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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File No. 0-14147
QUESTAR PIPELINE COMPANY
(Exact name of registrant as specified in its charter)
State of Utah 87-0307414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
79 South State Street, P.O. Box 11450, Salt Lake City, Utah 84147
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:(801) 530-2400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933:
9 7/8% Debentures due 2020
9 3/8% Debentures due 2021
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No
State the aggregate market value of the voting stock held by nonaffili-
ates of the registrant as of March 22, 1996. $0.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 22, 1996. 6,550,843 shares of Common
Stock, $1.00 par value. (All shares are owned by Questar Corporation.)
Registrant meets the conditions set forth in General Instruction
(J)(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K Report
with the reduced disclosure format.
TABLE OF CONTENTS
Heading Page
PART I
Items 1.
and 2. BUSINESS AND PROPERTIES
General
Transmission System
Transportation Service
Gathering
Storage
Processing
Regulatory Environment
Competition
Employees
Relationships with Affiliates
Item 3. LEGAL PROCEEDINGS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Item 6. (Omitted)
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
Items
10-13. (Omitted)
PART IV
Item 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
SIGNATURES
FORM 10-K
ANNUAL REPORT, 1995
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
General
Questar Pipeline Company (Questar Pipeline or the Company) is an
interstate pipeline company that is engaged in the gathering, processing,
transportation and storage of natural gas in the Rocky Mountain states of
Utah, Wyoming, and Colorado. During 1995, the Company completed the expansion
of its base-load storage project at Clay Basin, sought regulatory approval to
spin down its gathering assets and activities to a subsidiary, filed a general
rate case, completed the construction of the Blacks Fork plant through a joint
venture, and pursued a salt cavern gas storage project. In 1995, Questar
Pipeline was also forced to withdraw from the proposed acquisition of a
one-half interest in the Kern River pipeline when the Federal Trade Commission
determined to oppose the transaction on anticompetitive grounds.
Questar Pipeline is a wholly owned subsidiary of Questar Corporation
(Questar). As a "natural gas company," the Company is subject to regulation
by the Federal Energy Regulatory Commission (the FERC) pursuant to the Natural
Gas Act of 1938, as amended, and certain other federal legislation.
As an open-access pipeline, Questar Pipeline transports gas for
affiliated and unaffiliated customers and also gathers gas for such customers.
It also owns and operates the Clay Basin storage facility, which is a large
underground storage project in northeastern Utah, and other underground
storage operations in Utah and Wyoming. The Company is involved in three
partnerships, Blacks Fork Gas Processing Plant (Blacks Fork), Overthrust
Pipeline Company (Overthrust), and TransColorado Gas Transmission Company
(TransColorado).
The Company has significant business relationships with its affiliates,
particularly Mountain Fuel. Mountain Fuel, a regulated local distribution
company that serves over 592,700 customers in Utah, southwestern Wyoming, and
southeastern Idaho, has reserved approximately 800,000 decatherms (Dth) per
day of firm capacity on the Company's transmission system. (A Dth is an
amount of heat energy equal to 10 therms or one million British thermal units
(Btu). In the Company's system, each thousand cubic feet of gas (Mcf) equals
approximately 1.07 Dth.) Questar Pipeline transports natural gas owned by
Mountain Fuel and produced from properties operated by Wexpro Company
(Wexpro), another affiliate, as well as some natural gas volumes purchased
directly by Mountain Fuel from field producers and other suppliers. The
Company also transports volumes that are marketed by Universal Resources
Corporation (Universal Resources), another affiliated entity.
The following diagram sets forth the corporate structure of the Company
and certain affiliates:
Questar Corporation
Entrada Industries
Celsius Energy Company
Wexpro Company
Universal Resources
Questar Pipeline Company
Questar TransColorado, Inc.
Questar Gas Management Company
Mountain Fuel Supply Company
Questar InfoComm, Inc.
The major activities of Questar Pipeline are described in more detail
below:
Transmission System
The Company's transmission system is strategically located in the Rocky
Mountains near large reserves of natural gas. It is referred to as a "hub and
spoke" system, rather than a "long-line" pipeline, because of its physical
configuration, multiple interconnections to other interstate pipeline systems,
and access to major producing areas. Questar Pipeline's transmission system
has connections with the pipeline systems of Colorado Interstate Gas Company
(CIG); the middle segment of the Trailblazer Pipeline System (Trailblazer)
owned by Wyoming Interstate Company, Ltd. (WIC); Northwest Pipeline
Corporation (Northwest Pipeline); Williams Natural Gas Company (Williams); and
Kern River Gas Transmission Company (Kern River). These connections have
opened markets outside Mountain Fuel's service area and allow the Company to
transport gas for others.
