-----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, P+rJXzcqhKcgOSSsey0tu2Py1vszkr5ydxSVcSAXmBIjRDzcm7mXMnspVsrrbFRg sdw/eWCccrvRLfVlJBXT1Q== 0000764044-97-000002.txt : 19970401 0000764044-97-000002.hdr.sgml : 19970401 ACCESSION NUMBER: 0000764044-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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: 97568167 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, 1996 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) 324-2400 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 X No State the aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 21, 1997. $0. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 21, 1997. 6,550,843 shares of Common Stock, $1.00 par value. (All shares are owned by Questar Regulated Services Company.) Registrant meets the conditions set forth in General Instruction (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...................................... Storage..................................................... 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, 1996 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 transportation and storage of natural gas in the Rocky Mountain states of Utah, Wyoming, and Colorado. During 1996, the Company spun-down its gathering assets to Questar Gas Management Company (Questar Gas Management). 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. It also owns and operates the Clay Basin storage facility, which is a large underground storage project in northeastern Utah, and other underground storage operations in Utah and Wyoming. The Company is involved in two partnerships, Overthrust Pipeline Company (Overthrust), and TransColorado Gas Transmission Company (TransColorado). In mid-1996, Questar Pipeline and its affiliate Mountain Fuel Supply Company (Mountain Fuel) were placed under the same management team of officers and linked together to form the Regulated Services segment of Questar Corporation (Questar). Questar is a publicly-owned integrated energy supplier. This reorganization was completed as of January 1, 1997, when both entities became subsidiaries of Questar Regulated Services Company (Regulated Services) and specified employees from both the Company and Mountain Fuel were transferred to the new parent. The Company has significant business relationships with its affiliates, particularly Mountain Fuel. Mountain Fuel, a regulated local distribution company that serves over 618,200 customers in Utah, southwestern Wyoming, and southeastern Idaho, has reserved approximately 800,000 decatherms (Dth) per day of firm transportation capacity on the Company's transmission system and reserved storage capacity at Clay Basin and smaller storage reservoirs. (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 Questar Energy Trading Company (Questar Energy), another affiliated entity. The following diagram sets forth the corporate structure of the Company and certain affiliates: Questar Corporation Questar Regulated Services Company Questar Pipeline Company Mountain Fuel Supply Company Entrada Industries Inc. Wexpro Company Questar Gas Management Company Celsius Energy Company Questar Energy Trading Company Universal Resources Corporation Questar Energy Services Inc. 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 1,731 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 a 36 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. (During 1996, the Company's ownership interest increased from 18 percent to 36 percent as a result of purchasing the interest of Columbia Gulf Transmission Company.) Trailblazer is a major 800-mile pipeline that transports gas from producing areas in the Rocky Mountains to the Midwest. The 88-mile Overthrust segment is the western-most of Trailblazer's three segments. Since gas production from the Overthrust area is generally shipped on the Kern River pipeline to California, the Overthrust segment is currently underutilized. Questar Pipeline owns and operates a major compressor complex near Rock Springs, Wyoming, that compresses volumes of gas from the Company's transmission system for delivery to the WIC segment of the Trailblazer system and to CIG. The complex has become a major delivery point on Questar Pipeline's system. Five of the Company's major natural gas lines are connected to the system at the complex. In addition, both of CIG's Wyoming pipelines and the WIC segment are connected to the complex. 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 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. It is moving forward in phases in response to shipper demand and market opportunities. Transportation Service Questar Pipeline's largest transportation customer is Mountain Fuel. During 1996, the Company transported 100,161 thousand decatherms (MDth) for Mountain Fuel, compared to 79,872 MDth in 1995. These transportation volumes include Mountain Fuel's cost-of-service gas produced by Wexpro, as well as 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 that date, Questar Pipeline discontinued sale-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 72 percent of Questar Pipeline's reserved daily capacity. Mountain Fuel paid an annual reservation charge of approximately $45.8 million to the Company in 1996, which includes reservation charges attributable to firm 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 $9.1 million during 1996. Questar Pipeline's transportation agreement with Mountain Fuel expires on June 30, 1999. While it is too soon to predict whether Mountain Fuel will continue to need this same firm transportation capacity on the Company's transmission system, it is clear that design-day requirements for Mountain Fuel's firm sales and transportation customers are growing rapidly. Questar Pipeline recovers approximately 96 percent of its transmission cost of service through reservation 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 effect on its short-term operating results. Questar Pipeline's transportation revenues are not significantly affected by fluctuating demand based on the vagaries of weather or gas prices. The Company's total system throughput increased from 270,654 MDth in 1995 to 276,383 MDth in 1996. Most of this increase was attributable to expanded transportation volumes for Mountain Fuel. The total throughput increase was also attributable to increased volumes for other affiliated customers, which expanded from 38,839 MDth in 1995 to 44,327 MDth in 1996. Questar Pipeline's transportation volumes for nonaffiliated customers declined from 151,943 MDth in 1995 to 131,895 MDth in 1996. 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. It is permitted, as of February 1, 1996, to retain the first $800,000 in revenues associated with interruptible transportation services, and 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. Since most of its costs are collected through reservation charges from firm customers, Questar Pipeline has agreed to share interruptible transportation revenues with these customers. 