve as directors until the first annual meeting of the shareholders and until their successors are elected and qualified are: Name Address B. Z. Kastler 180 East First South Street Salt Lake City, Utah 84111 Joseph S. Jones 800 Walker Bank Building Salt Lake City, Utah 84111 C. F. Coleman 180 East First South Street Salt Lake City, Utah 84111 J. T. Simon 180 East First South Street Salt Lake City, Utah 84111 John Crawford, Jr. 180 East First South Street Salt Lake City, Utah 84111 R. P. Work 180 East First South Street Salt Lake City, Utah 84111 ARTICLE IX INCORPORATORS The name and address of each incorporator is: Name Address B. Z. Kastler 180 East First South Street Salt Lake City, Utah 84111 Joseph S. Jones 800 Walker Bank Building Salt Lake City, Utah 84111 John Crawford, Jr. 180 East First South Street Salt Lake City, Utah 84111 ARTICLE X. CUMULATIVE VOTING OF SHARES There shall be no cumulative voting in the election of directors of the Corporation. ARTICLE XI. PURCHASE OF SHARES BY CORPORATION The Corporation may purchase its own shares to the extent of unreserved and unrestricted capital surplus available therefor in addition to any right to purchase its own shares provided by law. The foregoing Restated Articles of Incorporation correctly set forth without change the corresponding provisions of the Articles of Incorporation as previously amended and supersede the Articles of Incorporation as amended. Dated this 24th Day of October, 1995. QUESTAR PIPELINE COMPANY By /s/ A. J. Marushack A. J. Marushack President and Chief Executive Officer By /s/ Connie C. Holbrook Connie C. Holbrook Secretary State of Utah ) : ss County of Salt Lake ) I, Lucille L. Curtis, a notary public, do hereby certify that on October 24, 1995, personally appeared before me A. J. Marushack and Connie C. Holbrook, who being by me first duly sworn, severally declared that they are the persons who signed the foregoing document, and that the statements therein contained are true. /s/ Lucille L. Curtis Notary Public Residing at Salt Lake City, Utah My Commission Expires: 8/27/99 EX-10.3 3 QUESTAR CORPORATION ANNUAL MANAGEMENT INCENTIVE PLAN (As amended and restated effective February 13, 1996) Paragraph 1. Name. The name of this Plan is the Questar Corporation Annual Management Incentive Plan (the Plan). Paragraph 2. Purpose. The purpose of the Plan is to provide an incentive to officers and key employees of Questar Corporation (the Company) for the accomplishment of major organizational and individual objectives designed to further the efficiency, profitability, and growth of the Company. Paragraph 3. Administration. The Management Performance Committee (Committee) of the Board of Directors shall have full power and authority to interpret and administer the Plan. Such Committee shall consist of no less than three disinterested members of the Board of Directors. Paragraph 4. Participation. Within 60 days after the beginning of each year, the Committee shall nominate Participants from the officers and key employees for such year. The Committee shall also establish a target bonus for the year for each Participant expressed as a percentage of base salary or specified portion of base salary. Participants shall be notified of their selection and their target bonus as soon as practicable. Paragraph 5. Determination of Performance Objectives. Within 60 days after the beginning of each year, the Committee shall establish target, minimum, and maximum performance objectives for the Company and for its major operating subsidiaries and shall determine the manner in which the target bonus is allocated among the performance objectives. The Committee shall also recommend a dollar maximum for payments to Participants for any Plan year. The Board of Directors shall take action concerning the recommended dollar maximum within 60 days after the beginning of the Plan year. Participants shall be notified of the performance objectives as soon as practicable once such objectives have been established. Paragraph 6. Determination and Distribution of Awards. As soon as practicable, but in no event more than 90 days after the close of each year during which the Plan is in effect, the Committee shall compute incentive awards for eligible participants in such amounts as the members deem fair and equitable, giving consideration to the degree to which the Participant's performance has contributed to the performance of the Company and its affiliated companies and using the target bonuses and performance objectives previously specified. Aggregate awards calculated under the Plan shall not exceed the maximum limits approved by the Board of Directors for the year involved. To be eligible to receive a payment, the Participant must be actively employed by the Company or an affiliate as of the date of distribution except as provided in Paragraph 8. Amounts shall be paid (less appropriate withholding taxes and FICA deductions) according to the following schedule: Award Distribution Schedule Percent of Award Date Initial Award 75% As soon as possible after initial (First Year of award is determined Participation) 25 One year after initial award is determined 100% Subsequent Awards 50% As soon as possible after award is determined 25 One year after award is determined 25 Two years after award is determined 100% Paragraph 7. Restricted Stock in Lieu of Cash. For 1992 and subsequent years, participants who have a target bonus of $10,000 or higher shall be paid all deferred portions of such bonus with restricted shares of the Company's common stock under the Company's Long-Term Stock Incentive Plan. Such stock shall be granted to the participant when the initial award is determined, but shall vest free of restrictions according to the schedule specified above in Paragraph 6. Paragraph 8. Termination of Employment. (a) In the event a Participant ceases to be an employee during a year by reason of death, disability or approved retirement, an award, if any, determined in accordance with Paragraph 6 for the year of such event, shall be reduced to reflect partial participation by multiplying the award by a fraction equal to the months of participation during the applicable year through the date of termination rounded up to whole months divided by 12. For the purpose of this Plan, approved retirement shall mean any termination of service on or after age 60, or, with approval of the Board of Directors, early retirement under the Company's qualified retirement plan. For the purpose of this Plan, disability shall mean any termination of service that results in payments under the Company's long-term disability plan. The entire amount of any award that is determined after the death of a Participant shall be paid in accordance with the terms of Paragraph 11. In the event of termination of employment due to disability or approved retirement, a Participant shall be paid the undistributed portion of any prior awards in his final paycheck or in accordance with the terms of elections to voluntarily defer receipt of awards earned prior to February 12, 1991, or deferred under the terms of the Company's Deferred Compensation Plan. In the event of termination due to disability or approved retirement, any shares of common stock previously credited to a Participant shall be distributed free of restrictions during the last month of employment. The current market value (defined as the closing price for the stock on the New York Stock Exchange on the date in question) of such shares shall be included in the Participant's final paycheck. Such Participant shall be paid the full amount of any award (adjusted for partial participation) declared subsequent to the date of such termination within 30 days of the date of declaration. Any partial payments shall be made in cash. (b) In the event a Participant ceases to be an employee during a year by reason of a change in control, he shall be entitled to receive all amounts deferred by him prior to February 12, 1991, and all undistributed portions for prior Plan years. He shall also be entitled to an award for the year of such event as if he had been an employee throughout such year. The entire amount of any award for such year shall be paid in a lump sum within 60 days after the end of the year in question. Such amounts shall be paid in cash. For the purpose of this Plan, a "change in control" shall be deemed to have occurred if (i) any "Acquiring Person" (as that term is used in the Rights Agreement dated as of February 13, 1996, between the Company and Chemical Mellon Shareholder Services, L.L.C. ("Rights Agreement")) is or becomes the beneficial owner (as such term is used in Rule 13d-3 under the Securities Exchange Act of 1934) of securities of the Company representing 15 percent or more of the combined voting power of the Company, or (ii) the stockholders of the Company approve (A) a plan of merger or consolidation of the Company (unless, immediately following consummation of such merger or consolidation, the persons who held the Company's voting securities immediately prior to consummation thereof will hold at least a majority of the total voting power of the surviving or new company), or (B) a sale or disposition of all or substantially all assets of the Company, or (C) a plan of liquidation or dissolution of the Company. A change of control shall also include any act or event that, with the passage of time, would result in a Distribution Date, within the meaning of the Rights Agreement. Paragraph 9. Interest on Previously Deferred Amounts. Amounts voluntarily deferred prior to February 12, 1991, shall be credited with interest from the date the payment was first available in cash to the date of actual payment. Such interest shall be calculated at a monthly rate using the typical rates paid by major banks on new issues of negotiable Certificates of Deposit in the amounts of $1,000,000 or more for one year as quoted in The Wall Street Journal on the first day of the relevant calendar month or the next preceding business day if the first day of the month is a non-business day. Paragraph 10. Coordination with Deferred Compensation Plan. Some Participants are entitled to defer the receipt of their cash bonuses under the terms of the Company's Deferred Compensation Plan, which became effective November 1, 1993. Any cash bonuses deferred pursuant to the Deferred Compensation Plan shall be accounted for and distributed according to the terms of such plan and the choices made by the Participant. Paragraph 11. Death and Beneficiary Designation. In the event of the death of a Participant, any undistributed portions of prior awards shall become payable. Amounts previously deferred by the Participant, together with credited interest to the date of death, shall also become payable. Each Participant shall designate a beneficiary to receive any amounts that become payable after death under this Paragraph or Paragraph 8. In the event that no valid beneficiary designation exists at death, all amounts due shall be paid as a lump sum to the estate of the Participant. Any shares of restricted stock previously credited to the Participant shall be distributed to the Participant's beneficiary or, in the absence of a valid beneficiary designation, to the Participant's estate, at the same time any cash is paid. Paragraph 12. Amendment of Plan. The Company's Board of Directors, at any time, may amend, modify, suspend, or terminate the Plan, but such action shall not affect the awards and the payment of such awards for any prior years. The Company's Board of Directors cannot terminate the Plan in any year in which a change of control has occurred without the written consent of the Participants. The Plan shall be deemed suspended for any year for which the Board of Directors has not fixed a maximum dollar amount available for award. Paragraph 13. Nonassignability. No right or interest of any Participant under this Plan shall be assignable or transferable in whole or in part, either directly or by operation of law or otherwise, including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy, or in any other manner, and no right or interest of any Participant under the Plan shall be liable for, or subject to, any obligation or liability of such Participant. Any assignment, transfer, or other act in violation of this provision shall be void. Paragraph 14. Effective Date of the Plan. The Plan shall be effective with respect to the fiscal year beginning January 1, 1984, and shall remain in effect until it is suspended or terminated as provided by Paragraph 12. EX-10.4 4 Transcolorado Gas Transmission Company Partnership Agreement This Agreement, Effective on the 30th day of June, 1990, is entered into between K N TransColorado, Inc., El Paso TransColorado Company, successor in interest to Westgas TransColorado, Inc. as of September 25, 1995, and Questar TransColorado, Inc. 1. Parties. The following are parties to this Agreement and each shall have a one-third interest in the partnership. 