The Company's transmission system includes 1,754 miles of transmission
lines that interconnect with other pipelines and that link various producers
of natural gas with Mountain Fuel's distribution facilities in Utah and
Wyoming. (This total transmission mileage includes pipelines associated with
the Company's storage fields and tap lines used to serve Mountain Fuel.) The
system includes two major segments, often referred to as the northern and
southern systems, which are linked together. The northern segment extends
from northwestern Colorado through southwestern Wyoming into northern Utah;
the southern segment of the transmission system extends from western Colorado
to Payson, in central Utah.
The Company's pipelines, compressor stations, regulator stations, and
other transmission-related facilities are constructed on properties held under
long-term easements, rights of way, or fee interests sufficient for the
conduct of its business activities.
In addition to the transmission system described above, Questar Pipeline
has an 18 percent interest and is the operating partner in Overthrust, a
general partnership that was organized in 1979 to construct, own, and operate
the Overthrust segment of Trailblazer. Trailblazer is a major 800-mile
pipeline that transports gas from producing areas in the Rocky Mountains to
the Midwest. The 88-mile Overthrust segment is the western-most of
Trailblazer's three segments. Since gas production from the Overthrust area
is generally shipped on the Kern River pipeline to California, the Overthrust
segment is currently underutilized.
Columbia Gas Transmission Corporation, formerly one of the three primary
shippers on Overthrust, was permitted to pay an exit fee during 1995 in order
to terminate its obligation to pay demand costs. The settlement agreement
specifying the exit fee was approved by the FERC and the bankruptcy court.
Questar Pipeline and its partners have explored several alternatives to
enhance the value of the Overthrust line.
Questar Pipeline owns and operates a major compressor complex near Rock
Springs, Wyoming, that compresses volumes of gas from the Company's
transmission system for delivery to the WIC segment of the Trailblazer system
and to CIG. The complex has become a major delivery point on Questar
Pipeline's system. Five of the Company's natural gas lines are connected to
the system at the complex. In addition, both of CIG's Wyoming pipelines and
the WIC segment are connected to the complex.
The Company and its partners are continuing to pursue a project
announced in 1990 to build and operate the proposed TransColorado pipeline.
(Questar TransColorado, Inc., the Company's wholly owned subsidiary, is the
named partner.) Questar Pipeline's partners are affiliates of El Paso Natural
Gas Company (replacing Public Service Company of Colorado) and KN Energy,
Inc. The proposed pipeline is 292 miles in length and would extend from the
Piceance Basin in western Colorado to northwestern New Mexico, where it would
interconnect with other major pipeline systems. As designed, the pipeline
could transport up to 300 million cubic feet (MMcf) of gas per day from
western Colorado and other producing basins in Wyoming and Utah to California
and midwestern and southwestern markets. This project has received the
necessary environmental clearance and regulatory approvals. The project,
which was originally developed prior to the adoption of Order No. 636 and was
delayed by regulatory and environmental approval processes, needs additional
support from customers before construction will begin.
The Kern River pipeline, which was originally a joint project between
Tenneco, Inc. and The Williams Companies Inc., became operational in late
February of 1992. Built to transport gas from Wyoming to the enhanced oil
recovery projects in Kern County, California, this line runs through the major
population areas of Utah. A tap--the Hunter Park tap--has been installed on
the Kern River line in Salt Lake County. This tap makes it possible for
Mountain Fuel and its transportation customers to take deliveries from the
Kern River line. At the current time, however, no deliveries have been made
from the Kern River line to industrial customers in the Wasatch Front area of
Utah.
In September of 1995, the Company announced an agreement to purchase
Kern River Corporation, which was one of two equal partners in the Kern River
Gas Transmission Company, the partnership that owned and operated the Kern
River pipeline. Questar Pipeline was forced to withdraw its acquisition
proposal in late December when the Federal Trade Commission determined to
oppose the transaction based on antitrust concerns.
Transportation Service
Questar Pipeline's largest transportation customer is Mountain Fuel.
During 1995, the Company transported 79,872 thousand decatherms (Mdth) for
Mountain Fuel, compared to 75,941 Mdth in 1994. These transportation volumes
include Mountain Fuel's cost-of-service gas produced by Wexpro, as well as
some volumes purchased by Mountain Fuel directly from field producers and
other suppliers.