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 1997, the Company plans to begin construction of a new 20-inch diameter line extending from Clay Basin to Coleman Station in southwestern Wyoming. This project, which will be built in phases and is scheduled to be finished in 1998, will significantly expand Questar Pipeline's capacity to move gas north from the storage reservoir and its southern system. The Company is also building a new pipeline into the Ferron area of eastern Utah, which is the site of a large project to produce gas from coal seams. 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. The Clay Basin facility, which was significantly expanded in 1995, 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.) As a result of this expansion, Clay Basin's maximum deliverability increased 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 important to distribution companies that need to match annual gas purchases with fluctuating customer demand, improve service reliability, and avoid imbalance penalties. Questar Pipeline currently offers interruptible storage service at Clay Basin. Effective January 1, 1997, it received regulatory approval to remove some constraints formerly applicable to interruptible storage service and hopes to expand interruptible services. The Company also intends to allow firm storage service customers the right to transfer their injection and withdrawal rights to other parties. Questar Pipeline also owns and operates three smaller storage reservoirs. These projects were developed specifically to serve Mountain Fuel's needs, and Mountain Fuel reserves 100 percent of their working gas capacity. These small reservoirs are used primarily to supplement Mountain Fuel's gas supply needs on peak days. 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. A settlement agreement in the Company's 1995 general rate case was approved by the FERC effective February 1, 1996. Under the terms of this settlement, Questar Pipeline was permitted to collect rates that reflected an annualized revenue increase of approximately $5.9 million, to earn a return on equity of 11.75 percent, and to retain specified revenues associated with interruptible transportation and storage services. Questar Pipeline does not currently plan to file a general rate case in 1997. It, however, will continue to review its revenues and costs as it adds new facilities that are not included in its rate base and makes expenditures to comply with regulatory mandates. During 1997, the Company expects to spend $2.8 million to comply with the standards originally proposed by the Gas Industry Standards Board (GISB) and mandated by the FERC. These requirements, commonly known as the GISB standards, are designed to facilitate the seamless transportation of gas volumes on pipeline systems and deal with such issues as nominations, confirmations, priority of service, allocation, balancing, and invoicing. Questar Pipeline is required to comply with some standards by June 1, 1997, to have an Internet web site by August 1, 1997, and to implement a second round of standards by November 1, 1997. The FERC has adopted specific criteria for determining when "rolled-in" rates (rather than incremental rates) are appropriate. Under the FERC's 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, can impose at-risk conditions on new projects even if it approves rolled-in rate treatment for them and can require additional support in subsequent rate cases to continue rolled-in treatment. In conjunction with its 1995 general rate case, Questar Pipeline received rolled-in rate treatment for some facilities that were previously certificated as at-risk facilities. The FERC, however, did not remove the at-risk designation formerly placed on them. Questar Pipeline has again requested the FERC to remove the at-risk condition on these facilities. The Company, when contemplating future expansion projects, must evaluate the risk of having shareholders, not customers, absorb any underrecovery of costs if incremental revenues for a new project do not cover the costs of such project, versus the risk of losing transportation volumes to competitors. Under the Natural Gas Pipeline Safety Act of 1968, as amended, the Company is subject to the jurisdiction of the Department of Transportation (DOT) with respect to safety requirements in the design, construction, operation and maintenance of its transmission and storage facilities. The Company also complies with the DOT's drug and alcohol testing regulations. In addition to the regulations discussed above, Questar Pipeline's activities in connection with the operation and construction of pipelines and other facilities for transporting or storing natural gas are subject to extensive environmental regulation by state and federal authorities, including state air quality control boards 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 and storage services has intensified in recent years. Regulatory changes have significantly increased customer flexibility and responsibility to directly manage their gas supplies. The Company actively competes with other interstate pipelines for transportation volumes throughout the Rocky Mountain region. The Company has two key assets that contribute to its continued success. It has a strategically located and integrated transmission system with interconnections to major pipeline systems and with access to major producing areas and markets. Questar Pipeline 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 contracts that are generally long-term in nature. Questar Pipeline has established partnerships with others to acquire expertise, share risks, and expand opportunities. Both the Overthrust pipeline and the proposed TransColorado pipeline involve partners. Employees As of December 31, 1996, the Company had 352 employees, compared to 467 as of the end of 1995. (This decrease reflects the transfer of approximately 108 employees when gathering assets and activities were spun down to Questar Gas Management.) As of the date of this report, Questar Pipeline has 169 employees, reflecting the transfer of employees to Regulated Services and Questar InfoComm, Inc. (Questar InfoComm.) 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. These relationships are described above. See Note 8 to the financial statements for additional information concerning transactions between the Company and its affiliates. The Company obtains data processing and communication services from another affiliate, Questar InfoComm, under the terms of a written agreement. Regulated Services, the Company's parent, has employees who perform engineering, accounting, marketing, budget, tax, and legal services for both Questar Pipeline and Mountain Fuel. Questar also provides certain administrative services, benefit plans, 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. The Company, Questar, Mountain Fuel and other affiliates are defendants in a lawsuit that was recently filed by a producer in Wyoming's federal district court. This lawsuit involves some of the same take-or-pay and tax reimbursement claims that are the subject of a case against Mountain Fuel that has not yet been reduced to a final judgement in the same court. The new lawsuit, however, also involves claims of fraud and antitrust violations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company, as the wholly owned subsidiary of a reporting person, is entitled to omit the information requested in this Item. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's outstanding shares of common stock, $1.00 par value, are currently owned by Regulated Services. Information concerning the dividends paid on such stock and the Company's ability to pay dividends is reported in the Statements of Shareholder's Equity and Notes to Financial Statements included in Item 8. ITEM 6. SELECTED FINANCIAL DATA The Company, as the wholly owned subsidiary of a reporting person, is entitled to omit the information requested in this Item. ITEM 7. MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Questar Pipeline conducts natural-gas transmission and storage operations. Following is a summary of operating income and operating information:
Year Ended December 31, 1996 1995 1994 (Dollars In Thousands) OPERATING INCOME Revenues Transportation $67,656 $61,749 $61,844 Storage 34,280 31,276 27,620 Other 2,242 1,747 1,645 Total revenues 104,178 94,772 91,109 Operating expenses Operating and maintenance 39,959 34,003 31,949 Depreciation and amortization 14,206 12,911 12,053 Other taxes 2,519 3,370 3,621 Total expenses 56,684 50,284 47,623 Operating income $47,494 $44,488 $43,486 OPERATING STATISTICS Natural gas transportation volumes (in Mdth) For unaffiliated customers 131,895 151,943 129,250 For Mountain Fuel 100,161 79,872 75,941 For other affiliated customers 44,327 38,839 45,093 Total transportation 276,383 270,654 250,284 Transportation revenue (per dth) $0.24 $0.23 $0.25 Clay Basin storage, working gas- volumes (in Bcf) 46.3 46.3 41.8
A rate increase and expanded firm gas-storage activities resulted in higher revenues in 1996 when compared with 1995. Questar Pipeline filed for a rate increase with the Federal Energy Regulatory Commission (FERC) on July 31, 1995. The Company began collecting revenues under the new rate structure, subject to refund, February 1, 1996. The FERC approved a rate settlement July 1, 1996 which included a stated return on equity of 11.75% and allowed Questar Pipeline to collect a greater share of costs from firm-transportation customers. The new rate structure adds approximately $5.9 million to annual revenues. A majority of Questar Pipeline's transportation capacity has been reserved by firm-transportation customers. Approximately 88% of firm-transportation capacity was reserved at year-end 1996, however all of city gate capacity is fully subscribed. Mountain Fuel has reserved transportation capacity from Questar Pipeline of approximately 800,000 decatherms per day, or about 72% of the total reserved daily-transportation capacity through 1999. Firm-transportation customers can release capacity to third parties when it is not required for their own needs. Interruptible-transportation revenues have been lower in 1996 and 1995 as a result of a shift by customers from interruptible-transportation service to a higher-quality capacity-release service. Storage revenues increased $3,004,000 in 1996. In addition to a rate increase, firm-storage capacity increased from 41.8 Bcf to 46.3 Bcf in May 1995, resulting in higher revenues in 1996 from a full 12 months of billings to customers. Storage revenues increased $3,656,000 in 1995 as a result of increased capacity at the Clay Basin storage reservoir. Storage capacity at year-end 1996 was 100% subscribed, with some contracts extending through the year 2025. Mountain Fuel has reserved 27% of firm-storage capacity through 2019. In 1997, Questar Pipeline began offering a more flexible- interruptible-storage service. Interruptible service will utilize capacity that is temporarily not required by firm-service customers. Questar Pipeline will retain 25% of the interruptible-storage revenues and credit the remaining 75% to firm-storage customers. Operating and maintenance expenses increased 18% in 1996 when compared with 1995 as a result of an expansion of transmission operations. Expenses increased 6% in 1995 when compared with 1994 primarily due to the costs associated with increased transportation volumes. Questar Pipeline initiated cost-containment measures with an affiliated company, Mountain Fuel, through the sharing of common services. Questar Pipeline and Mountain Fuel were made subsidiaries of recently formed Questar Regulated Services Company (Regulated Services). Regulated Services was organized in 1996 to provide administrative, financial, technical and related services to Mountain Fuel and Questar Pipeline. Depreciation expense was 10% higher in 1996 when compared to 1995 and 7% higher in 1995 when compared to 1994 as a result of Questar Pipeline's capital expenditures. Other taxes decreased in 1996 when compared with 1995 due to settlements with local taxing agencies that reduced property taxes. Interest and other income was $1,274,000 higher in 1996 when compared with 1995. Project costs incurred in 1995, including $1.2 million expended in an unsuccessful bid for another pipeline, were not repeated in 1996. Questar Pipeline purchased an 18% interest in the Overthrust Pipeline partnership from Columbia Gulf Transmission Company in 1996, bringing its ownership in the transmission line to 36%. The Company's share of Overthrust Pipeline's 1995 operating results were $1.2 million before income tax. Operating results were improved by a shipper's buyout of a transportation contract. The effective income tax rate was 37.2% in 1996, 35.1% in 1995 and 32.8% in 1994. A 1994 reversal of $1,245,000 of income tax expense previously expensed resulted in a lower effective income tax rate. The adjustment resulted from the exclusion from taxable income of the transportation revenues recorded on cushion-gas transported into storage. LIQUIDITY AND CAPITAL RESOURCES Operating Activities Net cash provided from operating activities was $46,710,000 in 1996, $36,991,000 in 1995 and $31,179,000 in 1994. Net cash provided from operating activities increased 26% in 1996 when compared with 1995 and 19% in 1995 when compared with 1994. The upward trend in cash flow resulted from higher net income, an increase in noncash expenses and more cash flow generation from working capital accounts. Investing Activities Following is a summary of capital expenditures for 1996, 1995 and a forecast of 1997 expenditures:
1997 Estimated 1996 1995 (In Thousands) Transmission system $24,600 $18,173 $15,216 Storage 1,700 1,466 2,500 Partnerships 5,300 2,890 506 General 3,200 1,279 4,924 Discontinued operations 1,576 $34,800 $23,808 $24,722
Questar Pipeline's 1996 capital expenditures included replacement and expansion of sections of gas mainlines, completion of the Clay Basin storage project and cushion-gas injection, storage well workovers and an additional 18% interest in Overthrust Pipeline. Financing Activities The Company funded 1996 capital expenditures and regular dividend payments primarily with cash flow provided from operations. The proceeds of a note collected from a former subsidiary were dividended to Questar. In 1995, cash flow provided from operations plus the collection of a note receivable from a former subsidiary financed 1995 capital expenditures and dividend payments. Forecasted 1997 capital expenditures of $34.8 million are expected to be financed with cash flow provided from operations and borrowings from Questar. Questar makes loans to the Company under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $11,800,000 at December 31, 1996 with an interest rate of 5.63% and $15,200,000 at December 31, 1995 with an interest rate of 6.01%. 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 in 1997. There were no amounts borrowed under this arrangement at either December 31, 1996 or 1995. Questar Pipeline guarantees $9 million of long-term debt borrowed by Blacks Fork Gas Processing Company. Questar Pipeline's capital structure at year-end 1996 was 42% long-term debt and 58% common shareholder's equity. Moody's and Standard and Poor's have rated the Company's long-term debt A-1 and A+, respectively. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's financial statements are included in Part IV, Item 14, herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has not changed its independent auditors or had any disagreements with them concerning accounting matters and financial statement disclosures within the last 24 months. PART III The Company, as the wholly owned subsidiary of a reporting person, is entitled to omit all information requested in Part III (Items 10-13). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1)(2) Financial Statements and Financial Statement Schedules. The financial statements identified on the List of Financial Statements are filed as part of this Report. (a)(3) Exhibits. The following is a list of exhibits required to be filed as a part of this Report in Item 14(c). Exhibit No. Exhibit 2.*1 Agreement of Transfer among Mountain Fuel Supply Company, Entrada Industries, Inc. and Mountain Fuel Resources, Inc., dated July 1, 1984. (Exhibit No. 2. to Registration Statement No. 2-96102 filed February 27, 1985.) 3.* Restated Articles of Incorporation dated November 17, 1995. (Exhibit No. 3. to Form 10-K Annual Report for 1995.) 3.3.* Bylaws (as amended on August 11, 1992). (Exhibit No. 3. to Form 10-Q Report for quarter ended June 30, 1992.) 4.1.* 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. (Exhibit No. 10.3. to Form 10-K Annual Report for 1995.) 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. (Exhibit No. 10.4. to Form 10-K Annual Report for 1995.) 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 through 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, through 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, through August 31, 2013. (Exhibit No. 10.7. to Form 10-K Annual Report for 1993.) 10.8.*3 Storage Service Agreement with Mountain Fuel Supply Company under Rate Schedule FSS, for 5.5 Bcf of working gas capacity at Clay Basin, with a term from May 15, 1994 through May 14, 2019. (Exhibit No. 10.8. to Form 10-K Annual Report for 1995.) 10.10.*2 Questar Pipeline Company Deferred Compensation Plan for Directors, as amended and restated February 13, 1996. (Exhibit No. 10.10. to Form 10-K Annual Report for 1995.) 10.11. Agreement for the Transfer of Assets between Questar Pipeline Company and Questar Gas Management Company, as amended, effective March 1, 1996. 22. Subsidiary Information. 24. Power of Attorney. 27. Financial Data Schedule. _______________ */ Exhibits so marked have been filed with the Securities and Exchange Commission as part of the indicated filing and are incorporated herein by reference. 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) The Company did not file a Current Report on Form 8-K during the last quarter of 1996. 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, 1996 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, 1996, 1995 and 1994 Balance sheets -- December 31, 1996 and 1995 Statements of cash flows -- Years ended December 31, 1996, 1995 and 1994 Statements of shareholder's equity -- Years ended December 31, 1996, 1995 and 1994 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 Shareholders and Board of Directors Questar Pipeline Company We have audited the accompanying consolidated balance sheets of Questar Pipeline as of December 31, 1996 and 1995, and the related consolidated statements of income and common shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 consolidated financial position of Questar Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 7 to the financial statements, Questar Pipeline Company changed its method of accounting for postemployment benefits in 1994. /s/ ERNST & YOUNG LLP Salt Lake City, Utah February 7, 1997 QUESTAR PIPELINE COMPANY STATEMENTS OF INCOME
Year Ended December 31, 1996 1995 1994 (In Thousands) REVENUES From unaffiliated customers $38,837 $36,780 $30,928 From affiliates - Note 8 65,341 57,992 60,181 TOTAL REVENUES 104,178 94,772 91,109 OPERATING EXPENSES Operating and maintenance - Note 8 39,959 34,003 31,949 Depreciation 14,206 12,911 12,053 Other taxes 2,519 3,370 3,621 TOTAL OPERATING EXPENSES 56,684 50,284 47,623 OPERATING INCOME 47,494 44,488 43,486 INCOME FROM UNCONSOLIDATED AFFILIATES 182 1,220 229 OTHER INCOME - Note 8 1,798 524 943 DEBT EXPENSE (13,416) (13,472) (13,107) INCOME BEFORE INCOME TAXES 36,058 32,760 31,551 INCOME TAXES - Note 5 13,415 11,492 10,337 INCOME FROM CONTINUING OPERATIONS 22,643 21,268 21,214 DISCONTINUED OPERATIONS - Questar Gas Management Company - Note 2 1,495 3,380 4,615 NET INCOME $24,138 $24,648 $25,829
See notes to financial statements. QUESTAR PIPELINE COMPANY BALANCE SHEETS
ASSETS December 31, 1996 1995 (In Thousands) CURRENT ASSETS Cash and short-term investments $2,550 $1,013 Notes receivable from Questar Gas Management 16,692 Accounts receivable 6,852 7,665 Accounts receivable from affiliates 931 6,041 Federal income tax receivable 446 Inventories, at lower of average cost or market 2,301 2,310 Prepaid expenses and deposits 1,938 2,157 TOTAL CURRENT ASSETS 15,018 35,878 PROPERTY, PLANT AND EQUIPMENT Transmission 297,144 289,059 Storage 211,273 212,492 General and intangible 38,274 37,001 Construction work in progress 16,020 9,279 562,711 547,831 Less allowances for depreciation 194,396 183,840 NET PROPERTY, PLANT AND EQUIPMENT 368,315 363,991 OTHER ASSETS Investment in discontinued operations 27,755 Investment in unconsolidated affiliates 14,347 9,084 Income taxes recoverable from customers - Note 5 3,930 3,948 Unamortized costs of reacquired debt 2,837 3,131 Other 4,303 4,824 25,417 48,742 $408,750 $448,611
