10-K 1 a2074934z10-k.txt FORM 10-K ================================================================================ 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, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File No. 0-14147 QUESTAR PIPELINE COMPANY -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) State of Utah 87-0307414 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 180 East 100 South, P.O. Box 45360, Salt Lake City, Utah 84145-0360 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (801) 324-5555 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933: Medium Term Notes, Series A, 5.85% to 7.55% due 2008 to 2018 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / State the aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 1, 2002. $0. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 1, 2002: 6,550,843 shares of Common Stock, $1.00 par value. (All shares are owned by Questar Regulated Services Company.) Registrant meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K Report with the reduced disclosure format. ================================================================================ TABLE OF CONTENTS
Heading Page ------- ---- PART I Items 1. and 2. BUSINESS AND PROPERTIES............................................ 1 General.......................................................... 1 Transmission System.............................................. 2 Transportation Service........................................... 4 Storage/Processing............................................... 4 New Projects..................................................... 5 Regulation....................................................... 6 Competition...................................................... 7 Employees........................................................ 7 Relationships with Affiliates.................................... 8 Item 3. LEGAL PROCEEDINGS.................................................. 8 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 9 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS.. 9 Item 6. (Omitted).......................................................... 9 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION....................... 10 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......... 14 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................... 15 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................... 15 i PART III Items 10-13. (Omitted).......................................................... 15 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................................ 15 SIGNATURES................................................................... 33
ii FORM 10-K ANNUAL REPORT, 2001 PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES. GENERAL Questar Pipeline Company ("Questar Pipeline" or the "Company") is an interstate pipeline company that transports natural gas in the Rocky Mountain states of Utah, Wyoming, and Colorado, and provides storage services in Utah and Wyoming. The Company is an affiliate of Questar Corporation ("Questar"), a diversified 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. Questar Pipeline, as an open-access pipeline, transports gas for affiliated and unaffiliated customers. It also owns and operates the Clay Basin storage facility, which is a large underground storage project in northeastern Utah, and other underground storage operations in Utah and Wyoming. The Company, through a subsidiary, also owns and operates a processing plant. Questar Pipeline is involved in two partnerships, Overthrust Pipeline Company ("Overthrust"), and TransColorado Gas Transmission Company ("TransColorado"). Questar Pipeline is a wholly owned subsidiary of Questar Regulated Services Company ("Regulated Services"), which is a subholding company under Questar. Other entities within the Regulated Services group include Questar Gas Company ("Questar Gas"), a local distribution company, and Questar Energy Services, Inc. ("QES"), an entity created to market additional energy-related services and products. All Regulated Services companies are managed by a common group of officers, which increases administrative efficiency. The Company has significant business relationships with its affiliates, particularly Questar Gas. Questar Gas has reserved approximately 849,000 decatherms ("Dth") per day of firm transportation capacity on Questar Pipeline's transmission system to serve the needs of its 731,900 customers in Utah, southwestern Wyoming, and southeastern Idaho, (A Dth is the amount of heat energy equal to 10 therms or one million British thermal units ("Btu")). Questar Gas also contracts for additional capacity during the heating season and had 50,000 Dth per day during the period from December 1, 2001 to February 28, 2002. Questar Gas has also contracted for firm storage capacity available at Clay Basin and has storage contracts at the smaller peaking storage reservoirs. Through a subsidiary, Questar Pipeline has a processing plant that extracts carbon dioxide from gas volumes delivered to Questar Gas. Questar Pipeline transports natural gas owned by Questar Gas and produced from properties operated by Wexpro Company ("Wexpro"), another affiliate, as well as natural gas volumes purchased directly by Questar Gas from field producers and other suppliers. The Company also transports volumes that are marketed by Questar Energy Trading Company ("Questar Energy Trading"), another affiliated entity. The following diagram sets forth the corporate structure of the Company and certain affiliates: Questar Corporation | ------------------------------------------------------------------------- | | | Questar Questar Questar Market Regulated InfoComm, Resources, Services Inc. Inc. Company | | | ----------------------|---------------------- | | | | | Questar QUESTAR Questar | Gas PIPELINE Energy | Company COMPANY Services, | Inc. | | | --------------------------------------------- | | | | | Questar Questar Questar | Transpor- Southern TransColo | tation Trails rado, Inc. | Servcies Pipeline | Company Company | --------------------------------------------------------------------------- | | | | Wexpro Other QMR Questar Questar Gas Company Entities Energy Management (Questar Exploration Trading Company and Production Company, Shenandoah Energy Inc.) The major activities of Questar Pipeline are described in more detail below: TRANSMISSION SYSTEM The Company's core transmission system is strategically located in the Rocky Mountains near large reserves of natural gas. It is referred to as a "hub and spoke" system, rather than a "long-line" pipeline, because of its physical configuration, multiple interconnections to other interstate pipeline systems, and access to major producing areas. Questar Pipeline's transmission system has connections with the pipeline systems of Colorado Interstate Gas Company ("CIG"); the middle segment of the Trailblazer Pipeline System ("Trailblazer") owned by Wyoming Interstate Company, Ltd. ("WIC"); The Williams Companies Inc. ("Williams"), including Kern River Gas Transmission Company ("Kern River"); TransColorado; and Overthrust. These connections have opened markets outside Questar Gas's service area for the Company and allow it to transport gas for others. -2- The Company's transmission system includes 1,840 miles of transmission lines that link various producers of natural gas with Questar Gas's distribution facilities in Utah and Wyoming and interconnect with other pipelines. (This total transmission mileage includes pipelines associated with the Company's storage fields and tap lines. It does not include the systems in which the Company has a partnership interest or Southern Trails line.) 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 link between the two systems is provided by the Company's line that runs from its Kanda/Coleman compressor station on the northern segment to its Clay Basin storage reservoir and then on to its Fidlar compressor station on the southern system. 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 currently has a 90 percent interest in and is the operating partner of Overthrust, a general partnership that was organized in 1979 to construct, own, and operate the Overthrust segment of Trailblazer. (The ownership percentage was recently increased from 72 percent.) Trailblazer is a major 800-mile pipeline system that transports gas from producing areas in the Rocky Mountains to the Midwest. The 88-mile Overthrust segment is the western-most segment in Trailblazer's system. Questar TransColorado, Inc., which is a subsidiary of Questar Pipeline, and KN TransColorado, Inc., a subsidiary of Kinder Morgan, Inc. (formerly KN Energy) each have a 50 percent interest in the TransColorado pipeline project. The Company's ownership interest in the project is subject to a complex lawsuit that is described under "Legal Proceedings" later in this Report. The pipeline, which was completed March 31, 1999, was built to transport gas from the Rocky Mountain area that was traditionally priced lower than other gas supplies to California and Midwestern markets through interconnections with major pipeline systems. The pipeline originates at a point on Questar Pipeline's system 25 miles east of Rangely in northwestern Colorado and extends 292 miles to the Blanco hub in northwestern New Mexico. In its first three years of operations, TransColorado incurred significant losses because basis differentials, which reflect gas prices in different producing basins, were not sufficient to encourage producers and market aggregators to transport volumes on the line. The Company wrote down its investment in TransColorado at year-end 1999 and has been recording operating losses in TransColorado since April 1, 2001, pending the outcome of the litigation and its ability to sell its interest to its partner. 