1.1 K N TransColorado, Inc., a Colorado corporation with its principal place of business located at 12055 West 2nd Place, Lakewood, Colorado 80228-1506. 1.2 El Paso TransColorado Company, a Delaware corporation with its principal place of business located at 100 North Stanton, El Paso, Texas 79901. 1.3 Questar TransColorado, Inc., a Utah corporation with its principal place of business located at 79 South State Street, Salt Lake City, Utah 84111. 2. Definitions. The terms defined in this section shall have the meanings set out below for purposes of the Agreement. 2.1 Affiliate. An affiliate is any person which, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with another person. 2.2 Capital Account. A capital account consists of the capital contributions and profits credited to the account of a partner, less the distributions and losses debited to the account, in accordance with section 6. The capital accounts are maintained for purposes of reflecting the economic arrangement among the partners and making allocations. The capital accounts of the partners shall not be, nor have the same meaning as, the "capital account" of the partnership under Section 12 of the Natural Gas Act. 2.3 Capital Contribution. A capital contribution consists of the capital contributed to the partnership by a partner. 2.4 Default. A default is a failure by a partner to make one or more capital contributions required under section 6 on the date specified for payment by the management committee under section 6.5.2(iii). 2.5 Defaulting Partner. A defaulting partner is a partner who is in default. 2.6 Expansion. An expansion is any pipeline, including appurtenances such as compression facilities, which increases the capacity of the project that is owned by the partnership. 2.7 FERC. The FERC refers to the Federal Energy Regulatory Commission or any federal commission, agency or other governmental body succeeding to the powers of the Federal Energy Regulatory Commission. 2.8 Initial Line. The initial line is the proposed main trunk pipeline proposed for the project, consisting of approximately 315 miles of 22 and 24 inch pipe commencing at Questar Pipeline Company's system in Rio Blanco County, Colorado and running south to Blanco, New Mexico and including two compressor stations. 2.9 Management Committee. The management committee is the committee provided for in section 4. 2.10 Operating Agreements. The operating agreements are the agreements that will be entered into between the partnership and affiliates of the partners to operate the project. 2.11 Operators. The operators are the companies designated by the management committee in accordance with section 5. 2.12 Out-of-Pocket Costs. Out-of-pocket costs are costs paid by a partner or its affiliate to any third party for the benefit of the project, but do not include affiliate employee expenses for travel, lodging and incidental items. 2.13 Partner. A partner is a company listed in Section 1 or any person who acquires a partnership interest in accordance with the terms of this Agreement. 2.14 Partnership. The partnership is the entity created by this Agreement. 2.15 Partner's Percentage. A partner's percentage is the percentage that is determined by dividing a partner's capital account by the sum total of all partners' capital accounts. Initially, each partner's percentage shall be one-third. 2.16 Person. A person is an individual, corporation, voluntary association, joint stock company, business trust, partnership, proprietorship or other legal entity, however constituted. 2.17 Project. The project is the TransColorado Gas Transmission System, an interstate natural gas transportation pipeline and related facilities to be designed, constructed and operated by the partnership and extending from its proposed interconnection with the facilities of Questar Pipeline Company located in northwestern Colorado to proposed interconnections with other interstate or intrastate pipelines located in Colorado and New Mexico. 2.18 Project Agreement. The project agreement is the agreement between Rocky Mountain Natural Gas Company, Western Gas Supply Company, and Questar Pipeline Company dated March 19, 1990, that preceded this Agreement. 2.19 Project Manager. The project manager is the person designated by the management committee to perform the duties described in section 5. 2.20 Project Management Agreement. The project management agreement is the agreement to be entered into between the partnership and the project manager to manage the design and construction of the project. 2.21 Secondary Facilities. Secondary facilities are pipelines and attendant facilities that are connected to the project. 2.22 Shipper. A shipper is any person who has signed a letter of intent, a precedent agreement or a similar agreement to obtain transportation service on the project. 3. Formation, Term and Purpose. The parties form the partnership described below for the indicated purposes. 3.1 Formation. By this Agreement the parties create a general partnership under the Uniform Partnership Law as in force pursuant to C.R.S. Sections 7-60-101 et seq. 3.2 Name. The name of the partnership is the TransColorado Gas Transmission Company. 3.3 Partnership Office. The principal office of the partnership shall be at the offices of K N TransColorado, Inc. or such other place as the management committee may determine. The management committee may also determine the location for other offices of the partnership. 3.4 Purpose. The partnership shall design, construct, own and operate the project. Prior to receiving initial regulatory authorization to construct the project, however, the partnership shall only conduct such business as is necessary to seek regulatory approvals and acquire interests in land and shall not acquire any assets other than interests in land or incur any liabilities or engage in any other acts except as determined by the management committee. 3.5 Term. The initial term of the Agreement shall be 25 years from the date of this Agreement and thereafter from year to year unless terminated in accordance with Section 13. 3.6 Regulatory Approvals. The partners will cooperate in seeking authority to construct and operate the project under the FERC's optional certificate procedures or any successor or alternate authority that is determined to be appropriate by the management committee. The partners will cooperate in seeking any additional authorizations, rulings, permits and approvals from other governmental authorities having jurisdiction that may be required to construct or to own and operate the project. 3.7 Secondary Facilities. The right of the partners or the partnership to acquire, construct, own or operate secondary facilities interconnecting with the project shall be governed by this section. 3.7.1 Any partner or its affiliate shall have the right to purchase, construct or acquire and may own any secondary facility, which will not be considered to be part of the project and will not be credited to the capital account of the partner. 3.7.2 If any partner or its affiliate would like the partnership to purchase, construct, acquire or own any secondary facility, the partner may submit a written request to the partnership. The partner shall notify each member of the management committee of the proposed location of the line, facility or extension, its estimated cost, appropriate engineering data, flow diagrams and maps and the proposed completion date. If any FERC application is required, any additional information needed for the filing should also be provided. 3.7.3 Within 30 days after the information described in section 3.7.2 has been provided to the management committee, it shall either unanimously approve the proposal or advise the partner requesting approval that it does not approve the proposal. If the proposal is approved, the partners agree to have applications prepared for any necessary regulatory authorizations or other approvals and to contribute to the partnership the appropriate portion of the cost of the proposed line, facility or extension. 3.8 Expansion of the Project. The rights and obligations of the partners to expand the project shall be governed by the provisions of this section. 3.8.1 Any partner that requests the partnership to construct an expansion shall notify the management committee of the amount of additional transportation requested, the proposed shippers who would use the additional capacity, the likely receipt and delivery points for the additional gas, the proposed completion date for the expansion and such other information as is requested by the management committee. 3.8.2 As soon as possible after receiving the proposal the management committee shall cause the preparation of cost estimates of the expansion and shall send them to the partners together with appropriate engineering data, flow diagrams and maps describing the expansion and such other information as is reasonably necessary to evaluate the proposal. 3.8.3 Within 60 days after the information described in section 3.8.2 has been sent to each partner, the management committee shall either unanimously approve the expansion proposed as set forth or as modified by the management committee or inform the partner making the proposal that it will not accept the proposal. If the management committee accepts the proposal, it shall direct that any necessary applications for regulatory approvals be prepared and shall direct the partners to contribute to the partnership the appropriate portion of the cost of the expansion or shall arrange for such other financing as the management committee unanimously approves. 