-----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, FgrjgYXbgoaHkuwoEnjHJio6zSnNiUgOHMPyN4FqS9tgbtnPb7xZqvsfpet7lhZj AD//dfZaCK94pkLEewTZrA== 0000764044-98-000002.txt : 19980330 0000764044-98-000002.hdr.sgml : 19980330 ACCESSION NUMBER: 0000764044-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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: SEC FILE NUMBER: 000-14147 FILM NUMBER: 98576153 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, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission File No. 0-14147 QUESTAR PIPELINE COMPANY (Exact name of registrant as specified in its charter) State of Utah 87-0307414 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 180 East First South, P.O. Box 45360, Salt Lake City, Utah 84145-0360 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code:(801) 324-5555 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933: 9 7/8% Debentures due 2020 9 3/8% Debentures due 2021 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 23, 1998. $0. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 23, 1998. 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, 1997 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. The Company is an affiliate of Questar Corporation ("Questar"), an integrated energy services holding company. As a "natural gas company," the Company is subject to regulation by the Federal Energy Regulatory Commission (the "FERC") pursuant to the Natural Gas Act of 1938, as amended, 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"). During 1997, Questar Pipeline increased its percentage interest in both partnerships. Questar Pipeline and its affiliate Questar Gas Company (formerly Mountain Fuel Supply Company, "Questar Gas"), comprise Questar's Regulated Services unit. The Company's parent is Questar Regulated Services Company ("Regulated Services"). All three companies are managed by the same group of officers, but the Company does have a separate general manager. The Company has significant business relationships with its affiliates, particularly Questar Gas, a regulated local distribution company that serves over 641,000 customers in Utah, southwestern Wyoming, and southeastern Idaho. Questar Gas 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 Questar Gas and produced from properties operated by Wexpro Company ("Wexpro"), another affiliate, as well as some natural gas volumes purchased directly by Questar Gas from field producers and other suppliers. The Company also transports volumes that are marketed by Questar Energy Trading Company ("Questar Energy"), another affiliated entity. The following diagram sets forth the corporate structure of the Company and certain affiliates: Questar Corporation Entrada Industries, Inc. Wexpro Company Universal Resources Corporation Celsius Energy Company Questar Energy Trading Company Questar Gas Management Company Questar Energy Services, Inc. Questar Regulated Services Company Questar Pipeline Company Questar Gas 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"); The Williams Companies, Inc. ("Williams"); and Kern River Gas Transmission Company ("Kern River"). These connections have opened markets outside Questar Gas's service area and allow the Company to transport gas for others. The Company's transmission system includes 1,763 miles of transmission lines that interconnect with other pipelines and that link various producers of natural gas with Questar Gas's distribution facilities in Utah and Wyoming. (This total transmission mileage includes pipelines associated with the Company's storage fields and tap lines used to serve Questar Gas.) The system includes two major segments, often referred to as the northern and southern systems, which are linked together. The northern segment extends from northwestern Colorado through southwestern Wyoming into northern Utah; the southern segment of the transmission system extends from western Colorado to Payson, in central Utah. The Company's pipelines, compressor stations, regulator stations, and other transmission-related facilities are constructed on properties held under long-term easements, rights of way, or fee interests sufficient for the conduct of its business activities. In addition to the transmission system described above, Questar Pipeline has a 54 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. Although the Overthrust segment is currently underutilized, the Company and its remaining partners are reviewing opportunities, including backhauling, to increase its value. The Overthrust partnership agreement requires unanimous consent of all partners on major operating and financial issues. 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. During 1997, Questar Pipeline agreed to increase its ownership interest in the TransColorado pipeline project to 50 percent. The Company and its remaining partner, KN Energy, have ordered the pipe and compression equipment currently intend to begin construction of the second phase of the project during 1998 after the final environmental clearances are obtained. The pipeline is approximately 292 miles in length and will extend from the Piceance Basin in western Colorado, to Blanco, New Mexico, where it will connect with other pipeline systems. (Questar Pipeline did not originally participate in the first phase of the project, which was a 22-mile line between the San Juan Basin and Blanco facilities, but will acquire El Paso Natural Gas Company's 50 percent interest in the first phase upon completion of the second phase.) As designed, the pipeline could transport up to 300 million cubic feet ("MMcf") of gas per day from western Colorado and other producing basins to California and other markets. TransColorado, which was first announced in 1990 and which has a total projected cost of $240 million, involves risks associated with the unwillingness of producers and other shippers to make long-term transportation commitments. Transportation Service Questar Pipeline's largest transportation customer is its affiliate, Questar Gas. During 1997, the Company transported 110.3 million decatherms ("MMDth") for Questar Gas, compared to 100.6 MMDth in 1996. These transportation volumes include Questar Gas's cost-of-service gas produced by Wexpro and volumes purchased by Questar Gas directly from field producers and other suppliers. Effective September 1, 1993, Questar Gas converted its firm sales capacity to firm transportation capacity on the Company's transmission system. Questar Gas has reserved capacity of about 800,000 Dth per day, or approximately 70 percent of Questar Pipeline's reserved daily capacity. Questar Gas paid an annual reservation charge of approximately $49.6 million to the Company in 1997, which includes reservation charges attributable to firm and "no-notice" transportation. Questar Gas only needs its total reserved capacity during peak-demand situations. When it is not fully utilizing its capacity, Questar Gas releases the capacity to others, primarily industrial transportation customers and marketing entities Questar Pipeline's transportation agreement with Questar Gas expires on June 30, 1999. The parties expect that the agreement will be extended, given Questar Gas's growing firm transportation requirements and the Company's competitive rates. Questar Gas, in common with other retail distribution utilities, is preparing for an environment in which transportation service may be unbundled from sales service. The Company recovers approximately 95 percent of its transmission cost of service through reservation charges from firm transportation customers. In other words, these customers pay 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 revenues may be adversely affected if the FERC changes its basic regulatory scheme of "straight-fixed variable" rates. The Company's total system throughput decreased from 276.4 MMDth in 1996 to 264.3 MMDth in 1997. Most of this decrease was attributable to lower transportation volumes for nonaffiliated customers, which declined from 131.9 MMDth in 1996 to 116.2 MMDth in 1997. 