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 -3- at the complex. In addition, both of CIG's Wyoming pipelines and the WIC segment are connected to the complex. TRANSPORTATION SERVICE Questar Pipeline's largest single transportation customer is its affiliate, Questar Gas. During 2001, the Company transported 110.3 million decatherms ("MMDth") for Questar Gas, compared to 108.2 MMDth in 2000. These transportation volumes include Questar Gas's cost-of-service gas produced by Wexpro and volumes purchased by Questar Gas directly from field producers and other suppliers. Questar Gas has reserved firm transportation capacity of about 849,000 Dth per day on an annual basis, or about 60 percent of the Company's reserved capacity, and has reserved an additional 50,000 Dth per day during the months of December, January and February. The Company's primary transportation agreement with Questar Gas was recently extended and expires June 30, 2017. Questar Gas paid an annual reservation charge of approximately $52.1 million to the Company in 2001, 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. The Company recovers approximately 95 percent of its transmission cost of service through reservation charges from firm transportation customers. In other words, these customers pay primarily for access to transportation capacity. Consequently, the Company's throughput volumes do not have a significant effect on its short-term operating results. Questar Pipeline's transportation revenues are not significantly affected by fluctuating demand based on the vagaries of weather or gas prices. The Company's revenues would vary with throughput if the FERC changes its basic regulatory scheme of "straight fixed-variable" rates. The Company's total system throughput increased from 275.2 MMDth in 2000 to 312.8 MMDth in 2001. Questar Pipeline increased the volumes it transports for nonaffiliated customers from 158.6 MMDth in 2000 to 195.6 MMDth in 2001. Questar Pipeline's transmission system is an open-access system and has been since September of 1988. The Company's tariff provisions require it to transport gas on a nondiscriminatory basis when it has available transportation capacity. The Company does have opportunities for interruptible transportation services. STORAGE/PROCESSING Questar Pipeline's Clay Basin storage facility in northeastern Utah is the largest underground storage reservoir in the Rocky Mountains. The facility has a total capacity of 117.5 Bcf. Clay Basin has been operational since 1977 and has been successfully expanded several times. Clay Basin's firm storage capacity is fully subscribed by customers under long-term agreements. Questar Gas currently has 13.4 MMDth of working gas capacity at Clay Basin. Other large customers include Williams; Puget Sound Energy Company, a distribution utility in the state of Washington; and Duke Energy Trading and Marketing L.L.C. Storage service is important to distribution companies that -4- need to match annual gas purchases with fluctuating customer demand, improve service reliability, and avoid imbalance penalties. Questar Pipeline offers interruptible storage service at Clay Basin and also allows firm storage service customers the right to release their injection and withdrawal rights to other parties. Questar Pipeline has proposed using a salt formation located near Evanston, Wyoming, for the first salt-cavern storage project located in the Rocky Mountain region. Current plans envision four potential caverns, which are formed through water leeching techniques, that would each contain 2.5 Bcf of working gas and that could be cycled 10-12 times per year. The Company is currently completing a well that will provide additional engineering data and is soliciting customer support. Depending on market support and regulatory approval, some salt-cavern storage operations could be effective by the end of 2004. The Company also owns and operates three smaller storage reservoirs. These projects were developed specifically to serve Questar Gas's needs, and Questar Gas reserves 100 percent of their working gas capacity. These small reservoirs are used primarily to supplement Questar Gas's gas supply needs on peak-demand days. The Company's storage facilities are certificated by the FERC, and its rates for storage service (based on operating costs and investment in plant plus an allowed rate of return) are subject to approval by the FERC. Through its subsidiary--Questar Transportation Services Company--Questar Pipeline also owns gathering lines and a processing plant near Price, Utah, that removes carbon dioxide from coalbed methane gas in order to raise the Btu content enough to be safely and efficiently used in appliances in Questar Gas's service area. The plant began operating in June of 1999. NEW PROJECTS In November of 2001, the Company completed its Main Line 104 project, which is 77 miles in length and 24 inches in diameter. The line extends from Price, Utah, near the Ferron area of coalbed methane gas, to Questar Gas's system at Payson, Utah, and the Kern River line near Elberta, Utah. Questar Gas has contracted for 50,000 Dth of capacity on the new line all year long and 50,000 Dth of additional capacity during the heating-season months of December, January and February. This additional capacity allows Questar Gas to have additional firm capacity to meet its long-term needs. Questar Pipeline, through a subsidiary, has begun converting the 490-mile eastern segment of the Southern Trails line that runs from the Blanco hub area in the San Juan Basin to multiple delivery points near the California state line. The conversion process includes adding four new compressor stations, installing additional receipt and delivery connections, and building a line to the TransColorado pipeline. The segment's daily capacity of 80,000 Dth is fully subscribed under long-term transportation contracts. The line is expected to be in service by mid-2002. Regulatory and marketing constraints have prevented the Company from developing the 210-mile western segment of Southern Trails that runs from the California border to Long Beach. Specifically, the California Public Utilities Commission (the "CPUC") has proposed a new peaking rate that penalizes new gas-fired power plants that elect to receive lower-cost gas supplies available from -5- pipelines such as Southern Trails while continuing to receive some services from the local California utility. The proposal would also subject such power plants to more restrictive balancing services than captive customers and would require them to pay more for interruptible service than plants located in other parts of California. While continuing to aggressively pursue natural gas markets on the California portion of Southern Trails, the Company is exploring options for the western segment, including sale or alternative uses. Questar Pipeline intends to offer specified hub services such as "parking," and "loaning" effective May 1, 2002. It plans to install an additional compressor at Clay Basin to facilitate such services and has filed the necessary tariff revisions with the FERC. The Company has introduced the concept of hub services to customers and believes that its central location, connections to multiple lines, and the accessibility of storage capacity will enable it to increase the load factor of its lines and increase its revenues by offering such services. REGULATION 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 2002. 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. Questar Pipeline and its affiliates in the Regulated Services group have actively opposed certain portions of the FERC's efforts to broaden the scope of its regulations that are currently limited to "marketing affiliates." The FERC issued a Notice of Proposed Rulemaking ("NOPR") in September of 2001, in which it proposed rules that would require pipelines to comply with certain "nondiscriminatory" standards when dealing with "energy company affiliates," a term that was broadly defined to pick up local distribution companies such as Questar Gas. At the current time, local distribution company affiliates, such as Questar Gas, that do not engage in unregulated gas sales are exempt from the FERC's standards. The Company believes that the current exemption should be continued. If adopted, the FERC's proposed rules would diminish the Company's operational efficiencies and increase its costs because QRS provides gas control, administrative, engineering, technical, accounting, legal, and regulatory services to both Questar Pipeline and Questar Gas. The Company is also required to comply with the FERC's Order No. 637 that requires it, among other things, to offer capacity segmentation to its transportation customers. Given its configuration as a hub- and spoke-pipeline, rather than as a long line, Questar Pipeline has argued that traditional segmentation would reduce shippers' flexibility to use their capacity on its system and would negatively affect its own throughput capacity. The FERC denied the Company's request of a waiver, but has acknowledged that segmentation should be implemented in a fashion that does not negatively impact firm-capacity customers. Questar Pipeline has until May 15, 2002, to file tariff provisions that comply -6- with the segmentation portion of Order No. 637. The Company has also filed a request for rehearing of the FERC's decision denying its request for a waiver from segmentation. Under the Natural Gas Pipeline Safety Act of 1968, as amended, the Company is subject to the jurisdiction of the Department of Transportation ("DOT") with respect to safety requirements in the design, construction, operation and maintenance of its transmission and storage facilities. The Company also complies with the DOT's drug and alcohol testing regulations. In addition to the regulations discussed above, Questar Pipeline's activities in connection with the operation and construction of pipelines and other facilities for transporting or storing natural gas are subject to extensive environmental regulation by state and federal authorities, including state air quality control boards, the Bureau of Land Management, the Forest Service, the Corps of Engineers, and the Environmental Protection Agency. These compliance activities increase the cost of planning, designing, installing and operating facilities. COMPETITION Questar Pipeline extended its footprint to other parts of the western United States by participating in the TransColorado pipeline project and purchasing the Southern Trails line. There are market risks associated with these projects, as evidenced by Questar Pipeline's decision to write down its investment in TransColorado. Questar Pipeline's efforts to complete the Southern Trails conversion are affected by its ability to obtain market support and by the local regulation and political climate in California. Competition for Questar Pipeline's transportation and storage services has intensified in recent years. Regulatory changes have significantly increased customer flexibility. The Company actively competes with other interstate pipelines for transportation volumes throughout the Rocky Mountain region. The Company has two key assets that contribute to its continued success. It has a strategically located and integrated, low-cost 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, which has been expanded in response to interest from customers and is fully subscribed by firm-service customers under contracts that are generally long-term in nature. The Company's announced projects to build a salt-cavern storage project and to offer hub services capitalize on these assets. EMPLOYEES As of December 31, 2001, the Company and a wholly owned subsidiary had 145 employees, compared to the 108 employees as of year-end 2000. Regulated Services, the Company's parent, had 361 employees at year-end 2001, compared to 358 at year-end 2000, who perform specified services for Questar Pipeline, and other members of the group. 