4. Management Committee. The business of the partnership shall be managed by the management committee, which shall have exclusive authority and full discretion to manage the affairs of the partnership. Unless otherwise expressly provided for in this Agreement, no partner shall have the authority to act for or to assume any obligation or responsibility on behalf of the partnership without the prior approval of the management committee. The management committee shall not have authority to take any action inconsistent with the terms of this Agreement, as it may be amended from time to time. 4.1 Management Committee Members. Each of the partners shall appoint in writing one member of the management committee and two alternates, either of whom may serve in the absence of the member. Any action that a member may perform under this Agreement may be performed, in his absence, by the alternates, and the member may delegate to the alternates as many of his powers and duties as he determines to be appropriate. The member and alternates shall be officers of the partner that appointed them or of an affiliate of the partner. Members and alternates shall serve until replaced by the partner that appointed them. 4.2 Powers of the Management Committee. Without limiting the general powers of the management committee described in this section, the management committee is specifically empowered to do the following: 4.2.1 Designate a project manager for the project to serve for the time and perform the duties specified in the project management agreement. 4.2.2 Appoint such agents as are necessary to assist the project manager or the operators. Appoint such technical and other committees and individuals as necessary and direct them to undertake all activities needed for the planning, construction, and operation of the project. 4.2.3 Determine what FERC or other regulatory approvals or certificates are required to construct and operate the project and direct the preparation and filing of any needed applications. 4.2.4 Except as otherwise provided in this Agreement or as delegated in the project management agreement or the operating agreements, authorize all agreements needed for the project, including but not limited to agreements with consultants and third parties to undertake activities or studies for the benefit of the project, financing arrangements, and commitments for transportation services for shippers. 4.2.5 Determine all policy or other matters for the project. 4.2.6 Adopt partnership rules and amendments concerning the conduct of the affairs of the partnership and the management committee, including procedures for determining the rates to be charged when the applicable FERC tariff allows discretion in setting rates. Adopt rules for such other matters as the management committee determines to be appropriate that are not inconsistent with this Agreement. 4.2.7 Have prepared and adopt, amend or reject capital and operating budgets. 4.2.8 Initiate litigation or arbitration, approve termination of litigation, arbitration or settlement of disputes involving claims against the partnership; approve all attorneys or agents representing the partnership in such matters. 4.2.9 Adopt an insurance and indemnity program covering the interest and obligations of the partnership, and, as appropriate, the partners. 4.2.10 Approve all tax policy matters regarding the partnership, including, but not limited to elections relating to federal income taxes required to be made by the partnership under Code Section 703(b), state income tax, preparation and filing of partnership returns, the handling of and participation in tax audits conducted by any government entity, and designation of a tax matters partner. 4.2.11 Appoint audit committees for the partnership with such powers and duties as are specified by the management committee. The audit committees shall report to the management committee. 4.2.12 Have developed accounting and payment procedures mutually acceptable to the management committee and the operators. 4.3 Management Committee Meetings. Meetings of the management committee may be held in person or by a telephone conference call during which each member may hear at the same time. In lieu of a meeting, the members may act upon unanimous written consent. Each partner shall have one vote equal to its partner's percentage at the time of the meeting. Minutes of each meeting shall be kept and shall be approved by each member or alternate acting at the meeting. Action by unanimous consent shall be placed in writing and signed by the members. A quorum shall consist of the members or their alternates representing all nondefaulting partners. 4.4 Effect of Management Committee Decisions. Any action taken by the partnership at the direction of the management committee shall be binding on the partnership and on each partner, whether approved by the regular members of the management committee or their alternates. 4.5 Voting Requirements. Unless otherwise provided in the Agreement, matters shall be decided by a vote of the members representing not less than a majority of the partners' percentages in the partnership. The following matters, however, shall require the unanimous approval of all of the partners. 4.5.1 The means of financing the project or any expansions of the project. 4.5.2 Selection of project route and design. 4.5.3 The filing of an application for certificates or other regulatory approvals for the initial line. 4.5.4 To proceed with the acquisition of right of way for the initial line. 4.5.5 Acceptance of certificates authorizing the initial line that have been granted by the FERC or other regulatory authority. 4.5.6 After receipt and acceptance of all necessary prior regulatory approvals and authorizations, the decision to begin construction of the project. 4.5.7 The form and content of any tariff to be used by the project. 4.5.8 Any agreement to purchase, construct, acquire or own any secondary facilities or expansions of the project. 4.5.9 Except as provided in sections 11.2.1 and 11.2.2, consent to the transfer of a partner's interest. 4.5.10 Except as provided in sections 10, 11 and 12, the decision to add a new partner to the partnership. 4.5.11 Except as otherwise provided in this Agreement, the decision to dissolve the partnership. 4.5.12 Any amendment of this Agreement. 4.6 Officials of the Partnership. One of the members of the management committee shall serve as chairman. A chairman shall serve for a term of three years unless he resigns or is removed. The first chairman shall be the management committee member representing K N TransColorado, Inc. Subsequent chairman shall be selected by a majority vote of the partners, and a chairman may be removed by a majority vote of the partners. A chairman may succeed himself for one or more subsequent terms. If the chairman's position changes to a member representing a different partner, then the operating agreements will be reexamined to determine if responsibilities should be reassigned to other partners or their affiliates. If the partners agree by majority vote, the operating agreements will be appropriately amended. The chairman shall have the power and responsibility for the general supervision of the business and property of the partnership in accordance with this Agreement and shall perform other administrative duties commonly incident to this responsibility. The chairman or his alternate shall chair meetings of the management committee. The management committee shall have the power to appoint officials or agents for the partnership to perform such duties as the management committee may direct. 4.7 Removal of Officials. Each partner may remove an official that it previously appointed at any time and shall have the right to fill vacancies occurring in the positions occupied by its appointees. The management committee may remove an official previously appointed by the management committee at any time and shall fill vacancies occurring in the positions occupied by its appointees. 4.8. Indemnification. The partnership shall indemnify and hold harmless the partners, the members of the management committee and those officials and agents appointed in writing by the management committee against all actions, claims, demands, costs and liabilities arising out of the acts or failures to act of any of the members or officials in good faith within the scope of their authority in the course of the partnership's business. These persons shall not be liable for any obligations, liabilities or commitments incurred by or on behalf of the partnership as a result of any such acts or failure to act. 5. Project Manager and Operators. 5.1 Project Manager. The partnership shall enter into a project management agreement with a project manager to serve during the preconstruction and construction periods. The project manager shall serve until it resigns or is removed by a majority vote of the management committee. 5.2 Operators. The partnership shall enter into operating agreements with affiliates of each of the partners to operate the project. 6. Capital Accounts and Capital Contributions. 6.1 Capital Accounts. The capital account of a partner consists of the total capital contributions made by the partner in accordance with sections 6.3 and 6.4, plus all profits of the partnership and less all distributions and all losses of the partnership allocated to such account. Capital contributions shall be made in money or property acceptable to the management committee, other than a note or other obligation of a partner. Profits and losses shall be determined in accordance with the accounting rules and regulations, if any, prescribed by the regulatory body or bodies under the jurisdiction of which the partnership is then operating, and to the extent of matters not covered by such rules or regulations, generally accepted accounting principles prevailing for companies engaged in a business similar to the partnership. 6.2 Allocation of Profits and Losses. At the end of each calendar month, each of the partners shall share in all net profits and net losses of the partnership for that month (determined in accordance with section 6.1) in proportion to its partner's percentage as of the beginning of the month for which profits and losses are being allocated, and the amount allocated to each partner shall be debited or credited, as the case may be, to the capital account of the partner, as provided in section 6.1. Except as provided below, all items of income, gain, loss (including depreciation recapture), deduction or credit for federal income tax purposes for each month shall be allocated in accordance with the foregoing allocation of net profits and net losses and are not subject to any special allocation. However, income, gain, loss and deduction for federal income tax purposes that is attributable to any property contributed to the partnership by a partner shall be allocated to the partners in the manner provided under Internal Revenue Code Section 704(c) and any regulations issued under that section. 6.3 Preconstruction and Construction Capital Contributions. Each partner agrees to contribute to the capital of the partnership one-third of the amount necessary to meet the cash requirements of the partnership prior to and during the construction of the project. These requirements include, but are not limited to, the costs of preparing and filing an application for FERC approval, preparing necessary environmental impact studies, obtaining interests in land and performing preliminary marketing activities. The capital contributions required by this section 6.3 shall be made in the amount and at the time specified by the management committee. 