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 services. Questar Pipeline will continue to develop and build new lines and related facilities that will allow it to meet customers needs or improve customer services. During 1997, it completed the first phase of a project to build a 20-inch diameter line extending from Clay Basin to Coleman Station in southwestern Wyoming. The final phase is scheduled to be finished in 1998. The project has already significantly expanded the Company's capacity to move gas north from its storage facility at Clay Basin and its southern system and will further expand it when the final phase is completed. Questar Pipeline has expanded its capacity to transport production from the Ferron area of eastern Utah, which is the site of a large project to produce gas from coal seams into market areas. During 1998, the Company will construct new compression facilities on its southern system in eastern Utah that will add approximately 52 thousand decatherns ("MDth") per day of firm capacity. Storage Questar Pipeline operates a major storage facility at Clay Basin in northeastern Utah. This storage reservoir has been operational since 1977 and has been providing open-access storage service 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 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.) Questar Pipeline recently completed a successful open season to offer additional working gas capacity of 5 Bcf, which was fully subscribed. It has filed the necessary notice with the FERC to increase the facility's total capacity to 117 Bcf and expects to inject the additional volumes this summer. Clay Basin's firm storage capacity is fully subscribed by customers under long-term agreements. Questar Gas currently has 12.5 Bcf of working gas capacity at Clay Basin. Other large customers include Williams; Washington Natural Gas Company, a distribution utility in the state of Washington; and BC Gas Utility Ltd., a distribution utility in British Columbia, Canada. Storage service is important to distribution companies that need to match annual gas purchases with fluctuating customer demand, improve service reliability, and avoid imbalance penalties. Questar Pipeline offers interruptible storage service at Clay Basin and also allows firm storage service customers the right to transfer their injection and withdrawal rights to other parties. The Company also owns and operates three smaller storage reservoirs. These projects were developed specifically to serve Questar Gas's needs, and Questar Gas reserves 100 percent of their working gas capacity. These small reservoirs are used primarily to supplement Questar Gas's gas supply needs on peak 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 does not currently plan to file a general rate case in 1998. 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. In February of 1998, the FERC concluded an investigation of the Company's gathering rates to Questar Gas for the period from November 1, 1988 through September 30, 1992. The FERC determined that Questar Pipeline committed a technical violation of the applicable law, but ruled that it was not appropriate to order refunds or assess fines. The order instituting the proceedings was issued by the FERC in May of 1997, contained allegations that the Company may have violated a provision of the Natural Gas Act and its tariff by charging gathering rates higher than the rates specified in its tariff, and asked Questar Pipeline why it should not be obligated to refund the alleged overcharge of approximately $3.4 million plus interest to Questar Gas. During 1997 and 1998, 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. The Company is complying with some GISB standards and has obtained an extension until June 1, 1998, to be in full compliance. 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. Under the Natural Gas Pipeline Safety Act of 1968, as amended, the Company is subject to the jurisdiction of the Department of Transportation ("DOT") with respect to safety requirements in the design, construction, operation and maintenance of its transmission and storage facilities. The Company also complies with the DOT's drug and alcohol testing regulations. In addition to the regulations discussed above, Questar Pipeline's activities in connection with the operation and construction of pipelines and other facilities for transporting or storing natural gas are subject to extensive environmental regulation by state and federal authorities, including state air quality control boards, the Bureau of Land Management, the Forest Service, the Corps of Engineers, and the Environmental Protection Agency. These compliance activities increase the cost of planning, designing, installing and operating facilities. Competition 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 also 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 intends to take advantage of these assets by increasing its "intra hub" capacity or its ability to quickly and reliably move gas volumes between receipt and delivery points and by expanding its storage capacity and services. 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, 1997, the Company had 164 employees, compared to 352 as of the end of 1996. (This decrease reflects the transfer of employees to Regulated Services as of January 1, 1997.) None of these employees is represented under collective bargaining agreements. The Company participates in the comprehensive benefit plans of Questar and pays the share of costs attributable to its employees covered by such plans. Questar Pipeline's employee relations are generally deemed to be satisfactory. Relationships with Affiliates There are significant business relationships between the Company and its affiliates, particularly Questar Gas. Some of these relationships are described above. See Note 8 to the financial statements for additional information concerning transactions between the Company and its affiliates. The Company obtains data processing and communication services from 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, regulatory affairs, and legal services for both Questar Pipeline and Questar Gas. Questar also provides certain administrative services, benefit plans, governmental affairs, financial, and audit, to the Company and other members of the consolidated group. A proportionate share of the costs associated with such services is directly billed or allocated to Questar Pipeline. ITEM 3. LEGAL PROCEEDINGS Questar Pipeline is involved in various legal and regulatory proceedings. While it is not currently possible to predict or determine the outcome of these proceedings, it is the opinion of management that the outcome will not have a material adverse effect on the Company's financial position or liquidity. The Company, Questar, Questar Gas and other affiliates are defendants in a lawsuit that was 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 Questar Gas that has not yet been reduced to a final judgement in the same court. The second lawsuit, however, also involves claims of antitrust violations against Questar Pipeline with respect to storage service. It has been formally and indefinitely stayed pending the entry of a final judgement in the first lawsuit. See "Regulatory Environment" for a discussion of regulatory proceedings involving the Company and the FERC. 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 financial results and operating information:
Year Ended December 31, 1997 1996 1995 (Dollars In Thousands) OPERATING INCOME Revenues Transportation $68,837 $67,656 $61,749 Storage 34,410 34,280 31,276 Other 2,190 2,242 1,747 Total revenues 105,437 104,178 94,772 Operating expenses Operating and maintenance 37,334 39,959 34,003 Depreciation and amortization 14,797 14,206 12,911 Other taxes 2,816 2,519 3,370 Total expenses 54,947 56,684 50,284 Operating income $50,490 $47,494 $44,488 OPERATING STATISTICS Natural gas transportation volumes (in Mdth) For unaffiliated customers 116,215 131,895 151,943 For Questar Gas 110,311 100,161 79,872 For other affiliated customers 37,797 44,327 38,839 Total transportation 264,323 276,383 270,654 Transportation revenue (per dth) $0.26 $0.24 $0.23 Clay Basin storage, working gas- volumes (in Bcf) 46.3 46.3 46.3
Revenues increased $1,259,000 or 1% in 1997 when compared with 1996 as a result of adding firm transportation contracts. The new contracts cover several short-haul portions of the pipeline. The increase in revenues reported in 1996 was due to a rate increase and expanded firm gas-storage activities. The Federal Energy Regulatory Commission approved rates which included a stated return on equity of 11.75%. At December 31, 1997, approximately 82% of Questar Pipeline's transportation system was reserved by firm-transportation customers under contracts with varying terms and lengths. The remaining 18% of transportation system capacity, which has multiple delivery points, is available for interruptible transportation. Questar Gas has reserved transportation capacity from Questar Pipeline of approximately 800,000 dth per day, or about 70% of the total reserved daily-transportation capacity at December 31, 1997. This contract, which represents 80% of the demand charges collected by Questar Pipeline, expires June 30, 1999. Negotiations are under way to structure an agreement that would benefit both companies. Management believes that any new contract will not have a material impact on the results of operations, financial position or cash flows of Questar Pipeline. Storage revenues were flat in 1997 compared with 1996 after increasing by 10% in 1996 from the year earlier. In addition to a rate increase, the higher revenues resulted when Clay Basin's firm-storage capacity increased from 41.8 Bcf to 46.3 Bcf in May 1995. Storage capacity at year-end 1997 was 100% subscribed and about 76% of the contractual volumes had remaining terms of at least 10 years. Questar Gas has reserved 27% of firm-storage capacity for at least 10 years. Questar Pipeline intends to expand working gas capacity at Clay Basin in 1998 by 5 Bcf at an estimated cost of $4 million. In an open season sign-up conducted in January 1998, all potential new capacity was pledged under long-term commitments. The expansion is expected to add about $3 million in annual revenues. Questar Pipeline's operating and maintenance (O & M) expenses decreased 7% in 1997 because of cost-containment measures and reduced labor and related costs. Questar Pipeline along with Questar Gas initiated cost-containment measures intended to slow the increase of O & M expenses. Questar Gas and Questar Pipeline in 1997 combined functions common to gas-distribution and gas-transmission operations in