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. -7- 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 9 of the Consolidated Financial Statements included under Item 14 of this Report for additional information concerning transactions between the Company and its affiliates. The Company obtains data processing and communication services from an affiliate, Questar InfoComm Inc. Regulated Services, the Company's parent, has employees who perform administrative, engineering, accounting, marketing, budget, tax, and legal services for all entities within it, including Questar Pipeline. Questar also provides certain administrative services--governmental affairs, financial, and audit--to the Company and other members of the consolidated group. A proportionate share of the costs associated with such services is directly billed or allocated to Questar Pipeline. ITEM 3. LEGAL PROCEEDINGS. There are various legal proceedings pending against the Company. Although it is too early to estimate the outcome of the various cases filed against Questar Pipeline and its affiliates, management believes that the outcome of these cases will not have a material adverse effect on the Company's financial position or liquidity. Significant cases are discussed below. TRANSCOLORADO. Questar TransColorado, Inc. ("QTC"), a subsidiary of Questar Pipeline, owns a 50 percent interest in the TransColorado Gas Transmission Company ("TransColorado), which is the partnership that built and operates the TransColorado pipeline project. QTC and its partner, KN TransColorado, Inc. ("KNTC") are involved in a complex lawsuit that is pending in a state district court in Colorado. At center stage in the lawsuit is the validity of a contractual right claimed by QTC to sell its 50 percent interest in TransColorado to KNTC during the 12-month period beginning March 31, 2001. KNTC originally filed the lawsuit in June of 2000 alleging that Questar Pipeline and its affiliates breached their fiduciary duties to TransColorado and KNTC by developing a plan to construct and operate a new pipeline (this project--Main Line 104--is described under the section "New Projects") that would compete with TransColorado, rendering it economically unviable. KNTC is seeking at least $150 million plus punitive damages, a declaratory judgment that KNTC's obligation to purchase QTC's interest in the project be declared void and unenforceable, and a dissolution of the partnership under Colorado law. QTC and its affiliates subsequently filed a counterclaim against KNTC and its named affiliates, including Kinder Morgan, Inc., seeking a declaratory judgment that its contractual right to sell its interest to Kinder Morgan is binding and enforceable and damages of at least $185 million. The parties have entered into a standstill agreement that preserves the claims made by both parties pending the resolution of the litigation. On December 31, 2000, QTC gave notice of its election to exercise its contractual right to sell its 50 percent interest in TransColorado to KNTC, subject to the standstill agreement. A trial before the judge is scheduled to begin April 1, 2002. -8- GRYNBERG. Questar affiliates, including the Company, are named defendants in a lawsuit filed by an independent producer (Grynberg) under the Federal False Claims Act. This case is substantially similar to other cases filed by Grynberg against pipelines and their affiliates have been consolidated for discovery and pre-trial motions in Wyoming's federal district court. The cases involve allegations of industry-wide mismeasurement and undervaluation of gas volumes on which royalty payments are due the federal government. The complaint seeks treble damages and imposition of civil penalties. The federal district judge denied the motions filed by the defendants to dismiss the lawsuits, but has not set a date for a scheduling conference. A second case involving Grynberg is currently on appeal before the Utah Supreme Court. The case was dismissed by a Utah state court judge after he granted the motion for summary judgment filed by the Questar parties. Grynberg claims that Questar Pipeline, Questar Gas Management Company and Questar Energy Trading Company mismeasured gas volumes attributable to his working interest in specified wells located in southwestern Wyoming. He cites mismeasurement to support claims for breach of contract, negligent misrepresentation, fraud, breach of fiduciary responsibilities and related causes. GAS PIPELINES. The Company and other Questar affiliates are among the numerous defendants in this case, which is currently styled as WILL PRICE V. GAS PIPELINES but was formerly known as QUINQUE OPERATING COMPANY V. GAS PIPELINES, that has been filed against the pipeline industry. Pending in a Kansas state district court, this case is similar to the cases filed by Grynberg, but the allegations of a conspiracy by the pipeline industry to set standards that result in the systematic mismeasurement of natural gas volumes and resulting underpayment of royalties are made on behalf of private and state lessors, rather than on behalf of the federal government. The defendants, including the Questar defendants, have filed motions to dismiss for lack of personal jurisdiction. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matters to a vote of its stockholder during the last quarter of 2001. 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. -9- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Questar Pipeline conducts natural gas transmission, storage and processing operations. Following is a summary of financial results and operating information:
Year Ended December 31, 2001 2000 1999 ------------------------------------------ (In Thousands) OPERATING INCOME Revenues Transportation $ 77,002 $ 72,547 $ 69,885 Storage 37,828 37,711 37,647 Processing 7,543 6,763 3,570 Other 2,520 2,055 1,058 ------------------------------------------ Total revenues 124,893 119,076 112,160 Operating expenses Operating and maintenance 47,244 43,761 38,534 Depreciation and amortization 15,407 15,391 16,743 Other taxes 2,920 3,071 2,488 ------------------------------------------ Total operating expenses 65,571 62,223 57,765 ------------------------------------------ Operating income $ 59,322 $ 56,853 $ 54,395 ========================================== OPERATING STATISTICS Natural gas transportation volumes (in Mdth) For unaffiliated customers 195,610 158,604 135,886 For Questar Gas 110,259 108,183 105,499 For other affiliated customers 6,892 8,370 12,153 ------------------------------------------ Total transportation 312,761 275,157 253,538 ========================================== Transportation revenue (per dth) $ 0.25 $ 0.26 $ 0.28 Clay Basin storage, working gas- capacity (in Bcf) 51.3 51.3 51.3
REVENUES Transportation volumes rose 14% in 2001 to reach 313 million dth after posting a 9% increase to 275 million dth in 2000. Not only are the volumes of gas transportation increasing, but the proportion of firm volumes to interruptible volumes is increasing. Firm transportation volumes, whose customers pay a fixed rate to reserve a portion of pipeline capacity, increased to 94% of the total in 2001 compared with 92% the previous year. The increase in firm transportation reflects a growing demand for gas for power generation and growing pipeline capacity. Main Line 104, a 77 mile extension in central Utah with a 272,000 dth per day capacity, began operations in November 2001 and is fully subscribed. As of December 31, 2001, approximately 77% of Questar Pipeline's transportation system was reserved by firm transportation customers under contracts with varying terms and lengths. Questar Gas continues to be Questar Pipeline's single largest transportation customer accounting for 70% of the demand charges collected. Questar Gas has reserved transportation capacity of 899,000 dth per day, -10- representing 61% of the total reserved daily-transportation capacity as of December 31, 2001. Questar Gas' transportation contracts have been extended with initial terms ending in 2006 to 2017. Revenues from storage operations remained unchanged in the three-years ending December 31, 2001. Questar Pipeline's primary storage facility at Clay Basin has been 100% subscribed under long-term contracts for several years. A majority of the storage contracts have terms in excess of eight years. The Clay Basin storage facility in eastern Utah was last expanded by 5 Bcf in May of 1998. Questar Gas has contracted for 26% of firm-storage capacity for terms extending from 2008 to 2019. A processing plant owned by Questar Transportation Services, which removes carbon dioxide from a portion of the gas stream, completed its second year of operation in 2001. OPERATING EXPENSES Operating and maintenance (O&M) expenses increased 8% in 2001 compared with 2000 due primarily to rising legal costs and information system maintenance. These increases more than offset labor savings from an early retirement program offered in the fourth quarter of 2000. Higher legal costs and a full year of expenses associated with a gas-processing plant were responsible for the 14% increase in O&M expense in 2000 compared with 1999. The estimated useful life of a processing plant that removes carbon dioxide from the gas stream was increased from 10 to 20 years resulting in a $1.3 million reduction of depreciation expense in 2000. Because processing fees are determined on a cost-of-service basis, the lower depreciation expense resulted in a $1.3 million refund to Questar Gas, the primary customer of processing services. INTEREST AND OTHER INCOME Interest and other income increased 97% in 2001 compared with 2000 mainly from increased AFUDC (capitalized financing costs) associated with Questar Pipeline's construction projects. Comparing the 2000 period with 1999, interest and other income was 28% lower due primarily to a reversal of a contingency reserve in 1999 related to the completion of the TransColorado Pipeline and another construction project. OPERATIONS OF UNCONSOLIDATED AFFILIATES Earnings from unconsolidated affiliates includes the Company's fifty-percent share of operating losses from the TransColorado Pipeline partnership of $2.2 million in 2001. The Company did not report operating losses in 2000 for TransColorado. In the 1999 period, the Company's share of the losses reported by TransColorado