Prior to September 1, 1993, the Company purchased gas for resale to
Mountain Fuel, its only sale-for-resale customer. As of such date, Questar
Pipeline discontinued sales-for-resale service, and Mountain Fuel converted
its firm sales capacity to firm transportation capacity. Mountain Fuel has
reserved capacity of about 800,000 Dth per day, or approximately 79 percent of
Questar Pipeline's reserved daily capacity. Mountain Fuel paid an annual
demand charge of approximately $49.4 million to the Company in 1995, which
includes demand charges attributable to firm transportation and "no-notice"
transportation. Mountain Fuel only needs its total reserved capacity during
peak-demand situations. When it is not fully utilizing its capacity, Mountain
Fuel releases the capacity to others, primarily industrial transportation
customers and marketing entities, and receives revenue credits from the
Company, which were approximately $13.0 million during the 12-month period
ending August 31, 1995.
Questar Pipeline recovers approximately 96 percent of its transmission
cost of service through demand charges from firm transportation customers. In
other words, these customers pay for access to transportation capacity, rather
than for the volumes actually transported. Consequently, the Company's
throughput volumes do not have a significant impact on its short-term
operating results. Questar Pipeline's transportation revenues are not
significantly affected by fluctuating demand based on the vagaries of weather
or gas prices.
The Company's total system throughput increased from 250,284 Mdth in
1994 to 270,654 Mdth in 1995. As previously noted, some of this increase was
attributable to increased transportation volumes for Mountain Fuel. The total
throughput increase was also attributable to increased volumes for
nonaffiliated customers (from 129,250 Mdth in 1994 to 151,943 Mdth in 1995).
Universal Resources transported volumes on Questar Pipeline's system, but
these volumes decreased from 45,093 Mdth in 1994 to 38,839 Mdth in 1995.
Questar Pipeline's transmission system is an open-access system and has
been since September of 1988. The FERC's Order No. 636 and the Company's
tariff provisions require it to transport gas on a nondiscriminatory basis
when it has available transportation capacity. The Company does have limited
opportunities for interruptible transportation service. It, however, is
currently obligated, on an annual basis, to credit 90 percent of the revenues,
net of variable costs, obtained from such service to firm customers after it
recovers $1.5 million in revenues associated with interruptible transportation
service. (See "Regulatory Environment" for a description of the proposed
settlement agreement in the Company's general rate case that includes a new
allocation of revenues for interruptible transportation service.)
In order to comply with Order No. 636, Questar Pipeline installed
additional metering that permits "real time" measurement of gas transported on
its system and an electronic bulletin board that allows interested parties to
request capacity on such system. Questar Pipeline spent approximately $4.7
million on such equipment and expects to recover the costs of this equipment
when the settlement agreement in its general rate case is approved.
Questar Pipeline will continue to develop and build new lines and
related facilities that will allow it to meet customer needs or to improve
transportation services. During 1995, the Company conducted a two-part, $10
million project to increase gas deliverability from west Colorado's Piceance
Basin by upgrading its Main Line 68 and the Fidlar Compressor Station south of
Vernal, in eastern Utah.
Gathering
During 1995, the Company provided gathering services for Mountain Fuel
and other customers, but the volumes associated with this activity decreased
as Rocky Mountain producers responded to low wellhead prices by shutting in
production. Questar Pipeline's gathering volumes decreased from 83,983 Mdth
in 1994 to 76,668 Mdth in 1995. On March 1, 1996, the Company transferred its
gathering assets and activities to Questar Gas Management Company (Questar Gas
Management) once both parties obtained the necessary regulatory approvals from
the FERC. Gathering services for Mountain Fuel are performed under an
agreement that was filed with and accepted by the FERC during 1994. Questar
Gas Management is obligated to gather gas volumes produced from Mountain
Fuel's cost-of-service properties for the life of such properties; the
contract to gather Mountain Fuel's field-purchased gas volumes expires in
1997.
Questar Pipeline spun down its gathering activities and assets to
Questar Gas Management, a nonregulated company, in order to remove such
activities from possible regulation by the FERC and to follow the example set
by other interstate pipelines. Questar Gas Management is also the named
partner in the Blacks Fork processing plant and will continue to seek new
opportunities to expand its gathering activities and to conduct other
nonregulated services such as natural gas processing, balancing and
aggregation services for producers, marketers, distribution companies, and
other end users.
Questar Gas Management owns 799 miles of gathering lines in addition to
field dehydration plants, compressor facilities, and other facilities.