order to eliminate duplications. O & M expenses increased 18% in 1996 when compared with 1995 caused by system expansion, one-time costs associated with the spin-down of certain assets that were eventually transferred in 1996 and issues in Questar Pipeline's 1996 rate settlement. Depreciation expense was 4% higher in 1997 when compared to 1996 and 10% higher in 1996 when compared to 1995 as a result of Questar Pipeline's capital expenditures. Settlements of disputed tax assessments with state and local governmental agencies in 1996 resulted in reduced property taxes. Questar Pipeline has a 50% ownership interest in a partnership building Phase II of the TransColorado pipeline in western Colorado. Upon completion of Phase II, Questar Pipeline will complete an acquisition of El Paso Energy Corporation's 50% interest in Phase I of the pipeline project completed in 1996, making Questar Pipeline a 50% owner of the entire project. KN Energy owns the other 50% interest. The 292-mile pipeline will cost about $240 million when completed. Questar Pipeline reported pretax earnings of $4,456,000 in 1997 from capitalizing the interest and financing costs associated with the pipeline project. Questar Pipeline purchased an additional 18% interest in the Overthrust Pipeline partnership in 1997, bringing its ownership in the transmission line to 54%. Approval of all partners is required for all substantive policy matters. The effective income tax rate was 38.1% in 1997, 37.2% in 1996 and 35.1% in 1995. Year 2000 Costs: Questar Pipeline has undertaken steps to identify areas of concern and potential remedies, prioritize needs, estimate costs and begin work either to repair or replace data processing software and hardware affected by Year 2000 issues. The expense, associated with addressing Year 2000 related problems, is not expected to be material. However, measurement of the cost has not been completed. The solutions either involve replacement or repair of the affected software or hardware systems. Some replacement or upgrade of systems would take place in the normal course of business. Several systems, key to Questar Pipeline's operations, have been scheduled to be replaced through vendor supplied systems before 2000. The costs of repairing existing systems is expensed as incurred, while the costs of replacing systems is capitalized and depreciated generally over a three- to five-year period. LIQUIDITY AND CAPITAL RESOURCES Operating Activities Net cash provided from operating activities was $43,236,000 in 1997, $46,710,000 in 1996 and $36,991,000 in 1995. Net cash provided from operating activities decreased 7% in 1997 when compared with 1996 due primarily to construction costs that had been incurred but not yet reimbursed by partners at December 31. Investing Activities Following is a summary of capital expenditures for 1997, 1996 and a forecast of 1998 expenditures:
1998 Estimated 1997 1996 (In Thousands) Transmission system $36,700 $19,622 $18,173 Storage 5,800 1,399 1,466 Partnerships 27,700 6,214 2,890 General 5,900 5,361 1,279 $76,100 $32,596 $23,808
Capital expenditures included new pipelines, replacement and expansion of sections of existing gas mainlines and additional investments in pipeline partnerships. Financing Activities Questar Pipeline funded 1997 capital expenditures and dividend payments primarily with the proceeds from net cash provided from operating activities and an increase in notes payable to Questar. Forecasted 1998 capital expenditures of $76.1 million are expected to be financed from net cash flow provided from operations and borrowings from Questar. Questar makes loans to Questar Pipeline under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar at December 31 totaled $25,800,000 with an interest rate of 6.02% in 1997 and $11,800,000 with an interest rate of 5.63% in 1996. Questar Pipeline 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 1998. There were no amounts borrowed under this arrangement at either December 31, 1997 or 1996. Questar Pipeline guarantees $9 million of long-term debt borrowed by Blacks Fork Gas Processing Company. Questar Pipeline's capital structure at year-end 1997 was 41% long-term debt and 59% common shareholder's equity. Moody's and Standard and Poor's have rated the Company's long-term debt A1 and A+, respectively. Forward Looking Statements This annual report contains some forward looking statements about future operations and expectations of Questar Pipeline. Management believes they are reasonable representations of Questar Pipeline's expected performance at this time. Actual results may vary from management's stated expectations and projections. 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.* 1,2\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. 3\ Annual Management Incentive Plan adopted by Questar Pipeline Company, Questar Gas Company, and Questar Regulated Services Company. 10.4. Partnership Agreement for the TransColorado Gas Transmission Company dated July 1, 1997, between KN TransColorado, Inc. and Questar TransColorado, Inc. 10.5.* 4\ 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.* 4\ 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.* 4\ 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.* 4\ 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.* 3\ 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. (Exhibit No. 10.11. to Form 10-K Annual Report for 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\The Overthrust Partnership Agreement has not been formally amended to delete the names of Columbia Gulf Transmission Company and Tennessee Overthrust Gas Company as partners. 3\Exhibit so marked is management contract or compensation plan or arrangement. 4\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 1997. 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, 1997 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, 1997, 1996 and 1995 Balance sheets -- December 31, 1997 and 1996 Statements of cash flows -- Years ended December 31, 1997, 1996 and 1995 Statements of shareholder's equity -- Years ended December 31, 1997, 1996 and 1995 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 accompanying balance sheets of Questar Pipeline Company as of December 31, 1997 and 1996, and the related statements of income and common shareholder's equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Salt Lake City, Utah February 9, 1998 QUESTAR PIPELINE COMPANY STATEMENTS OF INCOME
Year Ended December 31, 1997 1996 1995 (In Thousands) REVENUES From unaffiliated customers $36,343 $38,837 $36,780 From affiliates - Note 8 69,094 65,341 57,992 TOTAL REVENUES 105,437 104,178 94,772 OPERATING EXPENSES Operating and maintenance - Note 8 37,334 39,959 34,003 Depreciation 14,797 14,206 12,911 Other taxes 2,816 2,519 3,370 TOTAL OPERATING EXPENSES 54,947 56,684 50,284 OPERATING INCOME 50,490 47,494 44,488 INCOME FROM UNCONSOLIDATED AFFILIATES 4,629 182 1,220 OTHER INCOME - Note 8 1,323 1,798 524 DEBT EXPENSE (13,536) (13,416) (13,472) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 42,906 36,058 32,760 INCOME TAXES - Note 5 16,338 13,415 11,492 INCOME FROM CONTINUING OPERATIONS 26,568 22,643 21,268 DISCONTINUED OPERATIONS - Questar Gas Management Company - Note 2 1,495 3,380 NET INCOME $26,568 $24,138 $24,648
See notes to financial statements. QUESTAR PIPELINE COMPANY BALANCE SHEETS ASSETS
December 31, 1997 1996 (In Thousands) CURRENT ASSETS Cash and short-term investments $7,075 $2,550 Accounts receivable 9,535 6,852 Accounts receivable from affiliates 1,316 931 Federal income tax receivable 446 Inventories, at lower of average cost or market 2,303 2,301 Prepaid expenses and deposits 2,035 1,938 TOTAL CURRENT ASSETS 22,264 15,018 PROPERTY, PLANT AND EQUIPMENT Transmission 306,486 297,144 Storage 213,264 211,273 General and intangible 40,093 38,274 Construction work in progress 20,760 16,020 580,603 562,711 Less allowances for depreciation 202,427 194,396 NET PROPERTY, PLANT AND EQUIPMENT 378,176 368,315 OTHER ASSETS Investment in unconsolidated affiliates 26,977 14,347 Income taxes recoverable from customers 4,552 3,930 Unamortized costs of reacquired debt 2,564 2,837 Other 3,031 4,303 37,124 25,417 $437,564 $408,750
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31, 1997 1996 (In Thousands) CURRENT LIABILITIES Notes payable to Questar - Note 3 $25,800 $11,800 Accounts payable and accrued expenses Accounts payable 14,069 10,762 Accounts payable to affiliates 3,633 2,089 Federal income taxes 62 Other taxes 1,229 896 Accrued interest 1,076 1,076 Total accounts payable and accrued expenses 20,069 14,823 TOTAL CURRENT LIABILITIES 45,869 26,623 LONG-TERM DEBT - Notes 3 and 4 134,563 134,544 OTHER LIABILITIES 4,523 4,322 DEFERRED INCOME TAXES - Note 5 62,298 58,768 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 101,726 95,908 190,311 184,493 $437,564 $408,750
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, 1995 $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 1997 net income 26,568 Cash dividends (20,750) Balance at December 31, 1997 $6,551 $82,034 $101,726
See notes to financial statements. QUESTAR PIPELINE COMPANY STATEMENTS OF CASH FLOWS