Pipeline partnership amounted to $5.9 million. Earnings from the Overthrust Pipeline partnership were $1.1 million, $1.2 million and $.8 million in 2001, 2000, and 1999, respectively. DEBT EXPENSE Debt expense was 4% lower in 2001 compared to 2000 mainly from reducing interest rates. Questar Pipeline replaced $115 million of long-term debt with a weighted average interest rate of 9.5%, with less expensive long-term debt with a weighted average interest rate of 7.09%. INCOME TAXES The effective combined federal and state income tax rate was 37.1% in 2001, 31.5% in 2000 and 38.5% in 1999. The income tax rate in 2000 was below the combined statutory rate of about 37% primarily due to a Colorado state income tax credit. The credit, derived from conducting business in a designated enterprise zone, reduced state income taxes by $3.2 million in 2000. -11- TRANSCOLORADO LITIGATION Questar TransColorado, Inc. (QTC), a subsidiary of Questar Pipeline, and KN TransColorado, Inc. (KNTC), a subsidiary of Kinder Morgan, are partners in the TransColorado Gas Transmission Company (TransColorado). The partners are involved in a complex lawsuit pending in a Colorado state district court. At the center of the lawsuit is the validity of a contractual right claimed by QTC to put its 50% interest in TransColorado to KNTC during the 12-month period beginning March 31, 2001. QTC believes it is entitled to receive $118 million under the put. QTC and KNTC entered a standstill agreement regarding various issues in the litigation. QTC provided notice to KNTC that it elected to put its interest in TransColorado as of March 31, 2001, were it not for the provisions of the standstill agreement. The trial is scheduled to commence on April 1, 2002. LIQUIDITY AND CAPITAL RESOURCES Operating Activities
Year Ended December 31, 2001 2000 1999 ------------------------------------------ (In Thousands) Net income (loss) $29,741 $29,825 ($8,391) Non-cash adjustments to net income 29,460 30,821 61,483 Changes in operating assets and liabilities 15,162 6,545 (37,895) ------------------------------------------ Net cash provided from operating activities $74,363 $67,191 $15,197 ==========================================
Net cash provided from operating activities increased 11% in 2001 compared with 2000 primarily due to the timing of payments associated with capital expenditures in 2001, partially offset by lower collections from customer accounts. Net cash provided from operating activities increased 342% in 2000 compared with 1999. The increase is due primarily from higher collections of accounts receivable in 2000 from a partner in a pipeline project, while payments on accounts payable were lower due to higher payments to vendors for construction projects in 1999. Investing Activities Following is a summary of capital expenditures for 2001, 2000 and a forecast for 2002 expenditures:
Year Ended December 31, 2002 Forecast 2001 2000 ------------------------------------------ (In Thousands) Transmission system $21,700 $103,218 $15,312 Storage 19,800 9,389 333 Partnerships 4,000 104,701 9,024 Southern Trails Pipeline 30,000 32,418 13,975 Processing plant 400 6,523 250 General 6,500 454 4,141 ------------------------------------------ $82,400 $256,703 $43,035 ==========================================
-12- Capital spending focused on expansion of the gas transmission network, investment in transmission partnerships and conversion of a crude-oil pipeline. Construction was completed on Main Line 104, a 77 mile pipeline in central Utah that cost $95.4 million. Questar Pipeline borrowed $100 million and used the proceeds to repay debt, through a wholly owned subsidiary, Questar TransColorado, Inc. (QTC), owed by TransColorado Gas Transmission Company (TransColorado). Capital expenditures for the Southern Trails Pipeline totaled $32.4 million in 2001. Financing Activities Net cash provided from operating activities and a net increase in debt, enabled Questar Pipeline to fund record 2001 capital expenditures and pay dividends. Forecasted 2002 capital expenditures are expected to be financed from net cash flow provided from operations and borrowing from Questar. Questar Pipeline filed a Form S-3 with the Securities and Exchange Commission to issue up to $250 million of medium-term notes, Series B, with maturities of nine months to 30 years. During 2001, the Company issued 10-year medium-term notes for $100 million with a coupon rate of 7.09% and $80 million with a coupon rate of 6.57%. The funds were used to refinance debentures of $30 million at 9 7/8% and $85 million at 9 3/8% and to finance a portion of capital expenditures and partnership investments. Questar Pipeline borrowed $100 million of floating rate debt from a bank for a 12-month period to repay through a wholly owned subsidiary, Questar TransColorado, Inc., one-half of the outstanding and currently maturing debt owed by the TransColorado Gas Transmission Company. Questar makes loans to Questar Pipeline under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $18.3 million with an interest rate of 2.31% at December 31, 2001 and no amounts were borrowed as of December 31, 2000. Questar Pipeline also invests excess cash balances with Questar. The funds are centrally managed by Questar and earn an interest rate that is identical to the interest rate paid by the subsidiaries borrowing from Questar. Notes receivable from Questar as of December 31, 2000 amounted to $20.7 million with an interest rate of 6.91% at December 31, 2000 and no amounts loaned as of December 31, 2001. The Company has negative working capital of $134.1 million at December 31, 2001. Questar Pipeline borrowed $100 million of floating rate debt for a 12-month period to refinance 50% of a loan held by the TransColorado partnership that matured in October 2001. The Company intends to repay the debt through the settlement of the lawsuit, KN TransColorado, Inc. v. Questar Corporation, as described in note 7 to the financial statements. In addition, the record capital expenditures for the Company in 2001, caused additional short-term obligations. Questar Pipeline's capital structure at year-end 2001 was 56% long-term debt and 44% common shareholder's equity. Moody's and Standard and Poor's have rated the Company's long-term debt A1 and A+, respectively. Critical Accounting Policy The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. Management believes the following accounting policy may involve a higher degree of judgement. -13- RATE REGULATION Rate regulatory agencies establish rates for the storage and transportation of natural gas. The regulatory agencies also regulate, 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 return on investment. The financial statements of Questar Pipeline are presented in accordance with regulatory requirements. Methods of allocating cost to time periods, in order to match revenues and expenses, may differ from those of other businesses because of cost- allocation methods used to establish rates. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. All of the Company's long-term debt is borrowed at fixed rates. As the need arises, the Company borrows funds on short-term basis, which bear variable-interest rates. Forward-Looking Statements This report includes "forward-looking statements" within the meaning of Section 27(a) of the Securities Act of 1933, as amended, and Section 21(e) of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding the Company's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may", "will", "could", "expect", "intend", "project", "estimate", "anticipate", "believe", "forecast", or "continue" or the negative thereof or variations thereon or similar terminology. Although these statements are made in good faith and are reasonable representations of the Company's expected performance at the time, actual results may vary from management's stated expectations and projections due to a variety of factors. Important assumptions and other significant factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements include changes in general economic conditions, gas prices and supplies, competition, rate-regulatory issues and other factors beyond the control of the Company. These other factors include the rate of inflation, the effect of natural phenomena, the effect of accounting policies issued periodically by accounting standard-setting bodies, and adverse changes in the business or financial condition of the Company. -14- 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 company under the Securities and Exchange Act of 1934, as amended, 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. Description ----------- ----------- 2.*1 Agreement of Transfer among Mountain Fuel Supply Company, Entrada Industries, Inc. and Mountain Fuel Resources, Inc., dated July 1, 1984. (Exhibit No. 2. to Registration Statement No. 2-96102 filed February 27, 1985.) 3.* Restated Articles of Incorporation dated November 17, 1995. (Exhibit No. 3. to Form 10-K Annual Report for 1995.) 3.3.* Bylaws (as amended on August 11, 1992). (Exhibit No. 3. to Form 10-Q Report for quarter ended June 30, 1992.) 4.1.*(2) Indenture dated as of August 17, 1998, with First Security Bank, N.A., as Trustee, for Debt Securities. (Exhibit No. 4.01. to Registration Statement on Form S-3 (No. 333-61621) filed August 17, 1998.) 10.1.*(1),(3) Overthrust Pipeline Company General Partnership Agreement, 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 -15- amendment dated August 21, 1991, is included as Exhibit No. 10.4. to Form 10-K Annual Report for 1992.) 10.2.* Partnership Agreement for the TransColorado Gas Transmission Company dated July 1, 1997, between KN TransColorado, Inc. and Questar TransColorado, Inc. (Exhibit No. 10.4. to Form 10-K Annual Report for 1997.) 10.3.* Letter of Understanding dated July 13, 1998, on Issues Relating to Phase II of TransColorado between Questar TransColorado, Inc. and KN TransColorado, Inc. (Exhibit No. 10.1. to Form 10-Q Report for quarter ended June 30, 1998.) 10.4.* Agreement for the Transfer of Assets between Questar Pipeline Company and Questar Gas Management Company, as amended, effective March 1, 1996. (Exhibit No. 10.11. to Form 10-K Annual Report for 1996.) 10.5.*(4) Asset Purchase Agreement dated October 23, 1998, between Questar Line 90 Company, a wholly-owned subsidiary, and ARCO Pipeline Company. (Exhibit No. 10.5. to Form 10-Q Report for quarter ended September 30, 1998.) 10.6 Questar Pipeline has not submitted copies of tariff provisions or individual agreements with primary transportation and storage customers. Copies are available on request. 12. Ratio of earnings to fixed charges. 21. Subsidiary Information. 23. Consent of Independent Auditors 24. Power of Attorney.