LIABILITIES AND SHAREHOLDER'S EQUITY December 31, 1996 1995 (In Thousands) CURRENT LIABILITIES Notes payable to Questar - Note 3 $11,800 $15,200 Accounts payable and accrued expenses Accounts payable 10,762 8,531 Accounts payable to affiliates 2,089 1,537 Federal income taxes 353 Other taxes 896 1,289 Accrued interest 1,076 1,076 Total accounts payable and accrued expenses 14,823 12,786 TOTAL CURRENT LIABILITIES 26,623 27,986 LONG-TERM DEBT - Notes 3 and 4 134,544 134,525 DEFERRED CREDITS 4,322 5,346 DEFERRED INCOME TAXES - Note 5 58,768 56,149 COMMITMENTS AND CONTINGENCIES - Note 6 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 95,908 136,020 184,493 224,605 $408,750 $448,611
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, 1994 $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 1996 net income 24,138 Cash and other dividends (64,250) Balance at December 31, 1996 $6,551 $82,034 $95,908
See notes to financial statements. QUESTAR PIPELINE COMPANY STATEMENTS OF CASH FLOWS
Year Ended December 31, 1996 1995 1994 (In Thousands) OPERATING ACTIVITIES Net income $24,138 $24,648 $25,829 Depreciation 16,291 14,547 13,678 Deferred income taxes 388 (163) 1,047 Income from partnerships (182) (1,220) (229) Income from discontinued operations (1,495) (3,380) (4,615) 39,140 34,432 35,710 Changes in operating assets and liabilities Accounts receivable 5,923 1,530 (4,045) Federal income taxes (799) 1,433 (1,322) Inventories 9 (275) (189) Prepaid expenses and deposits 219 207 (442) Accounts payable and accrued expenses 2,783 (395) 695 Other (565) 59 772 NET CASH PROVIDED FROM OPERATING ACTIVITIES 46,710 36,991 31,179 INVESTING ACTIVITIES Capital expenditures Purchase of property, plant and equipment (20,958) (22,640) (48,221) Investment in discontinued operations (1,576) Other investments (2,850) (506) (614) Total capital expenditures (23,808) (24,722) (48,835) Proceeds from (costs of) disposition of property, plant and equipment 343 (2,822) 2,665 NET CASH USED IN INVESTING ACTIVITIES (23,465) (27,544) (46,170) FINANCING ACTIVITIES Capital contribution 25,000 Change in note receivable from Questar Gas Management 16,692 8,518 (3,502) Change in notes payable to Questar Corp. (3,400) 600 11,600 Payment of dividends (35,000) (19,000) (18,000) NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES (21,708) (9,882) 15,098 Change in cash and short-term investments 1,537 (435) 107 Beginning cash and short-term investments 1,013 1,448 1,341 ENDING CASH AND SHORT-TERM INVESTMENTS $2,550 $1,013 $1,448
Questar Pipeline transferred 100% of its ownership in Questar Gas Management to Questar in 1996 in the form of a dividend of shares. The $29,250,000 transfer was a noncash transaction and is excluded from the Statements of Cash Flows. See notes to financial statements. QUESTAR PIPELINE COMPANY NOTES TO FINANCIAL STATEMENTS Note 1 - Summary of Accounting Policies Business: Questar Pipeline Company (the Company or Questar Pipeline) is a wholly-owned subsidiary of Questar Regulated Services Company (Regulated Services). Regulated Services is a holding company and wholly-owned subsidiary of Questar Corporation (Questar). Regulated Services was organized in 1996 and provides administrative functions for its two subsidiaries, Questar Pipeline and Mountain Fuel Supply Company (Mountain Fuel). 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 subject to refund. Property, Plant and Equipment: Property, plant and equipment is stated at cost. The provision for depreciation is based upon rates, which will systematically charge the costs of assets over their estimated useful lives. The costs of property, plant and equipment are depreciated in the financial statements using the straight-line method, ranging from 3 to 33% per year and averaging 3.7% in 1996. 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 a 36% partnership interest in the Overthrust Pipeline Company, and is the operator of the Overthrust Segment of the Trailblazer Pipeline System. The Company is a one-third partner in 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 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-and over-provided deferred taxes in customer rates on a systematic basis. Questar Pipeline uses the deferral method to account for investment tax credits as required by the FERC. The Company's operations are consolidated with those of Questar and its subsidiaries for income tax purposes. The income tax arrangement between Questar Pipeline and Questar provides that amounts paid to or received from Questar are substantially the same as would be paid or received by the Company if it filed a separate return. Questar Pipeline also receives payment for tax benefits used in the consolidated tax return even if such benefits would not have been usable had the Company filed a separate return. 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 $542,000 in 1996, $330,000 in 1995 and $976,000 in 1994. 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 2 - Discontinued Operations - Gathering Division Spin Down and Transfer Questar Pipeline transferred approximately $55 million of gas-gathering assets to Questar Gas Management Company, a wholly owned subsidiary. The transfer was approved by the FERC February 28, 1996 and was effective March 1, 1996. Questar Gas Management was subsequently transferred to the nonregulated Market Resources group of Questar on July 1, 1996. The transaction was in the form of a stock dividend payable to Questar with no gain or loss recorded. Questar Pipeline's financial statements for 1995 and 1994 were restated, reflecting gas-gathering operations as a discontinued business segment. Note 3 - Debt Questar makes loans to the Company under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $11,800,000 at December 31, 1996 with an interest rate of 5.63% and $15,200,000 at December 31, 1995 with an interest rate of 6.01%. 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 in 1997. There were no amounts borrowed under this arrangement at either December 31, 1996 or 1995. 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: 1996 1995 (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 456 475 $134,544 $134,525 Sinking fund redemption of the 9 7/8% debt begins in 2001 in the amount of $2,500,000. There are no debt provisions restricting the payment of dividends. Cash paid for interest on debt was $13,227,000 in 1996, $13,192,000 in 1995, and $13,065,000 in 1994. Note 4 - Financial Instruments The carrying amounts and estimated fair values of the Company's financial instruments at December 31 were as follows:
1996 1995 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (In Thousands) Financial assets Cash and short-term investments $2,550 $2,550 $1,013 $1,013 Financial liabilities Short-term loans 11,800 11,800 15,200 15,200 Long-term debt 134,544 150,938 134,525 158,256
The Company used the following methods and assumptions in estimating fair values: (1) Cash and short-term investments and short-term loans - the carrying amount approximates fair value; (2) Long-term debt - the fair value of long-term debt is based on quoted market prices. Note 5 - Income Taxes The components of income taxes charged to income for years ended December 31 were as follows:
1996 1995 1994 (In Thousands) Federal Current $11,663 $10,695 $9,555 Deferred 700 101 118 State Current 998 684 644 Deferred 54 12 20 $13,415 $11,492 $10,337
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:
1996 1995 1994 (In Thousands) Income before income taxes $36,058 $32,760 $31,551 Federal income taxes at statutory rate $12,620 $11,466 $11,043 State income taxes, net of federal income tax benefit 703 456 439 Prior years' tax settlement 146 (162) Tax adjustment on revenues from cushion gas transported into storage (1,245) Other (54) (268) 100 Income tax expense $13,415 $11,492 $10,337 Effective income tax rate 37.2% 35.1% 32.8%
Significant components of the Company's deferred tax liabilities and assets at December 31 were as follows:
1996 1995 (In Thousands) Deferred tax liabilities Property, plant and equipment $54,550 $51,881 Income taxes recoverable from customer 1,450 1,487 Unamortized debt reacquisition costs 1,050 1,159 Pension costs 644 519 Other 1,882 1,971 Total deferred tax liabilities 59,576 57,017 Deferred tax assets 808 868 Net deferred tax liabilities $58,768 $56,149
Cash paid for income taxes was $13,797,000 in 1996, $10,268,000 in 1995 and $11,688,000 in 1994. Note 6 - Rate Matters, Litigation and Commitments Questar Pipeline filed for a rate increase with the FERC on July 31, 1995. The Company began collecting revenues under the new rate structure, subject to refund, February 1, 1996. The FERC approved a rate settlement July 1, 1996. The settlement included a stated return on equity of 11.75% and allowed the Company to collect a greater share of costs from firm transportation customers. As a result of the new rate structure, Questar Pipeline is expected to add approximately $5.9 million to annual revenues. 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 7 - 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 $974,000 in 1996, $867,000 in 1995 and $927,000 in 1994. 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, 1996, Questar's fair value of plan assets exceeded the accumulated benefit obligation. Postretirement Benefits Other Than Pensions: The Company pays a portion of health-care costs and life insurance costs for employees who retired prior to January 1, 1993. The plan changed for employees hired after January 1, 1993, to link the health-care benefits to years of service and to limit Questar's monthly health care contribution per individual to 170% of the 1992 contribution. Employees hired after December 31, 1996, do 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, which began in 1992. Costs of postretirement benefits other than pensions were $666,000 in 1996, $788,000 in 1995 and $853,000 in 1994. The FERC allows rate-recovery of future postretirement benefits costs to the extent that pipeline companies contribute the amounts to an external trust. As part of its 1996 general rate settlement, Questar Pipeline began making contributions to an external trust fund in 1996 for an amount of future postretirement costs and will recover costs at December 1995 over a three-year period. 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. Beginning in 1996, the FERC allowed Questar Pipeline to recover postemployment costs measured at December 1995 in future rates over a three-year period. Employee Investment Plan: The Company participates in Questar's Employee Investment Plan (ESOP), which allows eligible employees to purchase Questar common stock or other investments through payroll deduction. The Company makes contributions of Questar 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 $531,000 in 1996, $515,000 in 1995 and $456,000 in 1994. Note 8 - Related Party Transactions Questar Regulated Services was organized in 1996 and provides shared services for its two subsidiaries, Mountain Fuel and Questar Pipeline. These include business, technical and financial support, as well as planning and business development. Services and the subsequent billings will begin in 1997. The Company receives a substantial portion of its revenues from Mountain Fuel Supply Company. Revenues received from Mountain Fuel amounted to $61,146,000 or 59% in 1996, $54,096,000 or 57% in 1995 and $56,200,000 or 62% in 1994. The Company also received revenues from other affiliated companies totaling $4,195,000 in 1996, $3,896,000 in 1995 and $3,981,000 in 1994. Questar performs certain administrative functions for the Company. The Company was charged for its allocated portion of these services which totaled $3,045,000 in 1996, $2,644,000 in 1995, and $2,831,000 in 1994. 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. Questar InfoComm Inc is an affiliated company that provides data processing and communication services to Questar Pipeline. The Company paid Questar InfoComm $7,155,000 in 1996, $7,542,000 in 1995 and $7,036,000 in 1994. Questar Pipeline has a 15-year lease for space in an office building located in Salt Lake City, Utah, that is owned by affiliated company, Interstate Land. The lease begins in the fourth quarter of 1997 when remodeling of the building is scheduled for completion. The annual lease payment for the next five years, beginning in 1998, is $576,000. The Company received interest income from affiliated companies of $609,000 in 1996, $1,998,000 in 1995 and $2,022,000 in 1994. The Company incurred debt expense to Questar of $158,000 in 1996, $272,000 in 1995 and $134,000 in 1994. 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 26th day of March, 1997. QUESTAR PIPELINE COMPANY (Registrant) By /s/ D. N. Rose D. N. Rose President & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ D. N. Rose President & Chief Executive Officer; D. N. Rose Director (Principal Executive Officer) /s/ S. E. Parks Vice President, Treasurer and Chief S. E. Parks Financial Officer (Principal Financial Officer) /s/ G. H. Robinson Vice President and Controller G. H. Robinson (Principal Accounting Officer) *R. D. Cash Chairman of the Board; Director *U. Edwin Garrison Director *A. J. Marushack Director *G. L. Nordloh Director *D. N. Rose Director March 26, 1997 *By /s/ D. N. Rose Date D. N. Rose, Attorney in Fact EXHIBIT INDEX Exhibit Number Exhibit 2.*1 Agreement of Transfer among Mountain Fuel Supply Company, Entrada Industries, Inc. and Mountain Fuel Resources, Inc., dated July 1, 1984. (Exhibit No. 2. to Registration Statement No. 2-96102 filed February 27, 1985.) 