6.4 Post Construction Capital Contributions. Each partner agrees to contribute to the capital of the partnership one-third of the amount determined to be necessary by the management committee for the operation and maintenance of the project and the purchase or construction of any secondary facilities or expansions of the project approved by the management committee. 6.5 Payment of Capital Contributions. 6.5.1. The management committee shall cause the project manager or the appropriate operator to prepare and deliver to each partner budgets, cash flow projections and other financial forecasts with respect to the partnership as may be reasonably requested by any partner. The management committee shall cause to be issued a written request for payment of each capital contribution to be made in accordance with sections 6.3 and 6.4, at such times and in such amounts as the management committee directs. All amounts received by the partnership from a partner on or before the date specified in section 6.5.2(iii) shall be credited to such partner's capital account as of the specified date and all amounts received from a partner after the date specified in section 6.5.2(iii) shall be credited to such partner's capital account as of the date of its receipt. 6.5.2 Each written request for payment issued pursuant to section 6.5.1 shall state: (i) the amount of the capital contribution requested from each partner; (ii) the purposes for which the capital contributions are to be applied, in such reasonable detail as the management committee shall direct; and (iii) the date on which the payments shall be made and the method of payment. 6.5.3 Each partner will make payment of its capital contributions in accordance with the requests issued under section 6.5.1. If a capital contribution is made 10 or more days after the date specified for payment by the management committee under section 6.5.2(iii), interest on the delinquent amount shall accrue daily from the date payment should have been made until the date payment is received by the partnership. Interest shall be calculated on a daily basis using 365 days for a year at 2% plus the base rate on corporate loans at large U. S. money center commercial banks (prime rate) as quoted in The Wall Street Journal under "Money Rates" for each relevant day. A partner's payment of interest shall not be used to increase its capital account. Any interest paid by the defaulting partner shall be allocated as income to the nondefaulting partners' capital accounts and distributed immediately. In addition, if a payment is 10 or more days late, and there has been a reduction in the allocations made under section 6.2 to the defaulting partner, that partner must make any necessary payments to bring its capital account into balance with those of the nondefaulting partners, including additional capital contributions to its own capital account, or in the case of a disproportionate allocation of loss, contributions to increase the capital accounts of the nondefaulting partners, whichever is appropriate. If a payment is less than 10 days late and there has been a reduction in the allocations made to the defaulting partner under section 6.2, such reduction shall be reversed through an accounting adjustment to all of the partners' capital accounts. 6.6 Unsolicited Contributions. No partner shall make any capital contributions to the partnership except as requested by the management committee pursuant to section 6.5. 7. Distributions of Excess Cash. The management committee will determine the cash requirements of the partnership at least semiannually. Distributions of any amount in excess of the cash requirements shall be made only to all partners simultaneously in proportion to their respective partners' percentages at the time of distribution, in such total amounts and at such times as directed by the management committee. However, if section 10.1(c) applies, distribution of excess cash shall be made to each nondefaulting partner in the proportion that its partner's percentage bears to the partners' percentages of all nondefaulting partners. 8. Records, Accounting and Taxation. 8.1 Fiscal Year. The fiscal year of the partnership shall begin on January 1 and end on the following December 31. 8.2 Location of Records. The books of account and other records for the partnership shall be kept and maintained at the principal office of the partnership or at such other location as the management committee directs. Any partner wishing to make copies of any such records of the partnership may do so at the expense of the partner. 8.3 Books of Account. The books of account for the partnership shall be maintained on an accrual basis in accordance with the accounting rules and regulations, if any, prescribed by the regulatory body under the jurisdiction of which the partnership is operating, and, to the extent of matters not covered by such rules or regulations, generally accepted accounting principles prevailing for companies engaged in a business similar to that of the partnership. The books of account shall be audited by certified public accountants selected by the management committee following the end of each fiscal year at the expense of the partnership and, if reasonably required by any partner, at the end of the partner's fiscal year at the expense of the partner. 8.4 Annual Financial Statements and Tax Returns. Within 60 days following the end of the fiscal year, the project manager or appropriate operator shall prepare and deliver to each partner (with footnote disclosure) an income statement, a statement of cash flows for the fiscal year, a statement of financial position and a statement of changes in each partner's capital account as of the end of the fiscal year, together with an auditor's opinion by the certified public accountants. Within 120 days following the end of the fiscal year, the tax matters partner shall cause to be prepared the federal, state and local income tax returns and other accounting and tax information and schedules as shall be necessary for the preparation by each partner of its income tax returns for the fiscal year. The tax matters partner shall also cause to be prepared and timely filed the federal and any state and local income tax returns of the partnership. 8.5 Interim Financial Statements. As soon as practicable after the end of each calendar month in each fiscal year, the project manager or appropriate operator shall prepare and deliver to each partner, together with an appropriate certificate of the person preparing the document, an income statement, a statement of cash flows, a statement of financial position, a tax schedule and a statement of changes in each partner's capital account for the month (including sufficient information to permit the partners to calculate their tax accruals), for the portion of the fiscal year then ended and for the 12 month period then ended. 8.6. Taxation of Partnership. The partners intend that the partnership shall be treated as a partnership for federal, state and local income tax purposes. The partners will take all action, including amending this Agreement and executing other documents, needed to qualify for and receive this tax treatment. 8.7 Government Reports. The project manager or appropriate operator shall prepare and file all reports prescribed by the FERC and any other regulatory or governmental agency having jurisdiction. 8.8 Inspection of Facilities and Audit by Partners. Each partner shall have the right at reasonable times during regular business hours to inspect the facilities of the partnership and to audit and make copies of the books of account and other records of the partnership, including partnership minutes, resolutions and contracts. This right may be exercised through any agent or employee of the partner designated in writing by it or by an independent public accountant or attorney so designated. Each partner shall bear all expenses incurred in any inspection or audit made at the partner's request. 8.9 Deposit and Withdrawal of Funds. Funds of the partnership shall be deposited in the financial institutions designated by the management committee. All individuals authorized as signatories for the partnership shall be designated by the management committee. All withdrawals of funds shall be made only by checks, wire transfer, debit memorandum or other written instrument. 8.10 Record Retention. All records that are required by this Agreement or other agreements of the partnership shall be retained by the partnership for the longer of the period of time required by the FERC or any other federal or state agency having jurisdiction or by state law or, the period during which any state or federal tax audit may occur, or as determined by the management committee, but in no event for less than three years. 8.11 Section 754 Election. At the direction of the management committee, the tax matters partner shall file an election with the Internal Revenue Service under Section 754 of the Internal Revenue Code in the manner prescribed in regulations issued under Section 754. The election shall provide that the basis of partnership property shall be adjusted in the case of a distribution of property, in the manner provided in Code Section 734, and, in the case of a transfer of a partnership interest, in the manner provided in Code Section 743. 8.12 Tax Matters Partner. The management committee shall designate a tax matters partner within the meaning of Internal Revenue Code Section 6231(a)(7) in the manner required by regulations issued under that Section. 9. Reimbursement of Costs. Certain costs incurred by the partners or their affiliates shall be reimbursed by the partnership as provided in this section. 9.1 Out-of-Pocket Costs. Out-of-pocket costs have been or will be incurred by the partners or their affiliates. After the execution of this Agreement, but not more often than monthly, the partners shall present a detailed accounting of these costs to the partnership for reimbursement. If approved by the management committee, the partnership shall reimburse the appropriate partner or affiliate for out-of-pocket costs. 9.2 In-house Costs. One or more of the partners or their affiliates may have accrued or may accrue in-house costs, as specified in Exhibit A to this Agreement, to help with the formation of the partnership and the design or construction of the project. Each partner that has accumulated in-house costs shall present a detailed accounting of them to the partnership for payment as of each April 1 and October 1. If approved by the management committee, the partnership shall reimburse the appropriate partner or affiliate for the amount of its accrued in-house costs. 10. Default. 10.1 Consequences of Default. For as long as a partner is in default, (a) the representative of the defaulting partner on the management committee shall not have any vote as a member of the management committee and action by the management committee shall require the unanimous vote of the remaining members during the period of default; (b) the defaulting partner shall continue to be liable to make capital contributions to the partnership in accordance with section 6; and (c) no distributions shall be made to the defaulting partner, except as provided in section 13.3.2. A defaulting partner shall be liable to the partnership and the other partners for all losses, damages and expenses sustained or incurred by the partnership or the partners as a result of the default. 