Year Ended December 31, 1997 1996 1995 (In Thousands) OPERATING ACTIVITIES Net income $26,568 $24,138 $24,648 Depreciation 15,886 16,291 14,547 Deferred income taxes 1,526 388 (163) Income from unconsolidated affililates (4,629) (182) (1,220) Income from discontinued operations (1,495) (3,380) 39,351 39,140 34,432 Changes in operating assets and liabilities Accounts receivable (3,068) 5,923 1,530 Federal income taxes 508 (799) 1,433 Prepaid expenses and deposits (97) 219 207 Accounts payable and accrued expense 4,851 2,783 (395) Other 1,691 (556) (216) NET CASH PROVIDED FROM OPERATING ACTIVITIES 43,236 46,710 36,991 INVESTING ACTIVITIES Capital expenditures Purchase of property, plant and equipment (26,382) (20,958) (22,640) Investment in discontinued operations (1,576) Other investments (6,214) (2,850) (506) Total capital expenditures (32,596) (23,808) (24,722) Proceeds from (costs of) disposition of property, plant and equipment 635 343 (2,822) NET CASH USED IN INVESTING ACTIVITIES (31,961) (23,465) (27,544) FINANCING ACTIVITIES Change in notes receivable from Questar Gas Management 16,692 8,518 Change in notes payable to Questar Corp. 14,000 (3,400) 600 Payment of dividends (20,750) (35,000) (19,000) NET CASH USED IN FINANCING ACTIVITIES (6,750) (21,708) (9,882) Change in cash and short-term investments 4,525 1,537 (435) Beginning cash and short-term investments 2,550 1,013 1,448 ENDING CASH AND SHORT-TERM INVESTMENTS $7,075 $2,550 $1,013
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 was 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, accounting and engineering functions for its two subsidiaries, Questar Pipeline and Questar Gas Company (Questar Gas). Significant accounting policies are presented below. Regulation: Questar Pipeline is regulated by the Federal Energy Regulatory Commission (FERC) which establishes rates for the transportation and storage of natural gas. The FERC also regulates, among other things, the extension and enlargement or abandonment of jurisdictional natural gas facilities. Regulation is intended to permit the recovery, through rates, of the cost of service including a rate of return on investment. The financial statements are presented in accordance with regulatory requirements. Methods of allocating costs to time periods, in order to match revenues and expenses, may differ from those of nonregulated businesses because of cost allocation methods used in establishing rates. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent liabilities reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition: Revenues are recognized in the period that services are provided or products are delivered. Questar Pipeline periodically collects revenues subject to possible refunds pending final orders from the FERC. The Company establishes reserves for revenues collected subject to refund. Cash and Short-Term Investments: Short-term investments consist principally of repurchase agreements with maturities of three months or less. Investment in Unconsolidated Affiliates: Questar Pipeline has a 54% interest in the Overthrust Pipeline partnership, and is the operator of the Overthrust Segment of the Trailblazer Pipeline System. Approval of all partners is required for all substantive policy matters. Questar Pipeline has a 50% ownership interest in a partnership building Phase II of the TransColorado pipeline in western Colorado. Upon completion of Phase II, Questar Pipeline will complete an acquisition of El Paso Energy Corporation's 50% interest in Phase I of the pipeline project completed in 1996, making Questar Pipeline a 50% owner of the entire project. The Company accounts for its investment in these partnerships using the equity method. 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 3.5% in 1997. Allowance for Funds Used During Construction: The Company capitalizes the cost of capital during the construction period of plant and equipment. This amounted to $387,000 in 1997, $542,000 in 1996 and $330,000 in 1995. 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. Credit Risk: Questar Pipeline'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. 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. Reclassification: Certain reclassifications were made to the 1996 and 1995 financial statements to conform with the 1997 presentation. 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 1996 and 1995 were restated, reflecting gas-gathering operations as a discontinued business segment. Note 3 - Debt Questar makes loans to Questar Pipeline under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar at December 31 totaled $25,800,000 with an interest rate of 6.02% in 1997 and $11,800,000 with an interest rate of 5.63% in 1996. Questar Pipeline 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 1998. There were no amounts borrowed under this arrangement at either December 31, 1997 or 1996. 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:
1997 1996 (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 437 456 $134,563 $134,544
Sinking fund redemption of the 9 7/8% debt begins in 2001 in the amount of $2,500,000 and in 2002 for the 9 3/8% debt in the amount of $4,250,000. There are no debt provisions restricting the payment of dividends. Cash paid for interest was $13,351,000 in 1997, $13,227,000 in 1996 and $13,192,000 in 1995. Note 4 - Financial Instruments The carrying amounts and estimated fair values of the Company's financial instruments at December 31 were as follows:
1997 1996 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (In Thousands) Financial assets Cash and short-term investments $7,075 $7,075 $2,550 $2,550 Financial liabilities Short-term loans 25,800 25,800 11,800 11,800 Long-term debt 134,563 150,675 134,544 150,938
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:
1997 1996 1995 (In Thousands) Federal Current $13,247 $11,663 $10,695 Deferred 1,273 700 101 State Current 1,542 998 684 Deferred 276 54 12 $16,338 $13,415 $11,492
The difference between income tax expense and the tax computed by applying the statutory federal income tax rate of 35% to income from continuing operations before income taxes is explained as follows:
1997 1996 1995 (In Thousands) Income from continuing operations before income taxes $42,906 $36,058 $32,760 Federal income taxes at statutory rate $15,017 $12,620 $11,466 State income taxes, net of federal income tax benefit 1,204 703 456 Prior years' tax settlement 134 146 (162) Other (17) (54) (268) Income tax expense $16,338 $13,415 $11,492 Effective income tax rate 38.1% 37.2% 35.1%
Significant components of the Company's deferred tax liabilities and assets at December 31 were as follows:
1997 1996 (In Thousands) Deferred tax liabilities Property, plant and equipment $58,131 $54,550 Other 4,767 5,026 Total deferred tax liabilities 62,898 59,576 Deferred tax assets 600 808 Net deferred tax liabilities $62,298 $58,768
Cash paid for income taxes was $13,844,000 in 1997, $13,797,000 in 1996 and $10,268,000 in 1995. Note 6 - Rate Matters, Litigation and Commitments There are various legal proceedings against Questar Pipeline. 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 of Questar Pipeline's employees are covered by Questar's defined benefit pension plan. Benefits are generally based on years of service and the employee's 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 $520,000 in 1997, $974,000 in 1996 and $867,000 in 1995. 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, 1997, Questar's fair value of plan assets exceeded the accumulated benefit obligation. Postretirement Benefits Other Than Pensions: Questar Pipeline 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 postretirement medical 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, and corporate and U.S. government debt obligations. The Company is amortizing the transition obligation over a 20-year period, which began in 1992. Costs of postretirement benefits other than pensions were $257,000 in 1997, $666,000 in 1996, and $788,000 in 1995. 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 annual contributions of $1,187,000 to an external trust fund. Questar Pipeline's portion of plan assets and benefit obligations related to postretirement medical and life insurance benefits is not determinable because the plan assets are not segregated or restricted to meet the Company's obligations. Postemployment Benefits: Questar Pipeline recognizes the net present value of the liability for postemployment benefits, such as long-term disability benefits and health-care and life-insurance costs, when employees become eligible for such benefits. Postemployment benefits are paid to former employees after employment has been terminated but before retirement benefits are paid. The Company accrues both current and future costs. Beginning in 1996, the FERC allowed Questar Pipeline to recover $138,000 per year of postemployment costs in future rates over a three-year period if funded in an external trust. 