3.* Restated Articles of Incorporation dated November 17, 1995. (Exhibit No. 3. to Form 10-K Annual Report for 1995.) 3.3.* Bylaws (as amended on August 11, 1992). (Exhibit No. 3. to Form 10-Q Report for quarter ended June 30, 1992.) 4.1.* 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. (Exhibit No. 10.3. to Form 10-K Annual Report for 1995.) 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. (Exhibit No. 10.4. to Form 10-K Annual Report for 1995.) 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 through 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, through 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, through August 31, 2013. (Exhibit No. 10.7. to Form 10-K Annual Report for 1993.) 10.8.*3 Storage Service Agreement with Mountain Fuel Supply Company under Rate Schedule FSS, for 5.5 Bcf of working gas capacity at Clay Basin, with a term from May 15, 1994 through May 14, 2019. (Exhibit No. 10.8. to Form 10-K Annual Report for 1995.) 10.10.*2 Questar Pipeline Company Deferred Compensation Plan for Directors, as amended and restated February 13, 1996. (Exhibit No. 10.10. to Form 10-K Annual Report for 1995.) 10.11. Agreement for the Transfer of Assets between Questar Pipeline Company and Questar Gas Management Company, as amended, effective March 1, 1996. 22. Subsidiary Information. 24. Power of Attorney. 27. Financial Data Schedule. _______________ */ Exhibits so marked have been filed with the Securities and Exchange Commission as part of the indicated filing and are incorporated herein by reference. 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) The Company did not file a Current Report on Form 8-K during the last quarter of 1996. EX-10.11 2 Agreement for the Transfer of Assets This Agreement is entered into effective the 1st day of January, 1996, between Questar Pipeline Company, 79 South State Street, Salt Lake City, Utah 84111 (Questar Pipeline), and Questar Gas Management Company, 79 South State Street, Salt Lake City, Utah 84111 (QGM). Questar Pipeline and QGM are collectively referred to as the "Parties." The Parties Represent as Follows: A. Questar Pipeline is the sole owner of various gathering systems and facilities, a few of which have been certificated by the Federal Energy Regulatory Commission (FERC) under section 7(c) of the Natural Gas Act (NGA). Also, the FERC generally exercises jurisdiction over the rates of gathering services performed by interstate pipelines such as Questar Pipeline. The gathering systems and facilities consist of gathering laterals, field compressors, meters, dehydration equipment, regulators, valves and related equipment, the rights of way, easements and licenses upon which these gathering systems and facilities are located, and various operating agreements, gathering agreements and service agreements, all collectively referred to in this Agreement as the "Assets." The Assets are located in the states of Colorado, Utah and Wyoming. B. QGM is a wholly owned subsidiary of Questar Pipeline. It is a Utah corporation engaged in business activities not regulated by the FERC. C. Separation of FERC-jurisdictional and non-jurisdictional business activities will result in efficiencies of operation that will enable QGM to be more competitive in the gas-gathering and the gas-processing businesses. Questar Pipeline is filing an application with the FERC to obtain approval to abandon the certificated jurisdictional Assets by transfer to QGM. Questar Pipeline will also make appropriate filings with FERC under NGA section 4, seeking authorization to terminate all gathering services. Finally, QGM will seek a declaratory order from the FERC requesting that all of the Assets, operations and services are declared to be exempt from the FERC's jurisdiction under NGA sections 1(b), 2, 4 and 5. D. The Parties desire to enter into this Agreement to transfer ownership of the Assets in a manner that exempts QGM from FERC jurisdiction under section 1(b) of the NGA. Therefore, the Parties Agree as Follows: 1. Assets to be Transferred. In consideration of QGM's agreement to operate, maintain and assume all liabilities related to the Assets, Questar Pipeline agrees to transfer to QGM all of its right, title and interest to the Assets described on Attachment A, a list of gathering areas; Attachment B, a list of laterals; and Attachment C, a list of all contracts. At the time of closing, an assignment of all Assets will be provided to QGM on an assignment form similar to Attachment D. Attachments A through C may be changed from time to time to add or delete Assets. 2. Closing. Subject to receipt of all necessary FERC authorizations referred to in section 5A, Questar Pipeline shall transfer the Assets to QGM as an internal realignment of assets between a parent and a subsidiary. The Assets shall be valued at the net-book value as of January 1, 1996. As soon as practicable after receipt of acceptable FERC authority, the Parties will set a mutually agreeable closing date. Questar Pipeline will provide QGM with executed assignment documents to complete the transfer of the Assets. Subject to compatible FERC approval, the effective date of the transfer will be January 1, 1996, regardless of the actual date of closing. 3. Title. Questar Pipeline represents that it is the lawful owner of the Assets to be transferred under this Agreement and that the Assets to be transferred are free and clear of all liens and encumbrances. 4. Inspection; Representations and Warranties. QGM represents that it has inspected the Assets that are above ground, has reviewed the maintenance records of the pipelines and other below-ground facilities and is familiar with the condition of the Assets to be transferred. Except as to the representations and warranties provided in section 3, Questar Pipeline makes no representations or warranties whatsoever. All Assets are transferred in an "as is" condition and Questar Pipeline expressly excludes all warranties (except manufacturer's warranties) regarding the Assets, including without limitation, warranties as to merchantability and fitness for particular purpose, either express or implied. 5. Approvals. A. FERC. Most of the Assets to be transferred by Questar Pipeline to QGM are gathering facilities that have not been certificated by the FERC; however, a small percentage of the Assets are subject to certificates issued by the FERC. QGM will file a request for a declaratory order with the FERC, and Questar Pipeline must file an abandonment application under NGA section 7(b) for authorization to abandon the certificated gathering facilities by transfer to QGM. Further, subsequent to the FERC issuing orders in the abandonment and declaratory order dockets, Questar Pipeline must file under NGA section 4 for authorization to terminate gathering services provided through its facilities. Questar Pipeline's ability to transfer the Assets and QGM's ability to accept the Assets are conditioned upon each Party receiving, in its sole discretion, acceptable authorizations from the FERC. B. Board of Directors. The transfer of Assets is conditioned on the satisfactory written evidence of the authorization and approval of the transfer as provided for by this Agreement by the boards of directors of Questar Pipeline and QGM. 6. Acceptance of Gas into Questar Pipeline's System. After transfer of the Assets to QGM, Questar Pipeline will take no unreasonable action or make no unreasonable change to its current operating practices at any existing or future receipt point between its facilities and the gathering facilities acquired by QGM that would deny the receipt of gas tendered by QGM for transportation on Questar Pipeline's system. 