10.2 Action by Management Committee. In the event of default, the members of the management committee representing the nondefaulting partners shall promptly vote on a course of action to be taken, which may include requiring all of the nondefaulting partners to make capital contributions or lend funds to the partnership proportionate to their then-existing partners' percentages in a total amount equal to the amount of the default. 10.3 Sale of Defaulting Partner's Interest. If any default continues for more than 60 consecutive days, each of the nondefaulting partners shall have the right to purchase equal percentages of the defaulting partner's partnership interest. If any of the nondefaulting partners elects not to purchase equal percentages of such partnership interest, upon unanimous approval of the nondefaulting partners, they may purchase unequal percentages of the defaulting partner's partnership interest, including a purchase of the entire partnership interest by a single partner, or they may sell all or part of the partnership interest to a third party. If the nondefaulting partners cannot reach unanimous agreement on the sale of the defaulting partner's partnership interest in unequal percentages to the nondefaulting partners or to a third party, the partnership shall be dissolved. Any sale or assignment of the defaulting partner's partnership interest may be made without the consent or other agreement of the defaulting partner. 10.4 Price for Nondefaulting Partners. The price payable by one or both of the nondefaulting partners for the defaulting partner's partnership interest shall be the lesser of: (a) the fair market value of the partnership interest, as determined by the management committee, or (b) the amount reflected in the defaulting partner's capital account at the time of the sale. The proceeds from a sale to one or both of the nondefaulting partners shall be paid to the partnership and applied first in an amount equal to any losses, damages or expenses, including attorney's fees, sustained by the partnership as a result of the default. The proceeds shall next be applied to any nondefaulting partner in an amount equal to the losses, damages or expenses, including attorney's fees, incurred by such partner as a result of the default. Any remaining proceeds shall be paid to the defaulting partner. 10.5 Price for Third Party. The management committee may sell a defaulting partner's partnership interest to a third party at a reasonable price, as determined by the management committee. The proceeds from the sale of the defaulting partner's partnership interest shall be paid to the partnership, which shall act as an escrow agent in disbursing such proceeds. The proceeds shall be disbursed in the following order: (a) to the partnership to the extent of any losses, damages or expenses, including attorney's fees, sustained or incurred by the partnership as a result of the default; (b) to any partner to the extent of any losses, damages or expenses, including attorney's fees, sustained or incurred by the partner as a result of the default; (c) to the partnership up to the amount of the arrears in the defaulting partner's capital account; and (d) to the defaulting partner up to the balance in that partner's capital account to liquidate its interest in the partnership. Any proceeds used to satisfy the arrears in the defaulting partner's capital account shall be treated as a capital contribution by the new partner and credited to its capital account. If any proceeds remain after making the payments described in (a) through (d), the excess proceeds shall be distributed to each nondefaulting partner, excluding the new partner, in the proportion that its partner's percentage bears to the partners' percentages of all such nondefaulting partners. 10.6 Additional Remedies. Nothing in section 10 shall prevent the partnership or any partner from recovering from a defaulting partner the amount of any losses, damages or expenses incurred or sustained as a result of such default and not recovered pursuant to section 10, or from pursuing any other remedies that may be available in law or equity. The nondefaulting partners may place a lien on the future cash distributions to a partner who was in default to recover their losses, damages and expenses. 10.7 Continuation of Partnership. If a defaulting partner's interest in the partnership is assigned to a third person or purchased by one or both of the nondefaulting partners, the partnership shall not be dissolved and shall continue to carry out the business of the partnership. If one or both of the nondefaulting partners purchases the interest of a defaulting partner, the obligation to make capital contributions pursuant to section 6, the capital accounts, the partners' percentages, and voting rights on the management committee shall be appropriately adjusted to reflect the reduction in the number of partners. 10.8 Cure of Default. A defaulting partner shall have a right to cure one or more defaults at any time prior to the time its interest in the partnership is sold as provided in this section 10. A defaulting partner can cure a default by doing all of the following: (a) paying to the partnership the amount of the capital contributions it failed to make. These capital contributions shall be paid in the manner specified by the management committee and shall be credited to the defaulting partner's capital account. If the nondefaulting partners were required to make additional capital contributions due to a default, the partnership shall make cash distributions to them in the amount of such additional capital contributions; (b) making all payments required under section 6.5.3; (c) paying to the partnership the amount of any losses, damages or expenses, including attorney's fees, sustained or incurred by the partnership as a result of the default, excluding any amounts described in (a) and (b); and (d) paying to any partner the amount of any losses, damages or expenses, including attorney's fees, sustained or incurred by the partner as a result of the default, excluding any amounts described in (a) and (b). 10.9 Status of Partner in Default as Partner. A defaulting partner that has not been required to transfer its interest shall continue to be a partner. 11. Sale, Transfer or Pledge of Partnership Interest. Except with the unanimous consent of the management committee, or as permitted by section 11.2 of this Agreement, no partner may (or allow any of its affiliates to) sell, assign, pledge, hypothecate or otherwise transfer in any manner all or any part of its right, title or interest in the partnership or in this Agreement. 11.1 Sale of Partnership Interest. A partner may sell some or all of its interest in the partnership to an unaffiliated party only with the unanimous consent of the remaining partners and subject to the following provisions. 11.1.1 If a partner wishes to sell some or all of its interest in the partnership, it shall submit to the management committee a notice of intent to sell containing a list of proposed buyers unaffiliated with any partner. The management committee must unanimously agree on the acceptability of the buyers before the selling partner may negotiate on price and terms with those parties that are approved. The selling partner shall provide such information as the management committee reasonably requests about the prospective buyers. If the management committee cannot unanimously approve one or more of the proposed buyers, the selling partner may withdraw from the partnership, as provided in section 12. The management committee shall notify the selling partner of the acceptable prospective buyers, if any, within 30 days of receiving the notice of intent to sell. 11.1.2 If the selling partner is able to reach agreement on the terms and conditions for sale of all or part of its interest to an approved proposed buyer, it must then give the remaining partners a right of first refusal to purchase the interest on the same terms and conditions. The remaining partners shall have 30 days from the date they receive the offer to exercise their right of first refusal. Unless the remaining partners unanimously agree otherwise, they must purchase the selling partner's partnership interest in equal percentages. 11.1.3 If the remaining partners elect not to purchase the selling partner's interest, the sale to the approved buyer must be on the same terms and conditions as those offered to the remaining partners. 11.2 Permitted Transfers by a Partner. Provided that a transfer does not result in a termination of the partnership for federal income tax purposes, nothing in this Agreement shall prevent: 11.2.1 The transfer by any partner of its entire right, title and interest in the partnership and in this Agreement to an affiliate of the partner if the affiliate assumes by express agreement with the partnership, in a way satisfactory to the management committee, all of the obligations of the transferor under this Agreement and if the transfer does not relieve the transferor of its obligations under the Agreement without the approval of the management committee, which approval shall not be unreasonably withheld. Upon approval, the affiliate shall be substituted as a partner. 11.2.2 An assignment, pledge or other transfer creating a lien or security interest in all or any portion of a partner's right, title or interest in the profits and surplus of the partnership or in any indebtedness of the partnership under any mortgage, indenture or deed of trust created by such partner; provided that the assignee, pledgee, mortgagee or trustee shall hold the same subject to the terms of this Agreement. 11.3 Effect of Permitted Transfers or Withdrawals. No assignment, pledge or other transfer or withdrawal pursuant to section 12 shall give rise to a right in the transferring or withdrawing partner to dissolve the partnership. An assignment, pledge or other transfer shall not give rise to a right in any transferee to become a partner in the partnership unless agreed to by unanimous vote of the management committee, except that affiliates will be substituted as partners, as provided in section 11.2.1. 11.4 Effect of Prohibited Transfers. Any transfer of an interest in the partnership by a partner in violation of the terms of this Agreement shall not cause a dissolution of the partnership, but shall result in the forfeiture of the partner's right to participate in the management of the partnership. This section does not limit any right the partnership or the other partners may have against the partner making the prohibited transfer. 12. Withdrawal of a Partner. A nondefaulting partner shall have the right to request withdrawal from the partnership if agreement on an acceptable course of action cannot be reached at any meeting of the management committee. The withdrawing partner shall give 60 days' notice of its intent to withdraw to the other partners. If any of the partners gives notice of withdrawal from the partnership, the following provisions shall apply. 12.1 Purchase by Partners. The remaining partners shall decide whether to purchase the interest of a withdrawing partner. Unless the remaining partners unanimously agree otherwise, each remaining partner shall purchase equal percentages of the partnership interest at the price provided for in section 12.4. If the remaining partners unanimously agree to purchase unequal percentages of the withdrawing partner's partnership interests, the new interests shall be reflected by appropriate adjustments in the partner's capital accounts and partners' percentages and voting rights on the management committee. 