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 $348,000 in 1997, $531,000 in 1996 and $515,000 in 1995. Note 8 - Related Party Transactions Questar Regulated Services was organized in 1996 and provides services common to its two subsidiaries, Questar Gas and Questar Pipeline. Regulated Services began providing administrative, technical and accounting support in 1997. Employees in these functions from both companies were reassigned to Regulated Services. Regulated Services charged Questar Pipeline $12,895,000 in 1997. These costs are included in operating and maintenance expenses, primarily, and are allocated based on several methods dictated by the nature of the charges. Management believes that the allocation methods are reasonable. Questar Pipeline receives a substantial portion of its revenues from Questar Gas Company. Revenues received from Questar Gas amounted to $64,924,000 or 62% in 1997, $61,146,000 or 59% in 1996 and $54,096,000 or 57% in 1995. The Company also received revenues from other affiliated companies totaling $4,166,000 in 1997, $4,195,000 in 1996 and $3,896,000 in 1995. Questar performs certain administrative functions for Questar Pipeline. The Company was charged for its allocated portion of these services which totaled $2,748,000 in 1997, $3,045,000 in 1996 and $2,644,000 in 1995. These costs are included in operating and maintenance expenses and are allocated based on each affiliate's proportional share of revenues, net of gas costs; property, plant and equipment; and payroll. Management believes that the allocation method is reasonable. Questar InfoComm Inc is an affiliated company that provides data processing and communication services to Questar Pipeline. The Company paid Questar InfoComm $9,458,000 in 1997, $7,155,000 in 1996 and $7,542,000 in 1995. 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 annual lease payment for the next five years, beginning in 1998, is $576,000. The Company received interest income from affiliated companies of $11,000 in 1997, $609,000 in 1996 and $1,998,000 in 1995. Questar Pipeline incurred debt expense to Questar of $348,000 in 1997, $158,000 in 1996 and $272,000 in 1995. 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 27th day of March, 1998. QUESTAR PIPELINE COMPANY (Registrant) By /s/ D. N. Rose D. N. Rose President & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ D. N. Rose President & Chief Executive Officer; D. N. Rose Director (Principal Executive Officer) /s/ S. E. Parks Vice President, Treasurer and Chief S. E. Parks Financial Officer (Principal Financial Officer) /s/ G. H. Robinson Vice President and Controller G. H. Robinson (Principal Accounting Officer) *R. D. Cash Chairman of the Board; Director *U. Edwin Garrison Director *Marilyn S. Kite Director *Scott S. Parker Director *D. N. Rose Director March 27, 1998 *By /s/ D. N. Rose Date D. N. Rose, Attorney in Fact EX-10.3 2 Exhibit 10.3 QUESTAR REGULATED SERVICES COMPANY, QUESTAR GAS COMPANY, AND QUESTAR PIPELINE COMPANY ANNUAL MANAGEMENT INCENTIVE PLAN Paragraph 1. Name. The name of this Plan is the Annual Management Incentive Plan (the Plan) for Questar Regulated Services Company, Questar Gas Company, and Questar Pipeline Company (collectively referred to as Regulated Services). Paragraph 2. Purpose. The purpose of the Plan is to provide an incentive to officers and key employees of Regulated Services for the accomplishment of major organizational and individual objectives designed to further the efficiency, profitability, and growth of Regulated Services. Paragraph 3. Administration. The Management Performance Committee (Committee) of the Board of Directors of Questar Corporation (Questar) 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. Recommendations made by the Committee shall be reviewed by the Boards of Directors of participating employers. 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 Regulated Services and for its affiliates 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 Regulated Services 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 Regulated Services 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 award is (First Year determined of 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. Participants who have a target bonus of $10,000 or higher shall be paid all deferred portions of such bonus with restricted shares of Questar's common stock under Questar'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 Questar's qualified retirement plan. For the purpose of this Plan, disability shall mean any termination of service that results in payments under Questar'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 Questar'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 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 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 Questar'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 Boards of Directors for the participating employers, 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 Boards of Directors for the participating employers 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, 1997, and shall remain in effect until it is suspended or terminated as provided by Paragraph 12. This Plan replaces the individual plans previously adopted by Questar Gas and Questar Pipeline that became effective January 1, 1984. Plan participants who previously received awards under predecessor plans or any other Annual Management Incentive Plan adopted by an affiliate shall be treated as ongoing participants for purposes of the distribution schedule in Paragraph 6. EX-10.4 3 Exhibit 10.4 Transcolorado Gas Transmission Company Partnership Agreement This Agreement, Effective on the 1st day of July, 1997, is entered into between KN TransColorado, Inc. (KN) and Questar TransColorado, Inc. (Questar). This Agreement reflects the withdrawal of El Paso TransColorado Company from the TransColorado Partnership in the Agreement Concerning Withdrawal from Partnership and Release and Indemnification dated June 30, 1997. 1. Parties. The following are Parties to this Agreement and each shall have a one-half interest in the Partnership. 1.1 KN TransColorado, Inc., a Colorado corporation with its principal place of business located at P.O. Box 281304, 370 Van Gordon Street, Lakewood, Colorado 80228-8340. 1.2 Questar TransColorado, Inc., a Utah corporation with its principal place of business located at P.O. Box 45433, 180 East 100 South, Salt Lake City, Utah 84145-0433. 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 Construction-Engineering Agreement. The Construction-Engineering Agreement was entered into between the Partnership and the Construction Project Manager on January 1, 1991, and amended February 28, 1995, to manage the design and construction of the Project. 2.5 Construction Project Manager. The Construction Project Manager is Questar Pipeline Company (Questar Pipeline) and it has been designated by the Management Committee to perform the duties described in section 5. 2.6 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). 2.7 Defaulting Partner. A Defaulting Partner is a Partner who is in Default. 2.8 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. 2.9 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. 2.10 June 27, Agreement. The KN TransColorado, Inc. and Questar TransColorado, Inc., Agreement of June 27, 1997, attached as Exhibit A to this Agreement. 2.11 June 30, Agreement. The Agreement concerning Withdrawal From Partnership and Release and Indemnification of June 30, 1997, between KN TransColorado, Inc., Questar TransColorado, Inc. and El Paso TransColorado Company, attached as Exhibit B to this Agreement. 2.12 Management Committee. The Management Committee is the committee provided for in section 4. 2.13 Operating Agreements. The Operating Agreements are the agreements that will be entered into between the Partnership, Affiliates of the partners or other third parties to operate the Project. 2.14 Operators. The Operators are the companies designated by the Management Committee in accordance with section 5. 2.15 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. 2.16 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. 2.17 Partnership. The Partnership is the entity created by this Agreement. 2.18 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-half. 2.19 Person. A Person is an individual, corporation, voluntary association, joint stock company, business trust, partnership, proprietorship or other legal entity, however constituted. 2.20 Phase I. The southern-most 22.5 mile, 24-inch diameter segment of the Project and a 2 1/2 mile, 16-inch diameter residue lateral connecting the Coyote Gas Treating Ltd. Liability Company plant with the TransColorado main line segment and related facilities. 2.21 Phase II. The extension of Phase I of the Project from Coyote Gulch North to an interconnection with Questar Pipeline. 2.22 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 a proposed interconnection with the facilities of Questar Pipeline located in northwestern Colorado to proposed interconnections with other interstate or intrastate pipelines located in Colorado and New Mexico. 2.23 Project Agreement. The Project Agreement is the agreement between Rocky Mountain Natural Gas Company, Western Gas Supply Company, and Questar Pipeline dated March 19, 1990, that preceded this Agreement. 2.24 Secondary Facilities. Secondary Facilities are pipelines and attendant facilities that are connected to the Project. 2.25 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 KN 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. 3.5 Term. The initial term of the Agreement shall commence on its execution and shall terminate 25 years after the in-service date of Phase II. 3.6 Regulatory Approvals. The Partners have and will continue to 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 identified. 