---------- * 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) Wells Fargo Bank Northwest, N.A., serves as the successor trustee. (3) The Overthrust Partnership Agreement has not been formally amended to delete the names of Columbia Gulf Transmission Company, Tennessee Overthrust Gas Company, and Northern Overthrust Pipeline Company and NGPL-Overthrust Inc. as partners. (4) Questar Line 90 Company has been merged with Questar Southern Trails Company and no longer exists as an entity. (b) The Company did not file a Current Report on Form 8-K during the fourth quarter of 2001. -16- 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, 2001 QUESTAR PIPELINE COMPANY SALT LAKE CITY, UTAH FORM 10-K -- ITEM 14 (a)(1) AND (2) QUESTAR PIPELINE COMPANY AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following financial statements of Questar Pipeline Company are included in Item 8: Consolidated statements of income -- Years ended December 31, 2001, 2000 and 1999 Consolidated balance sheets -- December 31, 2001 and 2000 Consolidated statements of cash flows -- Years ended December 31, 2001, 2000 and 1999 Consolidated statements of shareholder's equity -- Years ended December 31, 2001, 2000 and 1999 Notes to consolidated financial statements All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. -17- Report of Independent Auditors Board of Directors Questar Pipeline Company We have audited the accompanying consolidated balance sheets of Questar Pipeline Company and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, common shareholder's equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Questar Pipeline Company and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP ------------------------- Ernst & Young LLP Salt Lake City, Utah February 8, 2002 -18- QUESTAR PIPELINE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 2001 2000 1999 ----------------------------------------------- (In Thousands) REVENUES From unaffiliated customers $ 49,402 $ 42,500 $ 36,922 From affiliates 75,491 76,576 75,238 ----------------------------------------------- TOTAL REVENUES 124,893 119,076 112,160 OPERATING EXPENSES Operating and maintenance 47,244 43,761 38,534 Depreciation and amortization 15,407 15,391 16,743 Other taxes 2,920 3,071 2,488 ----------------------------------------------- TOTAL OPERATING EXPENSES 65,571 62,223 57,765 ----------------------------------------------- OPERATING INCOME 59,322 56,853 54,395 INTEREST AND OTHER INCOME 5,950 3,025 4,229 OPERATIONS OF UNCONSOLIDATED AFFILIATES Income (loss) (1,106) 1,220 (5,109) Write-down of investment in partnership (49,700) ----------------------------------------------- (1,106) 1,220 (54,809) DEBT EXPENSE (16,908) (17,584) (17,466) ----------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES 47,258 43,514 (13,651) INCOME TAXES (CREDIT) 17,517 13,689 (5,260) ----------------------------------------------- NET INCOME (LOSS) $ 29,741 $29,825 $ (8,391) ===============================================
See notes to consolidated financial statements. -19- QUESTAR PIPELINE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, 2001 2000 ------------------------------- (In Thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 520 $ 1,855 Note receivable from Questar 20,700 Accounts receivable 8,581 10,044 Accounts receivable from affiliates 1,524 1,623 Materials and supplies, at lower of average cost or market 2,328 2,276 Prepaid expenses and other 643 477 ------------------------------- TOTAL CURRENT ASSETS 13,596 36,975 PROPERTY, PLANT AND EQUIPMENT Transmission 438,143 345,790 Storage 222,823 221,478 Processing 24,849 23,656 General and intangible 49,801 45,355 Construction work in progress 145,632 94,967 ------------------------------- 881,248 731,246 Less allowances for depreciation and amortization 256,755 243,006 ------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 624,493 488,240 INVESTMENT IN UNCONSOLIDATED AFFILIATES 121,099 19,088 OTHER ASSETS Regulatory assets 14,823 10,190 Other noncurrent assets 4,286 6,238 ------------------------------- TOTAL OTHER ASSETS 19,109 16,428 ------------------------------- $778,297 $560,731 ===============================
-20-
December 31, 2001 2000 ------------------------------- (In Thousands) LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES Short-term loans $100,000 Note payable to Questar 18,300 Accounts payable and accrued expenses Accounts and other payables 18,599 $ 4,861 Accounts payable to affiliates 4,268 1,472 Federal income taxes 4,152 Other taxes 2,145 Interest 2,380 1,625 ------------------------------- Total accounts payable and accrued expenses 29,399 10,103 ------------------------------- TOTAL CURRENT LIABILITIES 147,699 10,103 LONG-TERM DEBT 310,065 245,020 DEFERRED INCOME TAXES 73,222 62,741 OTHER LIABILITIES 4,434 7,231 COMMITMENTS AND CONTINGENCIES - Note 7 COMMON SHAREHOLDER'S EQUITY Common stock - par value $1 per share; authorized 25,000,000 shares; issued and outstanding 6,550,843 shares 6,551 6,551 Additional paid-in capital 142,034 142,034 Retained earnings 94,292 87,051 ------------------------------- TOTAL COMMON SHAREHOLDER'S EQUITY 242,877 235,636 ------------------------------- $778,297 $560,731 ===============================
See notes to consolidated financial statements. -21- QUESTAR PIPELINE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Additional Common Paid-in Retained Stock Capital Earnings ----------------------------------------------- (In Thousands) Balance at January 1, 1999 $ 6,551 $ 82,034 $108,617 1999 net loss (8,391) Payment of common stock dividends (21,500) ----------------------------------------------- Balance at December 31, 1999 6,551 82,034 78,726 2000 net income 29,825 Equity investment 60,000 Payment of common stock dividends (21,500) ----------------------------------------------- Balance at December 31, 2000 6,551 142,034 87,051 2001 net income 29,741 Payment of common stock dividends (22,500) ----------------------------------------------- Balance at December 31, 2001 $ 6,551 $142,034 $ 94,292 ===============================================
See notes to consolidated financial statements. -22- QUESTAR PIPELINE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2001 2000 1999 ----------------------------------------------- (In Thousands) OPERATING ACTIVITIES Net income (loss) $ 29,741 $ 29,825 $ (8,391) Adjustments to reconcile net income (loss) to net cash provided from operating activities Depreciation and amortization 16,605 16,516 17,847 Deferred income taxes and investment tax credits 10,481 12,850 (13,619) Write-down of investment in partnership 49,700 (Income) loss from unconsolidated affiliates, net of cash distributions 2,690 1,660 7,701 Net gains from sales of properties (316) (205) (146) ----------------------------------------------- 59,201 60,646 53,092 Changes in operating assets and liabilities Accounts receivable 1,921 10,102 (400) Materials and supplies (1,409) 167 (240) Prepaid expenses and other 1,191 1,305 (68) Accounts payable and accrued expenses 14,720 (3,542) (37,018) Federal income taxes 4,217 (1,625) 1,177 Other assets (2,681) (3,994) 72 Other liabilities (2,797) 4,132 (1,418) ----------------------------------------------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 74,363 67,191 15,197 INVESTING ACTIVITIES Capital expenditures Purchase of property, plant and equipment (152,002) (34,011) (36,010) Other investments (104,701) (9,024) (14,414) ----------------------------------------------- Total capital expenditures (256,703) (43,035) (50,424) Proceeds from (costs of) disposition of property, plant and equipment (540) (1,088) 3,724 ----------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (257,243) (44,123) (46,700) FINANCING ACTIVITIES Equity investment 60,000 Short-term notes 100,000 Change in note receivable from Questar 20,700 (19,600) (1,100) Change in note payable to Questar 18,300 (42,500) 4,500 Issuance of long-term debt 180,000 42,000 Repayment of long-term debt (114,955) Payment of dividends (22,500) (21,500) (21,500) ----------------------------------------------- NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES 181,545 (23,600) 23,900 ----------------------------------------------- CHANGE IN CASH AND CASH EQUIVALENTS (1,335) (532) (7,603) BEGINNING CASH AND CASH EQUIVALENTS 1,855 2,387 9,990 ----------------------------------------------- ENDING CASH AND CASH EQUIVALENTS $ 520 $ 1,855 $ 2,387 ===============================================