12.2 Sale to Third Party. If the remaining partners do not purchase the partnership interest, by unanimous vote the remaining partners may permit or direct the withdrawing partner to assign its partnership interest to a third person who will become a partner in the partnership. However, the withdrawing partner shall have no obligation to assign its partnership interest to a third party for less than the price specified in section 12.4. 12.3 Need to Agree. If the remaining partners of the management committee do not unanimously agree either to purchase the withdrawing partner's partnership interest or to permit its assignment, the partnership shall be dissolved. 12.4 Price of Partnership Interest. Unless otherwise agreed, the price to be paid to any withdrawing partner by the remaining partners as consideration for the transfer of its interest in the partnership shall be the amount contained in the withdrawing partner's capital account. 13. Dissolution of the Partnership. Voluntary and involuntary dissolution of the partnership shall be governed by this section. 13.1 Voluntary Dissolution. 13.1.1 After the initial term of the Agreement, any partner may elect to dissolve the partnership and terminate this Agreement by giving the other partners written notice of such election not less than 1 year prior to the date the termination is to take place. 13.1.2 By unanimous vote of the management committee, the partners may elect to dissolve the partnership and terminate this Agreement at any time during or after its initial term. 13.1.3 Winding up of the partnership business shall include securing any necessary prior approval of the FERC and, upon such election of the management committee and receipt of any necessary FERC approval, the partnership shall undertake sale or abandonment of all or substantially all of the partnership's business and assets. 13.2 Automatic Dissolution. The partnership shall automatically and without notice be dissolved upon the happening of any of the following events: 13.2.1 Ninety days have elapsed since the commencement of any proceedings by or against any of the partners for any relief under any bankruptcy or insolvency law, or any law relating to the relief of debtors, readjustment of indebtedness, reorganization, arrangement, composition or extension, and, if such proceedings have been commenced against any of the partners, the proceedings have not been dismissed, nullified, stayed or otherwise rendered ineffective (but then only so long as the stay continues in force); 13.2.2 Ninety days have elapsed since the entry of a decree or order of a court having jurisdiction for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of any of the partners or of a substantial part of a partner's property, or for the winding up or liquidation of its affairs, when the decree or order remains in force undischarged and unstayed for a period of 90 days, or any substantial part of the property of any of the partners shall be sequestered or attached and is not returned to the possession of the partner or released from the attachment within 90 days; 13.2.3 Any of the partners makes a general assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due; 13.2.4 The filing of a certificate of dissolution by any partner under the laws of the state of its incorporation or the entering of a final order dissolving any partner by any court of competent jurisdiction; 13.2.5 The sale or abandonment of all or substantially all of the partnership's business and assets; 13.2.6 Any event which makes it unlawful for the business of the partnership to be carried on or for the partners to carry on such business in a partnership; or 13.2.7 Failure of the management committee to agree to permit or require the assignment or purchase of a withdrawing partner's interest in the partnership as provided in section 12.3. 13.3 Winding Up and Liquidation. If the partnership is dissolved pursuant to the provisions of section 13, the management committee shall continue to exercise the powers vested in it by this Agreement and continue to operate the project in the normal course to the extent appropriate for the purpose of winding up the business of the partnership and liquidating the assets in an orderly manner. Partnership assets will be treated as follows: 13.3.1 Unrealized appreciation and depreciation on partnership assets that are not sold or otherwise disposed of in connection with the winding up and liquidation of the partnership shall be allocated to the partners' capital accounts as if such assets had been sold for their fair market value on the date the partnership is liquidated. If on the date of liquidation of the partnership any partner has a deficit in its capital account after reflecting in its capital account (i) the items specified in section 6.1 for the period ending on the date of liquidation of the partnership, and (ii) the allocations required under the first sentence of this section 13.3.1, that partner shall be required to contribute sufficient cash to the partnership to eliminate the deficit. 13.3.2 The net assets of the partnership remaining after the payment or provision for payment of all of the liabilities of the partnership shall be distributed to all of the partners in accordance with the positive capital account balances of the partners determined after adjustment of the partners' capital accounts in accordance with section 13.3.1. 13.3.3 No termination or dissolution shall deprive any partner not in default of any remedy otherwise available to it. 13.4 Termination Subject to the Natural Gas Act. The right and power to dissolve the partnership shall at all times be subject to the obligations and duties of the partnership as a natural gas company under the Natural Gas Act or any successor or parallel statutes and the jurisdiction of the FERC, and no dissolution under this section 13 shall be accomplished unless all applicable provisions of the act and any conditions or obligations of any certificates issued by the FERC have been complied with or fulfilled. 14. Limitation of Liabilities and Litigation. 14.1 Claims against Partners. If a claim or cause of action is prosecuted against a partner for a third-party liability incurred by the partnership, the partner against whom the claim or cause of action was prosecuted shall have the right to reimbursement of a judgment or reasonable settlement of the claim, plus costs and attorney's fees from and to the extent of the assets of the partnership. The management committee may advance costs and expenses of litigation to a partner. A partner that has a claim made against it that may result in liability to the partnership or to any other partner shall promptly notify the partnership and the other partners of the claim and shall provide the partnership a reasonable opportunity to participate in any litigation. 14.2 Claims against the Partnership. The management committee shall give each partner timely notice of all claims or litigation against the partnership. In addition, any partner that is sued as a partner in the partnership shall give every other partner and the partnership timely notice of the litigation. 14.3 Contract Restrictions. Unless approved by the management committee, the partnership or its agents or representatives shall not enter into any contracts, leases, subleases, notes, deeds of trust or other obligations unless the agreements or instruments contain appropriate provisions limiting the claims of all parties to or beneficiaries of the agreements or instruments to the assets of the partnership and expressly waiving any rights of the parties or beneficiaries to proceed against the partners individually. 15. Representations and Warranties of the Partners. Each partner represents, warrants and agrees that: 15.1 It is a corporation duly incorporated and validly existing, that it is in good standing under the laws of its jurisdiction of incorporation and that it is or will be authorized to do business in Colorado and other states, as necessary. 15.2 It will not voluntarily cause a dissolution or termination of the partnership by failure to maintain its corporate existence; 15.3 The execution, delivery and performance of this Agreement have been duly authorized by each partner's board of directors, and this Agreement, when executed, will be valid and binding on it; and 15.4 The execution of this Agreement does not contravene any provision of, or constitute a default under, any relevant indenture, mortgage or other agreement binding on the partner or any valid order of any court, commission or governmental agency to which the partner is subject. 16. Miscellaneous Provisions. 16.1 Notices. Any written notices or other communication may be mailed by certified or registered mail, return receipt requested, postage prepaid, or sent by overnight delivery service, fax or other electronic means to each of the partners at the addresses below or at any other address designated by the partner by written notice, and to the partnership at its principal office specified in section 3.3 or at any other address designated by written notice to each of the partners. Notice shall be deemed given three days following mailing or upon receipt if sent by any other means. K N TransColorado, Inc. 12055 West 2nd Place Lakewood, CO 80228-1506 Attn: President Telephone: (303) 989-1740 Fax: (303) 989-0368 El Paso TransColorado Company P.O. Box 1492 El Paso, TX 79978 Attn: A. W. Clark, Vice President Telephone: (915) 541-2600 Fax: (915) 541-2122 Questar TransColorado, Inc. 79 South State Street Salt Lake City, UT 84111 Attn: President Telephone: (801) 530-2150 Fax: (801) 530-2570 16.2 Subject to Applicable Law. This Agreement and the obligations of the partners hereunder are subject to all applicable laws, rules, court decisions, orders and regulations of governmental authorities having jurisdiction and in the event of conflict, said laws, rules, court decision, order and regulations of governmental authorities having jurisdiction shall control. 16.3 Further Assurances. Each of the partners agrees to execute and deliver all such other and additional instruments and documents and to do such other acts and things as may be necessary more fully to effectuate this Agreement and the partnership created hereby and to carry on the business of the partnership in accordance with this Agreement. 16.4 Amendment. This Agreement may be amended, supplemented or restated only in writing and with a written consent of each of the partners. Except as provided in section 11.2, if any partner is added to the partnership for any reason, this Agreement will be amended to add the partner as a party. 16.5 Choice of Law. This Agreement and the partnership shall be governed by and interpreted in accordance with the laws of Colorado. 16.6 Headings. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 16.7 Waiver. A waiver by any partner of any provision, condition or requirement shall not be deemed to be a waiver or release of any other partner from performance of any other provision, condition or requirement in this Agreement or release of any future performance of the same provision, condition or requirement. 