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 potential Shippers who would use the additional capacity, the likely receipt and delivery points for the additional gas, the intended 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 up to 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 that member's absence, by the alternate, and the member may delegate to the alternate as many of that member's powers and duties as that member 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 Construction Project Manager for the Project to serve for the time and perform the duties specified in the Construction-Engineering Agreement. 4.2.2 Appoint such agents as are necessary to assist the Construction 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 Construction-Engineering 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 Internal Revenue 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, by telephone conference call or by video conference call. In lieu of a meeting, the members may act upon written consent, by majority vote if there are three or more Partners, except for those items specifically set forth in this Agreement requiring unanimity. Each Partner shall have one vote equal to its Partner's Percentage at the time of the meeting on behalf of the member. 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. If the Partnership has two Partners, then all matters are to be decided by a unanimous vote of the Partners. If the Partnership has three or more Partners, then 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 Partners. 4.5.1 The means of financing the Project. 4.5.2 The form and content of any tariff to be used by the Project. 4.5.3 Any agreement to purchase, construct, acquire or own any Secondary Facilities or Expansions of the Project. 4.5.4 Except as provided in sections 12.2.1 and 12.2.2, consent to the transfer of a Partner's interest. 4.5.5 Except as provided in sections 11, 12 and 13, the decision to add a new Partner to the Partnership. 4.5.6 Except as otherwise provided in this Agreement, the decision to dissolve the Partnership. 4.5.7 Any amendment of this Agreement. 4.6 Officials of the Partnership. One of the members of the Management Committee shall serve as chairman. The chairman as of the execution of this Agreement shall be the Management Committee member representing KN with a term ending three years after the in-service date of Phase II. After KN's term expires, the chairmanship shall be open to election every two years by a majority of the Partners with no prohibition upon a chairman being elected to serve consecutive terms. If there are only two Partners, the chairmanship shall rotate between Partners if the Partner who is not Chairman at the end of KN's initial term desires the chairmanship. A chairman may be removed by a unanimous vote if there are two Partners or a majority vote if there are three or more Partners. 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. Construction Project Manager, Operators and Partnership Assignments. 5.1 Construction Project Manager. The Partnership has entered into a Construction-Engineering Agreement with the Construction Project Manager, Questar Pipeline, to serve during the preconstruction and construction periods. The Construction Project Manager shall serve until the completion of the Project, or until it resigns or is removed by the unanimous vote of the Management Committee. 5.2 Operators. The Partnership may enter into Operating Agreements with Affiliates of each of the Partners, third parties or directly employ personnel to operate various discrete functions related to the Project. 5.3 Partnership Assignments. Attached as Exhibit C to this Agreement is a current designation of duties related to the construction and operation of Phase II of the Project and other duties as related to Phase I of the Project not delegated to El Paso in the operating agreement with El Paso for Phase I. 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 in proportion to its Partner's Percentage, 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 in proportion to its Partner's Percentage, 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 Construction Project Manager, during the construction of Phase II, or the designated Operator thereafter, 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 Capital Accounts of the nondefaulting Partner(s) 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 that of the nondefaulting Partner(s), including additional Capital Contributions to its own Capital Account, or in the case of a disproportionate allocation of loss, contributions to increase the Capital Account of the nondefaulting Partner(s), 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 the defaulting Partner's Capital Account. 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 Partner's Percentage at the time of distribution, in such total amounts and at such times as directed by the Management Committee. However, if section 11.1(c) applies, distribution of excess cash shall be made to each nondefaulting Partner in the proportion that its Partner's Percentage bears to the Partner's Percentage of the nondefaulting Partner(s). 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 Construction Project Manager, during construction of Phase II or the designated Operator thereafter, 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 Construction Project Manager, during construction of Phase II or the designated Operator thereafter, 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), and other information as may be requested by the Management Committee 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 Management Committee will direct the appropriate entity to 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 D 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. Miscellaneous Agreements between KN and Questar. The Partners agree upon the following contractual arrangements for ownership of Phase I and Phase II of the Project, as are set forth in the June 27 Agreement and the June 30 Agreement. These agreements are incorporated into this Agreement. To the extent that there are conflicting provisions in the June 27 Agreement, the June 30 Agreement and this Agreement, this Agreement shall control. 10.1 Purchase of El Paso's Phase II Interest. Notwithstanding anything to the contrary in this Agreement, the June 27 Agreement or the June 30 Agreement, on the in-service date of Phase II of the Project, KN and Questar shall each pay El Paso 50% of the balance of El Paso's then-remaining net book value of Phase II that is currently estimated to be approximately $2,026,000. 10.2 Purchase by Questar of El Paso's Phase I Interest in TransColorado. Notwithstanding anything to the contrary in this Agreement, the June 27 Agreement or the June 30 Agreement, or any contrary provisions of the TransColorado Project-Phase I Construction, Ownership and Operation Agreement dated April 18, 1996, (April 18, 1996, Agreement), on the in-service date of Phase II of the Project, Questar will pay to El Paso 100% of El Paso's then net book value of Phase I and will assume 100% of El Paso's financial obligations in connection with Phase I, currently estimated to total approximately $8,000,000, El Paso and El Paso Energy Corporation have agreed to continue to be responsible for performing their obligations under the Revolving Credit Agreement between TransColorado Gas Transmission Company and Credit Lyonnais dated July 19, 1996, until the obligations are assumed by Questar on the in-service date of Phase II. KN shall be allocated all net profits from Phase I, paid by cash disbursements, until the in-service date of Phase II. Upon the in-service date of Phase II, the assets and operations of Phase I will be consolidated with those of Phase II. Thereafter, net profits from Phase I shall be combined with those from Phase II and allocated in the same manner as is set forth in section 6.2. 10.3 Election to sell. Notwithstanding anything to the contrary in this Agreement, the June 27 Agreement or the June 30 Agreement, Questar, beginning 24 months after the in-service date of Phase II of the Project, will have a 12-month period (Purchase Period) in which it may, on its own election, sell to KN its Partnership interest in the Project at an amount equal to Questar's Partnership interest percentage, at that time, of TransColorado's book equity, including net working capital (Questar's Equity). KN may negotiate with any other Partner to allow it to acquire a portion of Questar's Partnership interest. If no other Partner negotiates successfully with KN to purchase a portion of Questar's Partnership interest, then KN will be obligated to purchase all of Questar's Partnership interest. Further, if Questar elects to sell its interest in the TransColorado Partnership to KN and any additional Partners during the Purchase Period, KN and any other Partner who negotiates successfully to purchase Questar's interest in the Project will either assume or refinance all TransColorado Partnership debt within the 90-day time frame established to purchase Questar's Equity as is set forth in subsection 10.4 of this Agreement and will be solely liable and obligated for any TransColorado Partnership debt assumed or refinanced. 