Storage
Questar Pipeline operates a major storage facility at Clay Basin in
northeastern Utah. This storage reservoir has been operational since 1977;
open-access storage service has been available at Clay Basin since June of
1991. The Company's storage facilities are certificated by the FERC and its
rates for storage service (based on operating costs and investment in plant
plus an allowed rate of return) are subject to the approval of the FERC.
In 1995, the Company completed a three-year project to expand the
capacity of Clay Basin. The reservoir currently is certificated for 46.3
billion cubic feet (Bcf) of working gas capacity and a total capacity of 110
Bcf. (Working gas is gas that is injected and withdrawn. Cushion gas is gas
in the formation that is necessary to maintain pressure and is not withdrawn
under normal operating conditions.) As a result of this expansion, Clay
Basin's maximum deliverability increased from 500 million cubic feet of gas
(MMcf) per day to 765 MMcf per day.
Clay Basin's firm storage capacity is fully subscribed by customers
under long-term agreements. Mountain Fuel currently has 12.5 Bcf of working
gas capacity at Clay Basin. Other large customers include Northwest Pipeline;
Washington Natural Gas Company, a distribution utility in Washington; and BC
Gas Inc., a distribution utility in British Columbia. Storage service is
increasingly important to distribution companies that need to match annual gas
purchases with fluctuating customer demand, improve service reliability, and
avoid imbalance penalties.
Questar Pipeline also owns and operates three smaller storage
reservoirs. These projects were developed to serve Mountain Fuel's needs, and
Mountain Fuel reserves 100 percent of their working gas capacity. These small
reservoirs are used to supplement Mountain Fuel's gas supply needs on peak-days.
Questar Pipeline has located a salt formation in southwestern Wyoming
and has drilled a well to test the feasibility of utilizing it for a new salt
cavern gas storage project. Working gas can be cycled more frequently in a
salt cavern than in a depleted gas reservoir. Because of its location near
several pipelines, this project should help satisfy growing customer demand
for "quick-cycle" storage and load-balancing activities. Questar Pipeline is
soliciting customer interest in the project.
Processing
In mid-1995, the Blacks Fork processing plant became operational. This
project, which is located in southwestern Wyoming, was built and is operated
as a joint venture between Questar Gas Management and an affiliate of Coastal
Corporation. The plant has a capacity of 84 MMcf per day and was processing
more than 60 MMcf per day at year-end. Natural gas liquids--ethane, propane,
butane, and gasoline--are extracted from the natural gas volumes delivered to
the plant. The new plant and the expanded gathering system built in 1994
provide producers more options for gathering and processing their gas volumes.
Once the liquids are stripped, the natural gas can be transported by pipeline
to end-use markets. The processing plant is not subject to the jurisdiction
of the FERC. Questar Gas Management intends to pursue additional field
processing opportunities.
Regulatory Environment
The Company is a natural gas company under the Natural Gas Act and is
subject to the jurisdiction of the FERC as to rates and charges for storage
and transportation of gas in interstate commerce, construction of new storage
and transmission facilities, extensions or abandonments of service and
facilities, accounts and records, and depreciation and amortization policies.
Questar Pipeline holds certificates of public convenience and necessity
granted by the FERC for the transportation and underground storage of natural
gas in interstate commerce and for the facilities required to perform such
operations.
Questar Pipeline, in common with other interstate pipelines, chose to
terminate its sale-for-resale function when it implemented FERC Order No. 636.
To comply with Order No. 636, as amended, the Company restructured its tariff
provisions to provide for firm and interruptible transportation and storage
service, no-notice transportation service, a capacity release mechanism for
shippers and a straight fixed-variable (SFV) rate methodology. It was also
required to discontinue use of firm upstream capacity in its own name, to
provide flexible receipt and delivery points for firm transportation
customers, and to provide an interactive electronic bulletin board to assist
with the administration of the new provisions.
On July 31, 1995, the Company filed a general rate case application with
the FERC. In its application, Questar Pipeline requested regulatory approval
to increase its rates to collect an additional $23.3 million in annualized
revenues and to reflect a return on equity of 14.5 percent. The Company's
requested revenue increase included transition costs associated with Order No.
636, postemployment (retiree medical and long-term disability) costs,
increased labor costs, and the costs of facilities added since the Company's
last general rate case. Questar Pipeline began collecting the requested
rates, subject to refund, on February 1, 1996.