16.8 Attorney's Fees. Should there be any litigation between the partners concerning any provision of or the rights and duties under this Agreement, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted in such proceeding, to a reasonable sum from the nonprevailing partners (but not from the partnership) for their attorney's fees in the litigation. 16.9 Entire Agreement and Termination of Prior Agreements. This Agreement, amended and restated September 25, 1995, constitutes the agreement between the partners concerning its subject matter and supersedes any prior understanding or written or oral agreements concerning the subject matter. The Project Agreement dated March 19, 1990, and the letters of intent dated August 18, 1989, and February 9, 1990, among the partners are terminated as of the effective date of this Agreement. 16.10 Severability. Any provision of this Agreement prohibited by applicable law shall be invalid to the extent of such prohibition unless it is determined by unanimous consent of the management committee the such prohibition invalidates the purposes or intent of this Agreement. This Agreement is effective on the day first set forth above and is entered into as of the date set forth below by the authorized representatives whose signatures are shown below. K N Transcolorado, Inc. By: /s/ S. Wesley Hawn S. Wesley Haun, Vice President El Paso TransColorado Company By: /s/ A. W. Clark A. W. Clark, Vice President Questar TransColorado, Inc. By: /s/ A. J. Marushack A. J. Marushack, President and Chief Executive Officer Date: September 25, 1995 EX-10.8 5 FIRM STORAGE SERVICE AGREEMENT Questar Pipeline Company 79 South State Street Salt Lake City, Utah 84111 Contract No. STO46 THIS AGREEMENT is entered into this 12th day of April, 1993, by and between QUESTAR PIPELINE COMPANY, CLAY BASIN STORAGE DIVISION, a Utah corporation, "Seller," and MOUNTAIN FUEL SUPPLY COMPANY, "Buyer." Buyer represents that it desires Seller to store natural gas in Seller's Clay Basin Storage Field; and Seller represents that it is seeking FERC authorization to expand the storage capacity available in order to provide the storage service for Buyer on the terms specified in this agreement. Seller and Buyer agree as follows: AGREEMENT TERMS The terms selected below, together with the terms and conditions of this agreement, including the attached Appendices A and B, constitute the storage service to be provided and the rights and obligations of the parties. Buyer shall designate receipt and delivery points on Appendix A that are acceptable to Seller. 1. BUYER'S STATUS (Please Check One Only): XX Local Distribution Company Intrastate Pipeline Company Interstate Pipeline Company Marketer/Broker Producer End-User Other (Specify) _______________ 2. VOLUMES TO BE INJECTED AND WITHDRAWN (Subject to the provisions of Section 8, below): Firm Service (Please see note below for MRD calculation): 5,500 Annual Working Gas Volume (MMcf) 45.83 Minimum Required Deliverability Volume MMcf/day (MRD) Note: MRD must be calculated using the formula shown below: MRD = Annual Working Gas Volume (MMcf/year) 150 days x .80 3. RATES (Subject to the provisions of paragraph 2 of Appendix B): Firm Storage Service - Rate Schedule FSS DEMAND CHARGES: Deliverability (Please Check One Only): XX the maximum rate set forth in Seller's Statement of Rates a discounted rate of $___________/Mcf Inventory Capacity (Please Check One Only): XX the maximum rate set forth in Seller's Statement of Rates a discounted rate of $___________/Mcf Prior to the time the terms and conditions set forth in Appendix B are met to the sole satisfaction of Seller, demand charges under this agreement shall be applied to the levels of Annual Working Gas Volume and MRD that Seller, in Seller's sole judgement, can actually provide in the event the Annual Working Gas Volume and MRD requested by Buyer and set forth in Section 2 above cannot reasonably be commenced. Unless Seller notifies Buyer in writing that Seller is unable to provide the service at the requested levels, Buyer shall be responsible for all demand charges, as set forth above in this Section 3. COMMODITY CHARGES: Injection: $0.00851/Mcf Withdrawal: $0.01631/Mcf Overrun: $0.29124/Mcf 4. ACA CHARGE: XX yes no 5. ADDITIONAL FACILITIES CHARGES: Additional facilities: XX are required are not required Charge: N/A lump-sum payment of $ ____________ N/A monthly fee of $ ____________ 6. TERM OF THE AGREEMENT (Subject to the provisions of Section 8, below): (a) Initial term May 15, 1994 to May 14, 2019 (b) Renewal term XX none other: __________________________ (c) Termination. This agreement shall be renewed as stated in Section 6(b) above. This agreement may be terminated during any renewal period by either party upon 30 days' written notice to the other party prior to each injection period. 7. NOTICE: Unless otherwise provided in Seller's FERC Gas Tariff, Volume No. 2-A, all notices shall be given by telephone or other electronic means and confirmed in writing at the following addresses: Buyer: Mountain Fuel Supply Company 141 East First South Street Salt Lake City, Utah 84147 Attention: Vice President - Gas Supply Telephone: (801) 530-2043 Fax: (801) 530-2970 QUESTAR PIPELINE COMPANY 79 South State Street Salt Lake City, Utah 84111 Attn: Director, Gas Supply Planning Telephone: (801) 530-2020 Fax: (801) 530-2570 8. COMMENCEMENT OF SERVICE: Seller shall not be obligated to commence the requested Clay Basin expansion service under this agreement until all terms and conditions of Appendix B are met to the sole satisfaction of Seller. However, at any time prior to such fulfillment of the Appendix B terms and conditions, service may, if deemed feasible solely by Seller, be made available to Buyer using the priority determined by applying the present value ranking procedures set forth in Section 4.2 of Seller's FERC Gas Tariff, Original Volume No. 2-A to the effective service requests underlying the executed expansion service agreements. Service to remaining Buyers will commence as soon as deemed operationally practicable by Seller. If the FERC authorizes only a portion of the total expansion capacity requested by Seller and the authorized capacity is oversubscribed by Buyers who have executed a tendered firm storage service agreement, then the capacity so approved will be made available to such Buyers using the priority determined by applying the present value ranking procedure set forth in Section 4.2 of Seller's FERC Gas Tariff, Original Volume No. 2-A to the respective executed service agreements. Service agreements receiving no allocation of capacity under this methodology, and the respective underlying requests for service, shall be considered void for all purposes. 9. TARIFF: This agreement shall be subject to the terms and conditions attached to and made part of this agreement as Appendix B and all the applicable rate schedules and the General Terms and Conditions of Seller's FERC Gas Tariff, Original Volume No. 2-A, as it may be amended or superseded from time to time. 10. RESTRUCTURING TARIFF: Upon implementation by Seller of tariff changes required by the FERC to comply with restructuring under Order No. 636 in Docket No. RS92-9, this agreement will be reformed to conform to Seller's tariff. The reformed agreement will be issued to Buyer according to the procedures set forth in Seller's tariff, as it may be amended or superseded from time to time. The parties have executed this agreement to be effective the first day of its term. BUYER: Mountain Fuel Supply Co. QUESTAR PIPELINE COMPANY By: /s/ M. E. Benefield By: /s/ J. B. Carricaburu Title: Vice President Gas Supply Title: V. P., Gas Supply & Marketing Date: March 25, 1993 Date: April 12, 1993 APPENDIX A 1. Receipt Points Description Quantity/Mcf 2. Delivery Points Description Quantity/Mcf APPENDIX B CONDITIONS PRECEDENT TO SERVICE 1. Seller shall not be obligated to provide expanded firm storage service at Clay Basin under this agreement until the following conditions are met to the sole satisfaction of Seller: a. Receipt by Seller of signed firm storage service agreements from one or more Buyers for sufficient capacity and upon terms and conditions acceptable to Seller that justify construction of the Clay Basin expansion; b. Receipt and acceptance by Seller of all approvals required to expand the capacity at Clay Basin as requested by Seller and to construct the facilities necessary to provide all expanded firm storage service requested by all expansion Buyers and to commence the service, including all necessary authorizations from federal, state and local municipal agencies and other government authorities, in final form and substance satisfactory to Seller, permitting or authorizing the service; c. Receipt and acceptance by Seller of all necessary rights of way, easements and permits, if any, required to construct, operate and maintain the Clay Basin expansion facilities; d. Completion of construction and commencement of actual operation of all facilities, including injection of all required cushion gas, necessary to provide firm storage service to all expansion buyers. 2. Should the FERC approve Clay Basin storage rates for firm service above the rates in effect on February 12, 1993, and such increase is due solely to costs associated directly with the expansion of Clay Basin, Buyer may terminate this agreement. 3. Buyer's creditworthiness shall remain a continuing condition precedent to Seller's obligation to perform. Seller may require Buyer to reverify its creditworthiness as Seller deems necessary. EX-10.10 6 QUESTAR PIPELINE COMPANY DEFERRED COMPENSATION PLAN FOR DIRECTORS (As Amended and Restated February 13, 1996) 1. Purpose of Plan. The purpose of the Deferred Compensation Plan for Directors ("Plan") is to provide Directors of Questar Pipeline Company (the "Company") with an opportunity to defer compensation paid to them for their services as Directors of the Company and to maintain a Deferred Account Balance until they cease to serve as Directors of the Company or its affiliates. 2. Eligibility. Subject to the conditions specified in this Plan or otherwise set by the Company's Board of Directors, all voting Directors of the Company who receive compensation for their service as Directors are eligible to participate in the Plan. Eligible Directors are referred to as "Directors." Directors who elect to defer receipt of fees or who have account balances are referred to as "Participants" in this Plan. 3. Administration. The Company's Board of Directors shall administer the Plan and shall have full authority to make such rules and regulations deemed necessary or desirable to administer the Plan and to interpret its provisions. 