See notes to consolidated financial statements. -23- QUESTAR PIPELINE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Accounting Policies PRINCIPLES OF CONSOLIDATION: The consolidated financial statements contain the accounts of Questar Pipeline Company and subsidiaries (the Company or Questar Pipeline). The Company is a wholly owned subsidiary of Questar Regulated Services Company (Regulated Services). Regulated Services is a holding company and wholly owned subsidiary of Questar Corporation (Questar). Regulated Services was organized in 1996 and provides the administrative, accounting, engineering, legal and regulatory functions for its three subsidiaries, Questar Pipeline, Questar Gas Company (Questar Gas) and Questar Energy Services. Questar Pipeline provides storage and interstate transportation of natural gas. A subsidiary, Questar Transportation Services, operates a plant designed to remove excess carbon dioxide from a portion of a pipeline. A subsidiary, Questar Southern Trails Pipeline Company, has acquired an oil pipeline that will be converted to transport natural gas. All significant intercompany balances and transactions have been eliminated in consolidation. INVESTMENT IN UNCONSOLIDATED AFFILIATES: Questar Pipeline uses the equity method to account for investments in affiliates in which it does not have control. The principal affiliates are: Overthrust Pipeline Company and TransColorado Gas Transmission Company. Questar Pipeline is the operator of the Overthrust Segment of the Trailblazer Pipeline System. Approval of all partners is required for all substantive policy matters. Generally, the Company's investment in these affiliates equals the underlying equity in net assets, except for TransColorado where the investment was written down in 1999. The Company experienced an other-than-temporary decline in its partnership investment caused by low volumes resulting from unfavorable regional transportation economics. REGULATION: Questar Pipeline is regulated by the Federal Energy Regulatory Commission (FERC) which establishes rates for the transportation and storage of natural gas. The FERC also regulates, among other things, the extension and enlargement or abandonment of jurisdictional natural gas facilities. Regulation is intended to permit the recovery, through rates, of the cost of service including a 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. OTHER REGULATORY ASSETS AND LIABILITIES: Gains and losses on the reacquisition of debt by rate-regulated affiliates are deferred and amortized as debt expense over the would-be remaining life of the retired debt or the life of the replacement debt in order to match regulatory treatment. The cost of the early retirement windows offered to employees of rate-regulated subsidiaries is capitalized and amortized over a five-year period in accordance with regulatory treatment. Rate-regulated operations record cumulative increases in deferred taxes as income taxes recoverable from customers. The Company has adopted procedures with the FERC 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. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts 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. -24- CASH AND CASH EQUIVALENTS: Cash equivalents consist principally of repurchase agreements with maturities of three months or less. In almost all cases, the repurchase agreements are highly liquid investments in overnight securities made through commercial bank accounts that result in available funds the next business day. NOTES RECEIVABLE FROM QUESTAR: Notes receivable from Questar represent interest bearing demand notes for cash loaned to Questar until needed in the Company's operations. The funds are centrally managed by Questar and earn an interest rate that is identical to the interest rate paid by the Company for borrowings from Questar. 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 2.9%, 3.2% and 3.4% in 2001, 2000 and 1999 respectively. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION: The Company capitalizes the cost of capital during the construction period of plant and equipment in accordance with FERC guidelines. Capitalized financing costs, called allowance for funds used during construction (AFUDC), consist of debt and equity portions. The debt portion of AFUDC is recorded as a reduction of interest expense and the equity portion is recorded in other income. Debt expense was reduced by $3.7 million in 2001, $3.3 million in 2000 and $2.7 million in 1999. AFUDC included in interest and other income amounted to $4.8 million in 2001, $2.3 million in 2000 and $1.7 million in 1999. INCOME TAXES: The Company accounts for income tax expense on a separate return basis. Pursuant to the Internal Revenue Code and associated regulations, the Company 's operations are consolidated with those of Questar and its subsidiaries for income tax reporting purposes. The Company records tax benefits as they are generated. The Company receives payments from Questar for such tax benefits as they are utilized on the consolidated return. Questar Pipeline records cumulative increases in deferred taxes as income taxes recoverable from customers. ENERGY-PRICE FINANCIAL INSTRUMENTS: On January 1, 2001, the Company adopted the accounting provisions of Statement of Financial Accounting Standards 133, as amended, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 addresses the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the balance sheet at fair value. The accounting for changes in fair value, which result in gains or losses, of a derivative instrument would either be reported in income or comprehensive income. The Company has not entered into any commodity or interest-based derivative instruments. There is no financial impact on the Company since adopting this accounting standard. NEW ACCOUNTING STANDARDS: In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 141, "Business Combinations," which addresses financial accounting and reporting for business combinations. SFAS 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for under the pooling method initiated before but completed after June 30, 2001. The Company has not entered into any business combinations transactions since adopting this accounting standard. In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets," which addresses, among other things, the financial accounting and reporting for goodwill subsequent to an acquisition. The new standard eliminates the requirement to amortize acquired goodwill; instead, such goodwill shall be reviewed -25- at least yearly for impairment or sooner if a specific trigger occurs. Goodwill acquired after July 1, 2001, is exempt from amortization. At December 31, 2001, the Company did not have any goodwill or other intangible assets that qualify for the accounting treatment under SFAS 142. In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations," which addresses, among other things, the financial accounting and reporting of the fair value of legal obligations associated with the retirement of tangible long-lived assets. The new standard requires that retirement costs be estimated at fair value, capitalized and depreciated over the life of the assets. The new standard may affect the cost basis of rate-regulated assets. SFAS 143 is effective for 2003. The Company has not evaluated the impact of SFAS 143. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The new standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets, specifically, for a segment of a business accounted for as a discontinued operation, and modifies the provisions of SFAS 121. SFAS 144 is effective for 2002. The Company has not evaluated the impact of SFAS 144. RECLASSIFICATIONS: Certain reclassifications were made to the 2000 and 1999 financial statements to conform with the 2001 presentation. Note 2 - Investment in Unconsolidated Affiliates Questar Pipeline, through its subsidiaries, has interests in partnerships accounted for on the equity basis. Transportation of natural gas is the primary business activity of these partnerships. As of December 31, 2001, these affiliates did not have debt obligations with third-party lenders. The principal partnerships and percentage ownership were as follows: Overthrust Pipeline Co. (72%) and TransColorado Gas Transmission Co. (50%). Questar Pipeline acquired an additional 18% of Overthrust Pipeline in January 2002 bringing its ownership percentage to 90%. Summarized information of the partnerships follows:
2001 2000 1999 ----------------------------------------------- (In Thousands) Year Ended December 31, Revenues $ 16,164 $ 11,770 $ 9,116 Operating loss (4,805) (7,949) (4,877) Loss before income taxes (13,606) (20,764) (11,594) At December 31, Current assets $ 13,315 $ 4,927 Noncurrent assets 301,431 315,825 Current liabilities 5,146 208,402 Noncurrent liabilities 13,662 9,940 Debt included in current liabilities 200,000
Note 3 - Debt Questar makes loans to Questar Pipeline under a short-term borrowing arrangement. Outstanding short-term notes payable to Questar totaled $18.3 million with an interest rate of 2.31% at December 31, 2001 and no amounts were borrowed as of December 31, 2000. -26- Questar Pipeline also invests excess cash balances with Questar. The funds are centrally managed by Questar and earn an interest rate that is identical to the interest rate paid by the subsidiaries borrowing from Questar. Notes receivable from Questar as of December 31, 2000, amounted to $20.7 million with an interest rate of 6.91%, and no amounts loaned as of December 31, 2001. On October 12, 2001, Questar Pipeline borrowed $100 million of short-term debt with a variable rate of interest. The weighted average interest rate at December 31, 2001 was 2.831%. The proceeds were used to repay through a wholly-owned subsidiary, Questar TransColorado, Inc. (QTC), debt owed by TransColorado Gas Transmission Company (TransColorado). The details of long-term debt at December 31 are as follows:
2001 2000 -------------------------------- (In Thousands) Medium-term notes 5.85% to 7.55%, due 2008 to 2018 $310,400 $130,400 9 3/8% debentures due 2021 85,000 9 7/8% debentures due 2020 30,000 -------------------------------- Total long-term debt outstanding 310,400 245,400 Less unamortized debt discount 335 380 -------------------------------- $310,065 $245,020 ================================
On May 11, 2001, Questar Pipeline filed a Form S-3 with the Securities and Exchange Commission to issue up to $250 million of medium-term notes, Series B, with maturities of nine months to 30 years. On May 29, 2001, Questar Pipeline issued $100 million of ten-year notes with a 7.09% coupon rate. On September 26, 2001, Questar Pipeline issued $80 million of ten-year medium-term notes with a coupon rate of 6.57%. On March 30, 2001, Questar Pipeline redeemed the remaining $30 million of its 9 7/8% debentures. The redemption price was equal to 104.67% of the principal amount plus interest from December 1, 2000. In addition, Questar Pipeline redeemed all $85 million of its 9 3/8% debentures on June 25, 2001. The redemption price was equal to 104.51% of the principal amount plus interest for twenty-four days. Cash paid for interest was $19.1 million in 2001, $20.4 million in 2000 and $19 million in 1999. Note 4 - Financial Instruments and Risk Management The carrying amounts and estimated fair values of the Company's financial instruments at December 31 were as follows:
2001 2000 ----------------------------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ----------------------------------------------------------------- (In Thousands) Financial assets Cash and cash equivalents $ 520 $ 520 $ 1,855 $ 1,855 Financial liabilities Notes Payable to Questar $ 18,300 $ 18,300 Short-term loans 100,000 100,000 Long-term debt 310,065 309,272 245,020 250,099
The Company used the following methods and assumptions in estimating fair values: (1) Cash and cash -27- equivalents and short-term loans - the carrying amount approximates fair value; (2) Long-term debt - the fair value of long-term debt is based on discounted present value of cash flows using the Company's current borrowing rates. Fair value is calculated at a point in time and does not represent the amount the Company would pay to retire the debt securities. CREDIT RISK: Questar Pipeline's primary market is the Rocky Mountain region in the United States, and will include the southwestern region once Questar Pipline's subsidiary, Questar Southern Trails, puts its pipeline into service. The Company's exposure to credit risk may be impacted by the concentration of customers in these regions due to changes in economic or other conditions. The Company's customers may be affected differently by changing conditions. Management believes that its credit-review procedures, loss reserves and collection procedures have adequately provided for usual and customary credit-related losses. Note 5 - Income Taxes The components of income taxes for years ended December 31 were as follows:
2001 2000 1999 ----------------------------------------------- (In Thousands) Federal Current $ 6,523 $ 604 $ 7,852 Deferred 9,290 15,230 (13,466) State Current 476 222 721 Deferred 1,228 (2,367) (367) ----------------------------------------------- $17,517 $13,689 $ (5,260) ===============================================
The difference between the statutory federal income tax rate and the Company's effective income tax rate is explained as follows:
2001 2000 1999 ----------------------------------------------- (In Percentages) Federal income taxes at 35% 35.0 35.0 35.0 Increase (decrease) as a result of: State income taxes, net of federal income tax 2.4 (3.2) (1.7) Prior years' tax settlement 3.0 Other (0.3) (0.3) 2.2 ----------------------------------------------- Effective income tax rate 37.1 31.5 38.5 ===============================================
-28- Significant components of the Company's deferred income taxes at December 31 were as follows:
2001 2000 -------------------------------- (In Thousands) Deferred tax liabilities Property, plant and equipment $81,639 $69,991 Other 8,860 7,201 -------------------------------- Total deferred tax liabilities 90,499 77,192 Deferred tax assets Write-down of investment in partnership 10,306 11,806 Other 6,971 2,645 -------------------------------- Total deferred tax assets 17,277 14,451 -------------------------------- Net deferred income taxes $73,222 $62,741 ================================
A Colorado state income tax credit derived from conducting business in a designated enterprise zone reduced state income taxes by $3.2 million in 2000. The tax credit has a 3-year carryback and a 12-year carryforward provision. As of December 31, 2001, the balance of the tax credit carryforward was $2.5 million. Cash paid for income taxes was $5.3 million in 2001, $1.8 million in 2000 and $7.4 million in 1999. Note 6 - Rate Matters and Other FEDERAL RATE REGULATION On September 27, 2001, the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rule making on Standards of Conduct for Transmission Providers (NOPR) that would significantly broaden the scope of the FERC's affiliate regulations for pipelines. The NOPR would require all transmission providers to comply with standards of conduct dealing with affiliated energy companies. Those standards include the separation of functions and non-discriminatory treatment of transmission customers. The NOPR would essentially diminish operational efficiencies and increase costs by mandating a complete separation of operations. Questar Regulated Services supplies administrative, technical, accounting, legal and regulatory support for both Questar Pipeline and Questar Gas. Questar Gas, Questar Pipeline, industry associations and other companies have filed written and verbal comments with the FERC about the problems this NOPR would create for the industry and its customers and asked the FERC to reconsider its proposal. CPUC DECISION AND SOUTHERN TRAILS A ruling from the California Public Utilities Commission (CPUC) on Residential Load Service tariff has adverse effects on new pipelines attempting to enter the California market. Under the CPUC's proposed new peaking rate, new gas fired power plants wanting natural gas service from both Southern California Gas Company (SoCal) and the Southern Trails Pipeline will pay a higher rate for SoCal's service than customers taking service entirely from SoCal. In addition, new power plants would be subject to more restrictive balancing services than captive customers and would pay even more for interruptible service than California power plants in other parts of the state. While the Company continues to actively pursue natural gas markets on the California portion of its Southern Trails Pipeline, the Company is considering alternative uses as well. -29- Note 7 - Litigation and Commitments KN TRANSCOLORADO, INC. V. QUESTAR CORPORATION Questar TransColorado, Inc. (QTC) and its partner, KN TransColorado, Inc., (KNTC) in the TransColorado Gas Transmission Company (TransColorado) are involved in a complex lawsuit that is pending in a state district court in Colorado. At the center of the lawsuit is the validity of a contractual right claimed by QTC to put its 50% interest in TransColorado to KNTC during the 12-month period beginning March 31, 2001. The current value of the put is $118 million. KNTC filed a lawsuit in June of 2000 alleging that Questar Pipeline and its affiliates breached their fiduciary duties to TransColorado and KNTC by constructing and operating a pipeline (Questar Pipeline's Main Line 104) that would compete with TransColorado, rendering TransColorado economically unviable. KNTC is seeking damages in excess of $150 million plus punitive damages; a declaratory judgment that KNTC's obligation to purchase QTC's interest in the project be declared void and unenforceable; and a dissolution of the partnership under Colorado law. QTC and its affiliates subsequently filed a counterclaim and third-party complaint against KNTC and named affiliates, including Kinder Morgan, Inc., seeking a declaratory judgement that its contractual right to exercise the put is binding and enforceable, and damages of at least $185 million. The parties entered into a standstill agreement that preserves the claims made by Questar and KNTC pending the resolution of the litigation. On December 31, 2000, QTC gave notice of its election to exercise its contractual right to sell its 50% interest in TransColorado to KNTC. The parties have engaged in extensive discovery proceedings and used a special master to review some issues raised in discovery. The trial is scheduled to begin April 1, 2002. GRYNBERG LAWSUITS Questar affiliates are named defendants in a lawsuit filed by independent gas producer Jack J. Grynberg under the Federal False Claims Act. This case and all substantially similar cases filed by Grynberg against pipelines and their affiliates have been consolidated for discovery and pre-trial rulings in Wyoming federal district court. The cases involve allegations of industry wide mismeasurement and undervaluation of gas on which royalty payments are due the federal government. The complaint seeks treble damages and imposition of civil penalties. The Wyoming district court judge denied the defendant's initial motion to dismiss. No motions are currently pending. Grynberg has filed a case against Questar Pipeline, Questar Energy Trading and Questar Gas Management in Utah state district court, alleging mismeasurement of gas volumes attributable to his working ownership interest in a specified property in southwestern Wyoming. Grynberg alleges breach of contract, negligent misrepresentation, fraud, breach of fiduciary duty, etc. On March 13, 2001, the trial judge granted defendants' motion to dismiss a case by Grynberg and Grynberg appealed that ruling to the Utah State Supreme Court. Briefing of the case is currently taking place. It is too early to estimate the outcome of the cases filed by Grynberg against Questar affiliates. WILL PRICE V. GAS PIPELINES ET AL. (FORMERLY QUINQUE OPERATING CO. V. GAS PIPELINES) Questar Pipeline and Questar's subsidiaries are named defendants in a purported nationwide class action alleging mismeasurement of volumes and heating content of gas produced from private and state lands. The plaintiffs are alleging a conspiracy among the defendants to set industry standards that undermeasure gas. The defendants have filed motions to dismiss the pending actions for lack of personal jurisdiction and for failure to state a claim. The producer's complaint does not include a request for any specific monetary damages. -30- OTHER LEGAL PROCEEDINGS There are various other legal proceedings against Questar Pipeline. While it is not currently possible to predict or determine