10.4 Notice and Payment. Notwithstanding anything to the contrary in this Agreement, the June 27 Agreement or the June 30 Agreement, Questar may give written notice to the other Partners to this Agreement beginning 90 days prior to the Purchase Period up until the final day of the Purchase Period of Questar's election to sell its interest in TransColorado to KN and any other Partner who has negotiated successfully to purchase a portion of Questar's Partnership interest with KN. Upon receiving written notice from Questar that it elects to sell its Partnership interest in TransColorado, KN and any other Partner who has negotiated successfully with KN to acquire a portion of Questar's Partnership interest (Purchasing Partners), shall purchase Questar's Partnership interest in TransColorado and pay to Questar, within 90 days by wire transfer to a bank account designated by Questar, the value of Questar's Equity in the Project. 10.5 Permanent Release of Capacity by Questar. If Questar elects to exercise its option to sell its Partnership interest to KN and/or the Purchasing Partners pursuant to this Agreement, Questar or any affiliate, subsidiary or parent holding firm transportation capacity (Questar Capacity Holder) on the Project that was acquired to fulfill the terms and conditions of the November 13, 1997, agreement between TransColorado Gas Transmission Company and Enron Pipeline Company, attached as Exhibit E to this Agreement, the Questar Capacity Holder may then reduce that firm transportation contract demand on TransColorado by an amount equal to the firm transportation capacity held by it that is not at that time under capacity release contract to other shippers without any further liability to TransColorado for any reservation charges, reservation surcharges, or any other charges associated with the capacity returned to TransColorado. Thereafter as each capacity release contract is terminated, the Questar Capacity Holder may further reduce its firm transportation contract demand by the amount of the expiring capacity release contracts without any further liability to TransColorado for any reservation charges, reservation surcharges, or any other charges associated with the capacity returned to TransColorado. 10.6 Indemnification upon election. Notwithstanding anything to the contrary in this Agreement, the June 27 Agreement or the June 30 Agreement, if during the Purchase Period Questar elects to sell its Partnership interest in the Project to the Purchasing Partners, then the Purchasing Partners will defend, indemnify and hold Questar, Questar Pipeline and their respective officers, directors, employees, agents, parent companies, Affiliates and subsidiaries, harmless against all claims, damages (including consequential damages), judgments, causes of action, legal liability, attorneys' fees, accountants' fees and court costs and all costs of debt, including, but not limited to, interest and principal arising out of, in connection with, or in any way related to the Project, whether fixed, occurring or coming due, before or after Questar's notice to Purchasing Partners to sell its Partnership interest to Purchasing Partners during the Purchase Period, except for those claims, damages, judgments, causes of action, legal liability, attorneys' fees, accountants' fees, court costs and costs of debt, that are due to the gross negligence, recklessness or intentional misconduct of Questar, Questar Pipeline and their respective officers, directors, employees, agents, parent companies, Affiliates and subsidiaries. Further, this indemnification survives this Agreement and shall exist until the end of the applicable statute of limitations period. 10.7 Indemnification for Past Acts of KN and Questar. KN and Questar agree to indemnify each other for past acts as follows: 10.7.1 Notwithstanding anything to the contrary in this Agreement, the June 27 Agreement or the June 30 Agreement, KN will defend, indemnify and hold TransColorado, Questar and Questar Pipeline and their respective officers, directors, employees, agents, parent companies, Affiliates and subsidiaries, harmless against all claims, damages (including consequential damages), judgments, causes of action, legal liability, attorneys' fees, accountants' fees and court costs to any Person arising out of or in connection with any work performed by KN and its contractors, agents or Affiliates, prior to the date of this Agreement, and for any obligations incurred by KN and its contractors, agents and Affiliates, prior to the date of this Agreement, on the Project that have not been authorized by the Management Committee and have not been specifically ratified or assumed by Questar. Further, this indemnification survives this Agreement and shall exist until the end of the applicable statute of limitations period. 10.7.2 Notwithstanding anything to the contrary in this Agreement, the June 27 Agreement or the June 30 Agreement, Questar will defend, indemnify and hold TransColorado and KN and their respective officers, directors, employees, agents, parent companies, Affiliates and subsidiaries, harmless against all claims, damages (including consequential damages), judgments, causes of action, legal liability, attorneys' fees, accountants' fees and court costs to any Person arising out of or in connection with any work performed by Questar and its contractors, agents or Affiliates, prior to the date of this Agreement, and for any obligations incurred by Questar and its contractors, agents and Affiliates, prior to the date of this Agreement, on the Project that have not been authorized by the Management Committee and have not been specifically ratified or assumed by KN. Further, this indemnification survives this Agreement and shall exist until the end of the applicable statute of limitations period. 11. Default. 11.1 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 member(s) 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 14.3.2. A Defaulting Partner shall be liable to the Partnership and the other Partner(s) for all losses, damages and expenses sustained or incurred by the Partnership or the Partner(s) as a result of the Default. 11.2 Action by Management Committee. In the event of Default, the member(s) of the Management Committee representing the nondefaulting Partner(s) shall promptly vote on a course of action to be taken, which may include requiring (all of) the nondefaulting Partner(s) to make Capital Contributions or lend funds to the Partnership proportionate to each then-existing Partner' Percentage in a total amount equal to the amount of the Default. 11.3 Sale of Defaulting Partner's Interest. If any Default continues for more than 60 consecutive days, the nondefaulting Partner(s) shall have the right to purchase equal percentages of the Defaulting Partner's Partnership interest. If the nondefaulting Partner(s) elect(s) not to purchase equal percentages of such Partnership interest, upon unanimous approval of the nondefaulting Partner(s), 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 Partner(s) cannot reach unanimous agreement on the sale of the Defaulting Partner's Partnership interest in unequal percentages to the nondefaulting Partner(s) 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. 11.4 Price for Nondefaulting Partners. The price payable by the nondefaulting Partner(s) for the Defaulting Partner's Partnership interest shall be the lesser of: (a) the fair market value of the Partnership interest, as determined by an independent third-party valuation, 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 more of the nondefaulting Partner(s) shall be paid to the Partnership and applied first in an amount equal to any losses, damages or expenses, including attorneys' 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 attorneys' fees, incurred by such Partner as a result of the Default. Any remaining proceeds shall be paid to the Defaulting Partner. 11.5 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 an independent third-party valuation. 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 attorneys' fees, sustained or incurred by the Partnership as a result of the Default; (b) to any nondefaulting Partner to the extent of any losses, damages or expenses, including attorneys' 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 total of the Partner's Percentage of all the nondefaulting Partner(s). 11.6 Additional Remedies. Nothing in section 11 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 11, or from pursuing any other remedies that may be available in law or equity. The nondefaulting Partner(s) may place a lien on the future cash distributions to a Partner who was in Default to recover their losses, damages and expenses. 11.7 Continuation of Partnership. If a Defaulting Partner's interest in the Partnership is assigned to a third Person or purchased by the nondefaulting Partner(s), the Partnership shall not be dissolved and shall continue to carry out the business of the Partnership. If the nondefaulting Partner(s) purchase(s) 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. 11.8 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 11. 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 Partner(s) was (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 attorneys' 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 attorneys' fees, sustained or incurred by the Partner as a result of the Default, excluding any amounts described in (a) and (b). 11.9 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. 