7. Taxes. Real and personal property taxes on the Assets shall be paid by Questar Pipeline until December 31, 1995. Commencing January 1, 1996, all taxes on the Assets will be paid by QGM, regardless of the closing date. 8. Additional Documents. The Parties agree to execute additional documents that may be required after closing to accomplish the transfer of Assets contemplated by this Agreement. 9. Successors and Assigns. This Agreement shall be binding upon the Parties and their successors and assigns. 10. Applicable Law. This Agreement shall be interpreted in accordance with the laws of the state of Utah. 11. Waiver. No waiver by a Party of any one or more events of default by the other Party in the performance of any provision of this Agreement shall operate or be construed as a waiver of any future default or defaults, whether of a like or different character. 12. Entire Agreement; Amendments. This Agreement is the entire agreement between the Parties. No prior representations, if any, are being relied upon by QGM or Questar Pipeline, except as contained in this Agreement. All amendments to this Agreement shall be in writing. This Agreement is entered into as of the date first set forth above by the authorized representatives of the Parties whose signatures are set forth below. Questar Pipeline Company ATTEST: s/s Gary G. Sackett By s/s R. D. Cash Gary G. Sackett, Assistant R. D. Cash, Chairman of the Board Secretary Questar Gas Management Company ATTEST: /s/Gary G. Sackett By /s/J. B. Carricaburu Gary G. Sackett, Assistant J. B. Carricaburu, Vice President Secretary Amendment Number One to the Agreement for the Transfer of Assets Between Questar Pipeline Company and Questar Gas Management Company Dated January 1, 1996 This Amendment is effective the 1st day of March, 1996, between Questar Pipeline Company, 79 South State Street, Salt Lake City, Utah 84111 (Questar Pipeline), and Questar Gas Management Company, 79 South State Street, Salt Lake City, Utah 84111 (QGM). Questar Pipeline and QGM are collectively referred to as the Parties. The Parties Represent As Follows: A. Questar Pipeline and QGM entered into an agreement effective January 1, 1996, for the transfer of various gathering systems and related facilities from Questar Pipeline to QGM (Agreement). B. The Parties have determined that it is in their mutual interest to amend the Agreement. Therefore, The Parties Agree As Follows: 1. Due to a delay in the receipt of Federal Energy Regulatory Commission approval, the effective date of the transfer is March 1, 1996, instead of January 1, 1996. The date "January 1, 1996" in line one of the opening paragraph and in lines four and eight of paragraph two is deleted and replaced with "March 1, 1996." 2. Except as expressly amended, the Agreement remains in full force and effect. This Amendment is executed the 19th day of March, 1997, by the authorized representatives of the Parties whose signatures are set forth below. Questar Pipeline Company ATTEST: /s/Connie C. Holbrook By /s/D. N. Rose Connie C. Holbrook, Secretary D. N. Rose, President and Chief Executive Officer Questar Gas Management Company ATTEST: /s/Connie C. Holbrook By G. L. Nordloh Connie C. Holbrook, Secretary G. L. Nordloh, President and Chief Executive Officer EX-22 3 SUBSIDIARY INFORMATION Registrant Questar Pipeline Company has one subsidiary, Questar TransColorado, Inc., which is a Utah corporation. EX-24 4 POWER OF ATTORNEY We, the undersigned directors of Questar Pipeline Company, hereby severally constitute D. N. Rose and S. E. Parks, and each of them acting alone, our true and lawful attorneys, with full power to them and each of them to sign for us, and in our names in the capacities indicated below, the Annual Report on Form 10-K for 1996 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 1996 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 2-11-97 R. D. Cash /s/ D. N. Rose President & Chief 2-11-97 D. N. Rose /s/ U. E. Garrison Director 2-11-97 U. E. Garrison /s/ A. J. Marushack Director 2-11-97 A. J. Marushack /s/ Gary L. Nordloh Director 2-11-97 Gary L. Nordloh EX-27 5
5 The following schedule contains summarized financial information extracted from the Questar Pipeline Company income statements and balance Sheets for the periods ended December 31, 1996, 1995 and 1994. The schedule is qualified in its entirety by reference to such audited financial statements. 1,000 12-MOS 12-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 DEC-31-1994 2,550 1,013 1,448 0 0 0 8,229 30,398 41,526 0 0 0 2,301 2,310 2,035 15,018 35,878 47,373 562,711 547,831 530,135 194,396 183,840 177,653 408,750 448,611 442,200 26,623 27,986 27,564 134,544 134,525 134,506 0 0 0 0 0 0 6,551 6,551 6,551 177,942 218,054 212,406 408,750 448,611 442,200 0 0 0 104,178 94,772 91,109 0 0 0 39,959 34,003 31,949 16,725 16,281 15,674 0 0 0 13,416 13,472 13,107 36,058 32,760 31,551 13,415 11,492 10,337 22,643 21,268 21,214 1,495 3,380 4,615 0 0 0 0 0 0 24,138 24,648 25,829 0 0 0 0 0 0
EX-27.1 6
5 The following schedule contains summarized financial information extracted from the Questar Pipeline Company statements of income and balance sheets for the 3 month periods ended March 31, 1996 and 1995 and the 6 month periods ended June 30, 1996 and 1995. The schedule is qualified in its entirety by reference to such unaudited financial statements. 1,000 3-MOS 3-MOS 6-MOS 6-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 MAR-31-1996 MAR-31-1995 JUN-30-1996 JUN-30-1995 220 0 1,254 0 0 0 0 0 27,436 43,154 20,854 35,095 0 0 0 0 2,332 2,021 2,186 2,436 31,805 47,226 25,807 39,443 547,776 532,054 552,372 538,024 186,971 181,127 189,636 183,804 442,790 440,922 437,593 437,198 20,603 24,805 63,138 20,271 134,530 134,511 134,535 134,516 0 0 0 0 0 0 0 0 6,551 6,551 6,551 6,551 219,444 213,930 175,085 214,991 442,790 440,922 437,593 437,198 0 0 0 0 26,076 23,660 51,802 47,682 0 0 0 0 10,261 8,563 19,575 17,429 4,420 4,205 8,756 8,377 0 0 0 0 3,394 3,406 6,846 6,767 8,582 8,042 17,501 16,026 3,331 2,679 6,715 5,641 5,251 5,363 10,786 10,385 1,139 911 1,495 1,700 0 0 0 0 0 0 0 0 6,390 6,274 12,281 12,085 0 0 0 0 0 0 0 0
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