4. Election to Defer Compensation. (a) Time of Election. A Director can elect to defer future compensation or to change the nature of his election for future compensation by submitting a notice prior to the beginning of the calendar year. A newly elected Director is entitled to make a choice within five days of the date of his election or appointment to serve as a Director to defer payment of compensation for future service. An election shall continue in effect until the termination of the Participant's service as a Director or until the end of the calendar year during which the Director serves written notice of the discontinu- ance of his election. All notices of election, change of election, or discontinuance of election shall be made on forms prepared by the Corporate Secretary and shall be dated, signed, and filed with the Corporate Secretary. A notice of change of election or discontinuance of election shall operate prospectively from the beginning of the calendar year, but any compensation deferred shall continue to be held and shall be paid in accordance with the notice of election under which it was withheld. (b) Amount of Deferral. A Participant may elect to defer receipt of all or a specified portion of the compensation payable to him for serving as a Director and attending Board and Committee Meetings as a Director. For purposes of this Plan, compensation does not include any funds paid to a Director to reimburse him for expenses. (c) Period of Deferral. When making an election to defer all or a specified percentage of his compensation, a Participant shall elect to receive the deferred compensation in a lump sum payment within 45 days following the end of his service as a Director or in a number of annual installments (not to exceed four), the first of which would be payable within 45 days following the end of his service as a Director with each subsequent payment payable one year thereafter. Under an installment payout, the Participant's first installment shall be equal to a fraction of the balance in his Deferred Compensation Account as of the last day of the calendar month preceding such payment, the numerator of which is one and the denominator of which is the total number of installments selected. The amount of each subsequent payment shall be a fraction of the balance in the Participant's Account as of the last day of the calendar month preceding each subsequent payment, the numerator of which is one and the denominator of which is the total number of installments elected minus the number of installments previously paid. The term "balance," as used herein, refers to the amount credited to a Participant's Account or to the Fair Market Value (as defined in Section 5 (a)) of the Phantom Shares of Questar Corporation's common stock ("Common Stock") credited to his Account. (d) Phantom Stock Option and Certificates of Deposit Option. When making an election to defer all or a specified percentage of his compensation, a Participant shall choose between two methods of determining earnings on the deferred compensation. He may choose to have such earnings calculated as if the deferred compensation had been invested in Common Stock at the Fair Market Value (as defined in Section 5 (a)) of such stock as of the date such compensation amount would have otherwise been payable to him ("Phantom Stock Option"). Or he may choose to have earnings calculated as if the deferred compensation had been invested in negotiable certificates of deposit at the time such compensation would otherwise be payable to him ("Certificates of Deposit Option"). The Participant must choose between the two options for all of the compensation he elects to defer in any given year. He may change the option for future compensation by filing the appropriate notice with the Corporate Secretary before the first day of each calendar year, but such change shall not affect the method of determining earnings for any compensation deferred in a prior year. 5. Deferred Compensation Account. A Deferred Compensation Account ("Account") shall be established for each Participant. (a) Phantom Stock Option Account. If a Participant elects the Phantom Stock Option, his Account will include the number of shares and partial shares of Common Stock (to four decimals) that could have been purchased on the date such compensation would have otherwise been payable to him. The purchase price for such stock is the Fair Market Value of such stock, i.e., the closing price of such stock as reported on the Composite Tape of the New York Stock Exchange for such date or the next preceding day on which sales took place if no sales occurred on the actual payable date. The Participant's Account shall also include the dividends that would have become payable during the deferral period if actual purchases of Common Stock had been made, with such dividends treated as if invested in Common Stock as of the payable date for such dividends. (b) Certificates of Deposit Option Account. If a Participant elects the Certificates of Deposit Option, his Account will be credited with any compensation deferred by the Participant at the time such compensation would otherwise be payable and with interest calculated at a monthly rate using the typical rates paid by major banks on new issues of negotiable Certificates of Deposit on amounts of $1,000,000 or more for one year as quoted in The Wall Street Journal under "Money Rates" on the first day of the relevant calendar month or the next preceding business day if the first day of the month is a non-business day. The interest credited to each Account shall be based on the amount held in the Account at the beginning of each particular month. 6. Statement of Deferred Compensation Account. Within 45 days after the end of the calendar year, a statement will be sent to each Participant listing the balance in his Account as of the end of the year. 7. Retirement Upon retirement or resignation as a Director from the Board of Directors, a Participant shall receive payment of the balance in his Account in accordance with the terms of his prior instructions and the terms of the Plan unless he is still serving as a voting director of Questar Corporation ("Questar"). Upon retirement or resignation as a Director of Questar or upon appointment as a non-voting Senior Director of Questar, a Participant shall receive payment of the balance in his Account in accordance with the terms of his prior instructions and the terms of the Plan unless he is currently serving as a Director of the Company. 8. Payment of Deferred Compensation. (a) Phantom Stock Option. The amount payable to the Participant choosing the Phantom Stock Option shall be the cash equivalent of the stock using the Fair Market Value of such stock on the date of withdrawal. (b) Certificates of Deposit Option. The amount payable to the Participant choosing the Certificate of Deposit Option shall include the interest on all sums credited to the Account, with such interest credited to the date of withdrawal. (c) The date of withdrawal for both the Phantom Stock Option Account and the Certificates of Deposit Option Account shall be the last day of the calendar month preceding payment or if payment is made because of death, the date of death. (d) The payment shall be made in the manner (lump sum or installment) chosen by the Participant. In the event of a Participant's death, payment shall be made within 45 days of the Participant's death to the beneficiary designated by the Participant or, in the absence of such designation, to the Participant's estate. 9. Payment, Change in Control. Notwithstanding any other provisions of this Plan or deferred elections made pursuant to Section 4 of this Plan, a Director, in the event of a Change in Control of Questar, shall be entitled to elect a distribution of his account balance within 60 days following the date upon which Questar obtained actual knowledge of a Change in Control. As used herein, a Change in Control of Questar shall be deemed to have occurred if (i) any "Acquiring Person" (as that term is used in the Rights Agreement dated as of February 13, 1996, between Questar and Chemical Mellon Shareholder Services, L.L.C. ("Rights Agreement")) is or becomes the beneficial owner (as such term is used in Rule 13d-3 under the Securities Exchange Act of 1934) of securities of Questar representing 15 percent or more of the combined voting power of Questar, or (ii) the stockholders of Questar approve (A) a plan of merger or consolidation of Questar (unless immediately following consummation of such merger or consolidation, the persons who held Questar's voting securities immediately prior to consummation thereof will hold at least a majority of the total voting power of the surviving or new company, or (B) a sale or disposition of all or substantially all assets of Questar, or (C) a plan of liquidation or dissolution of Questar. A Change in Control shall also include any act or event that, with the passage of time, would result in a Distribution Date, within the meaning of the Rights Agreement. 10. Hardship Withdrawal. Upon petition to and approval by the Company's Board of Directors, a Participant may withdraw all or a portion of the balance in his Account in the case of financial hardship in the nature of an emergency, provided that the amount of such withdrawal cannot exceed the amount reasonable necessary to meet the financial hardship. The Board of Directors shall have sole discretion to determine the circumstances under which such withdrawals are permitted. 11. Amendment and Termination of Plan The Plan may be amended, modified or terminated by the Company's Board of Directors. No amendment, modification, or termination shall adversely affect a Participant's rights with respect to amounts accrued in his Account. In the event that the Plan is terminated, the Board of Directors has the right to make lump-sum payments of all Account balances on such date as it may determine. 12. Nonassignability of Plan. The right of a Participant to receive any unpaid portion of his Account shall not be assigned, transferred, pledged or encumbered or be subject in any manner to alienation or attachment. 13. No Creation of Rights. Nothing in this Plan shall confer upon any Participant the right to continue as a Director. The right of a Participant to receive any unpaid portion of his Account shall be an unsecured claim against the general assets and will be subordinated to the general obligations of the Company. 14. Effective Date. The Plan was effective on June 1, 1982, and shall remain in effect until it is discontinued by action of the Company's Board of Directors. The effective date of the amendment to the Plan establishing a Phantom Stock Option is January 1, 1983. The Plan was amended and restated effective April 30, 1991, and was further amended and restated effective February 13, 1996. EX-22 7 SUBSIDIARY INFORMATION Registrant Questar Pipeline Company has two subsidiaries, Questar TransColorado, Inc., and Questar Gas Management Company, both of which are Utah corporations. EX-25 8 POWER OF ATTORNEY We, the undersigned directors of Questar Pipeline Company, hereby severally constitute A. J. Marushack 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 1995 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 1995 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 2-13-96 R. D. Cash /s/ A. J. Marushack President & Chief 2-13-96 A. J. Marushack Executive Officer Director /s/ W. F. Edwards Director 2-13-96 W. F. Edwards /s/ U. E. Garrison Director 2-13-96 U. E. Garrison /s/ Neal A. Maxwell Director 2-13-96 Neal A. Maxwell /s/ Mary Mead Director 2-13-96 Mary Mead EX-27 9
5 The schedule contains summarized financial information extracted from the Questar Pipeline Company Statement of Income and Balance Sheet for the year end December 31, 1995, and is qualified in its entirety by reference to such audited financial statements. 1,000 YEAR DEC-31-1995 DEC-31-1995 1677 0 13845 0 2858 20932 632393 212898 463350 28225 134525 0 0 6551 218054 463350 0 117355 0 65418 1886 0 13472 38113 13465 24648 0 0 0 24648 0 0
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