12. Sale, Transfer or Pledge of Partnership Interest. Except with the unanimous consent of the Management Committee, or as permitted by section 12.2 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. 12.1 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 Partner(s), and subject to the following provisions. 12.1.1 If a Partner wishes to sell some or all of its interest in the Partnership, it shall notify the other Partner(s) to allow it (them) to purchase the selling Partner's interest. If more than one Partner desires to purchase a selling Partner's interest, then such sale shall be on a pro rata basis based on the Partner's Percentage of the acquiring Partners. If no Partner(s) express(es) interest within 30 days to purchase the selling Partner's interest, the selling Partner shall submit to the Management Committee a notice of intent to sell containing a list of proposed buyers unaffiliated with any Partner(s). 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 13. 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. 12.1.2 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 Partner(s) a right of first refusal to purchase the interest on the same terms and conditions. The remaining Partner(s) shall have 30 days from the date each Partner receives the offer to exercise their right of first refusal. 12.1.3 If the remaining Partner(s) elects 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 Partner(s). 12.2 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: 12.2.1The 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 transfer 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. 12.2.2 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. 12.3 Effect of Permitted Transfers or Withdrawals. No assignment, pledge or other transfer or withdrawal pursuant to section 13 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 12.2.1. 12.4 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 Partner may have against the Partner making the prohibited transfer. 13. 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 Partner(s). If any Partner gives notice of withdrawal from the Partnership, the following provisions shall apply. 13.1 Purchase by Partners. The remaining Partner(s) shall decide whether to purchase the interest of a withdrawing Partner. Unless the remaining Partner(s) unanimously agree(s) otherwise, each remaining Partner shall purchase equal percentages of the Partnership interest at the price provided for in section 13.4. If the remaining Partner(s) unanimously agree(s) to purchase unequal percentages of the withdrawing Partner's Partnership interest, the new interest(s) shall be reflected by appropriate adjustments to the Capital Account(s), Partner's Percentage and voting rights on the Management Committee of each remaining Partner(s). 13.2 Sale to Third Party. If the remaining Partner(s) does (do) not purchase the Partnership interest, by unanimous vote the remaining Partner(s) 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 13.4. 13.3 Need to Agree. If the remaining Partner(s) of the Management Committee does (do) not unanimously agree either to purchase the withdrawing Partner's Partnership interest or to permit its assignment, the Partnership shall be dissolved. 13.4 Price of Partnership Interest. Unless otherwise agreed, the price to be paid to any withdrawing Partner by the remaining Partner as consideration for the transfer of its interest in the Partnership shall be the amount contained in the withdrawing Partner's Capital Account. 14. Dissolution of the Partnership. Voluntary and involuntary dissolution of the Partnership shall be governed by this section. 14.1 Voluntary Dissolution. 14.1.1 After the initial term of the Agreement, any Partner may elect to dissolve the Partnership and terminate this Agreement by giving the other Partner(s) written notice of such election not less than 1 year prior to the date the termination is to take place. 14.1.2 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. 14.1.3 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. 14.2 Automatic Dissolution. The Partnership shall automatically and without notice be dissolved upon the happening of any of the following events: 14.2.1 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); 14.2.2 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; 14.2.3 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; 14.2.4 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; 14.2.5 The sale or abandonment of all or substantially all of the Partnership's business and assets; 14.2.6 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 14.2.7 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. 14.3 Winding Up and Liquidation. If the Partnership is dissolved pursuant to the provisions of section 14, 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: 14.3.1 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 14.3.1, that Partner shall be required to contribute sufficient cash to the Partnership to eliminate the deficit. 14.3.2 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 14.3.1. 14.3.3 No termination or dissolution shall deprive any Partner not in Default of any remedy otherwise available to it. 14.4 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 14 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. 15. Limitation of Liabilities and Litigation. 15.1 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. 5.2 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. 15.3 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. 16. Representations and Warranties of the Partners. Each Partner represents, warrants and agrees that: 16.1 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. 16.2 It will not voluntarily cause a dissolution or termination of the Partnership by failure to maintain its corporate existence; 16.3 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 16.4 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. 17. Miscellaneous Provisions. 17.1 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. KN TransColorado, Inc. Questar TransColorado, Inc. P.O. Box 281304 P.O. Box 45433 370 Van Gordon Street 180 East 100 South Lakewood, CO 80228-8340 Salt Lake City, UT 84145-0433 Attn: Vice President Attn: Vice President and General Manager Telephone: (303) 989-1740 Telephone: (801) 324-2551 Fax: (303) 989-0368 Fax: (801) 324-2678 17.2 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 decisions, orders and regulations of governmental authorities having jurisdiction shall control. 17.3 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. 17.4 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 12.2, if any Partner is added to the Partnership for any reason, this Agreement will be amended to add the Partner as a Party. 17.5 Choice of Law. This Agreement and the Partnership shall be governed by and interpreted in accordance with the laws of Colorado. 17.6 Headings. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 17.7 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. 17.8 Attorneys' 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 attorneys' fees in the litigation. 17.9 Entire Agreement and Termination of Prior Agreements. This Agreement, amended and restated July 1, 1997, constitutes the agreement between the Partners concerning its subject matter and supersedes any prior understanding or written or oral agreements concerning the subject matter, with the exception of the June 30 Agreement. This Agreement incorporates within all provisions of the June 27 Agreement. The Project Agreement dated March 19, 1990, and the letters of intent dated August 18, 1989, and February 9, 1990, among the Partners were terminated as of the effective date of the amended and restated September 25, 1995, Partnership Agreement. 17.10 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. KN Transcolorado, Inc. By: ______________________________________ H. Rickey Wells, Vice President Questar TransColorado, Inc. By: ______________________________________ D. N. Rose, President and Chief Executive Officer Date: _____________ 1997 Partnership Agreement between KN TransColorado, Inc., and Questar TransColorado, Inc. As Amended and Restated JULY 1, 1997 EXHIBIT B PARTNERSHIP ASSIGNMENT AND DUTIES Questar: Construction Project Manager. Regulatory Affairs Accounting Tax Matters KN: Finance Marketing EX-22 4 Exhibit 22 SUBSIDIARY INFORMATION Registrant Questar Pipeline Company has one subsidiary, Questar TransColorado, Inc., which is a Utah corporation. EX-24 5 Exhibit 24 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 1997 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 1997 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 2-10-98 R. D. Cash /s/ D. N. Rose President & Chief 2-10-98 D. N. Rose Executive Officer /s/ U. E. Garrison Director 2-10-98 U. E. Garrison /s/ Marilyn S. Kite Director 2-10-98 Marilyn S. Kite /s/ Scott S. Parker Director 2-10-98 Scott S. Parker EX-27 6
5 The following schedule contains summarized information extracted from the Questar Pipeline Company Balance Sheet and Income Statement for the period ended December 31, 1997, and is qualified in its entirety to such audited financial statements. 1,000 12-MOS DEC-31-1997 DEC-31-1997 7,075 0 10,851 0 2,303 22,264 580,603 202,427 437,564 45,869 134,563 0 0 6,551 183,760 437,564 0 105,437 0 37,334 17,613 0 13,536 42,906 16,338 26,568 0 0 0 26,568 0 0
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