the outcomes of these proceedings, it is the opinion of management that the outcomes will not have a material adverse effect on the Company's results of operations, financial position or liquidity. Note 8 - Employment Benefits PENSION PLAN: Substantially all of Questar Pipeline's employees are covered by Questar's defined benefit pension plan. Benefits are generally based on years of service and the employee's 72-pay period interval of highest earnings during the ten years preceding retirement. It is Questar's policy to make contributions to the plan at least sufficient to meet the minimum funding requirements of applicable laws and regulations. Plan assets consist principally of equity securities and corporate and U.S. government debt obligations. Questar Pipeline's portion of plan assets and benefit obligations is not determinable because the plan assets are not segregated or restricted to meet the Company's pension obligations. If the Company were to withdraw from the pension plan, the pension obligation for the Company's employees would be retained by the pension plan. At December 31, 2001, Questar's net benefit obligation exceeded the fair value of plan assets. Questar Regulated Services offered early retirement windows to eligible employees in 2000. In 2000, a total of 276 employees and recipients of long-term disability from Questar Gas, Questar Pipeline and Questar Regulated Services elected to retire effective October 31. The $14.4 million cost of the early retirement window will be amortized over a five-year period in accordance with regulatory treatment. Pension cost was $1.2 million in 2001, $.4 million in 2000 and $.4 million in 1999. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: Generally postretirement health-care benefits and life insurance are provided only to employees hired before January 1, 1997. Questar Pipeline pays a portion of postretirement health-care costs as determined by an employee's years of service and limited to 170% of the 1992 contribution. The Company's policy is to fund amounts allowable for tax deduction under the Internal Revenue Code. Plan assets consist of equity securities, and corporate and U.S. government debt obligations. The Company is amortizing the transition obligation over a 20-year period, which began in 1992. The FERC allows rate-recovery of future postretirement benefits costs to the extent that contributions are made to an external trust. Questar Pipeline has recorded a $2.3 million regulatory liability as of December 31, 2001. As a result of returns earned on investments, the Company recorded expense reductions of $.3 million, $.4 million and $.2 million in 2001, 2000, and 1999, respectively. At December 31, 2001, Questar's net benefit obligation exceeded the fair value of plan assets. Questar Pipeline's portion of plan assets and benefit obligations related to postretirement medical and life insurance benefits is not determinable because the plan assets are not segregated or restricted to meet the Company's obligations. POSTEMPLOYMENT BENEFITS: Questar Pipeline recognizes the net present value of the liability for postemployment benefits, such as long-term disability benefits and health-care and life-insurance costs, when employees become eligible for such benefits. Postemployment benefits are paid to former employees after employment has been terminated but before retirement benefits are paid. The Company accrues both current and future costs. The Company has a regulatory asset amounting to $.4 million as of December 31, 2001. -31- EMPLOYEE INVESTMENT PLAN: The Company participates in Questar's Employee Investment Plan (Plan), which allows eligible employees to purchase shares of Questar common stock or other investments through payroll deduction. The Company matches 80% of employees'-pretax purchases up to a maximum of 6% and contributes an additional $200 of common stock in the name of each eligible employee. The Company's expense equals its matching contribution. The Company's expense to the plan was $.4 million in 2001, $.3 million in 2000 and $.3 million in 1999. Note 9 - Related-Party Transactions Regulated Services provides administrative, technical, accounting, legal and regulatory support to Questar Pipeline at its cost. Regulated Services also obtains data processing and communication services from an affiliate, Questar InfoComm Inc., which are allocated to Questar Pipeline. Regulated Services charged Questar Pipeline $21 million in 2001, $18.8 million in 2000, and $22.6 million in 1999. The majority of these costs are allocated and included in operating and maintenance expenses. The allocation methods are based on several methods dictated by the nature of the charges. Management believes that the allocation methods are reasonable. Questar Pipeline receives a substantial portion of its revenues from Questar Gas Company. Revenues received from Questar Gas amounted to $72.9 million in 2001, $73.7 million in 2000 and $71.6 million in 1999. The Company also received revenues from other affiliated companies totaling $2.6 million in 2001, $2.8 million in 2000 and $3.6 million in 1999. Questar performs certain administrative functions for Questar Pipeline. The Company was charged for its allocated portion of these services that totaled $2.6 million in 2001, $3 million in 2000 and $2.4 million in 1999. These costs are included in operating and maintenance expenses and are allocated based on each affiliate's proportional share of revenues, net of gas costs; property, plant and equipment; and payroll. Management believes that the allocation method is reasonable. Questar InfoComm Inc. is an affiliated company that provides data processing and communication services to Questar Pipeline. Direct charges paid by the Company to Questar InfoComm amounted to $4.3 million in 2001, $9 million in 2000 and $8.3 million in 1999. Questar Pipeline has a 10-year lease with an option for renewal with an affiliate for some space in an office building located in Salt Lake City, Utah. Rent expense was $.7 million, $.6 million and $.6 million in 2001, 2000, and 1999, respectively. The annual lease payment for the five years following 2001 are scheduled as $.7 million per year from 2002 through 2006. The Company incurred debt expense payable to Questar of $.3 million in 2001, $.8 million in 2000 and $2.1 million in 1999 and received interest income amounting to $.7 million in 2001 and $.2 million in 2000. -32- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 26th day of March, 2002. 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; ----------------------- Director (Principal Executive Officer) D. N. Rose /s/ S. E. Parks Vice President, Treasurer and Chief ----------------------- Financial Officer (Principal S. E. Parks Financial Officer) /s/ D. M. Curtis Controller ----------------------- (Principal Accounting Officer) D. M. Curtis *R. D. Cash Chairman of the Board; Director *U. Edwin Garrison Director *Scott S. Parker Director *K. O. Rattie Director *D. N. Rose Director MARCH 26, 2002 *By /s/ D. N. Rose -------------- ----------------------------------------- Date D. N. Rose, Attorney in Fact -33- EXHIBIT INDEX -------------
Exhibit Number Exhibit ------- ------- 2.*(1) Agreement of Transfer among Mountain Fuel Supply Company, Entrada Industries, Inc. and Mountain Fuel Resources, Inc., dated July 1, 1984. (Exhibit No. 2. to Registration Statement No. 2-96102 filed February 27, 1985.) 3.* Restated Articles of Incorporation dated November 17, 1995. (Exhibit No. 3. to Form 10-K Annual Report for 1995.) 3.3.* Bylaws (as amended on August 11, 1992). (Exhibit No. 3. to Form 10-Q Report for quarter ended June 30, 1992.) 4.1.* 2Indenture dated as of August 17, 1998, with First Security Bank, N.A., as Trustee, for Debt Securities. (Exhibit No. 4.01. to Registration Statement on Form S-3 (No. 333-61621) filed August 17, 1998.) 10.1.*(1),(3) Overthrust Pipeline Company General Partnership Agreement, 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.* Partnership Agreement for the TransColorado Gas Transmission Company dated July 1, 1997, between KN TransColorado, Inc. and Questar TransColorado, Inc. (Exhibit No. 10.4. to Form 10-K Annual Report for 1997.) 10.3.* Letter of Understanding dated July 13, 1998, on Issues Relating to Phase II of TransColorado between Questar TransColorado, Inc. and KN TransColorado, Inc. (Exhibit No. 10.1. to Form 10-Q Report for quarter ended June 30, 1998.) 10.4.* Agreement for the Transfer of Assets between Questar Pipeline Company and Questar Gas Management Company, as amended, effective March 1, 1996. (Exhibit No. 10.11. to Form 10-K Annual Report for 1996.) 10.5.*(4) Asset Purchase Agreement dated October 23, 1998, between Questar Line 90 Company, a wholly-owned subsidiary, and ARCO Pipeline Company. (Exhibit No. 10.5. to Form 10-Q Report for quarter ended September 30, 1998.) 10.6. Questar Pipeline has not submitted copies of tariff provisions or individual agreements with primary transportation and storage customers. Copies are available on request. 12. Ratio of earnings to fixed charges. 21. Subsidiary Information. 23. Consent of Independent Auditors 24. Power of Attorney.
---------- * 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) Wells Fargo Bank Northwest, N.A., serves as the successor trustee. (3) The Overthrust Partnership Agreement has not been formally amended to delete the names of Columbia Gulf Transmission Company, Tennessee Overthrust Gas Company, and Northern Overthrust Pipeline Company and NGPL-Overthrust Inc. as partners. (4) Questar Line 90 Company has been merged with Questar Southern Trails Company and no longer exists as an entity. (b) The Company did not file a Current Report on Form 8-K during the fourth quarter of 2001.