On March 8, 1996, the Company filed a proposed settlement agreement with
the FERC that had been accepted by the FERC staff and most intervenors. The
terms of the proposed settlement include an annualized revenue increase of
$8.3 million, a return on equity of 11.75 percent, and a new sharing
allocation for interruptible transportation revenues. The new allocation
provision would permit Questar Pipeline, to the extent it is successful in
marketing interruptible transportation services, to retain the first $800,000
in revenues associated with such service. In addition, it would be allowed to
retain 50 percent of the revenues between $800,000 and $1.2 million and 25
percent of the revenues in excess of $1.2 million. The Company's settlement
rates would be effective February 1, 1996.
On March 15, 1996, the Gas Industry Standards Board, a group
representing pipelines, distributors, end users, marketers, and service
providers, filed a set of proposed standards with the FERC. The proposed
standards, which are designed to facilitate the seamless transportation of gas
volumes on pipeline systems, deal with such issues as nominating, capacity
release, electronic delivery, and invoicing processes. The standards, when
adopted by the FERC (in a proposed or modified version), may increase the
costs for Questar Pipeline and all other pipeline systems, but should result
in more efficient service for pipeline customers.
The FERC recently relaxed its "at-risk" policy on pipeline projects. It
established specific criteria for determining when "rolled-in" rates (rather
than incremental rates) are appropriate. (The FERC's original at-risk policy
meant that shareholders, not customers, would absorb any underrecovery of
costs if incremental revenues for a new project did not cover the costs of
such project.) Under the FERC's new policy, rolled-in rates will generally be
approved if rates to existing customers will not increase by more than five
percent and if specified system-wide operational and financial benefits can be
demonstrated. The FERC, however, could still impose at-risk conditions on new
projects even if it approved rolled-in rate treatment for them.
Under the Natural Gas Pipeline Safety Act of 1968, as amended, the
Company is subject to the jurisdiction of the Department of Transportation
(DOT) with respect to safety requirements in the design, construction,
operation and maintenance of its transmission and storage facilities. The
Company also complies with the DOT's drug and alcohol testing regulations.
In addition to the regulations discussed above, Questar Pipeline's
activities in connection with the operation and construction of pipelines,
plants, and other facilities for transporting, processing, or storing natural
gas and other products are subject to extensive environmental regulation by
state and federal authorities, including state air quality control boards and
the Environmental Protection Agency. These compliance activities increase
the cost of planning, designing, installing and operating facilities.
Competition
Competition for Questar Pipeline's transportation, storage, and
gathering services has intensified in recent years. Regulatory changes have
significantly increased customer flexibility and customer responsibility to
directly manage their gas supplies. The Company and Questar Gas Management
actively compete with other interstate pipelines, intrastate pipelines, and
gathering companies to gather and transport gas volumes throughout the Rocky
Mountain region.
In common with Questar Pipeline, other pipeline companies are interested
in expanding their non-regulated (or less-regulated) activities and are
focusing attention on gathering and field service activities. Other gathering
entities and marketing groups are encroaching on the Company's historic
service territory and competing with Questar Gas Management for gathering. It
is not uncommon for wells to have connections with more than one gathering
system or for producers to insist that gathering systems be tied to more than
one pipeline.
As a result, Questar Pipeline's customers have access to a larger
universe of service options and providers. The Company, to provide better
service and more flexibility, is improving its accounting processes and
electronic communications; implementing strategies to develop balancing and
pooling arrangements; and working with other parties to develop some standard
rules within the new environment. The national pipeline grid has become more
integrated, even as competition among the pipelines has become more
aggressive.
The Company has several key assets that contribute to its continued
success. It has a strategically located and integrated transmission system
with interconnections to major pipeline systems and with access to major
producing areas and markets. Questar Pipeline has the Clay Basin storage
facility, a storage reservoir that has been successfully operated since 1977,
that has been expanded in response to interest from customers, and that is
fully subscribed by firm-service customers under long-term contracts. Questar
Gas Management also has an extensive gathering system developed to collect gas
volumes from producing wells as well as expertise in extracting hydrocarbon
liquids from natural gas. As the operator of the new Blacks Fork processing
plant, Questar Gas Management is expanding its activities and expertise.
Questar Pipeline has consistently established partnerships with other
players to acquire expertise, share risks, and expand opportunities. The
Overthrust pipeline, proposed TransColorado pipeline, and Blacks Fork plant
projects all involve partners.
Employees
As of December 31, 1995, the Company had 467 employees, compared to 478
as of the end of 1994. None of these employees is represented under
collective bargaining agreements. The Company participates in the
comprehensive benefit plans of Questar and pays the share of costs
attributable to its employees covered by such plans. Questar Pipeline's
employee relations are generally deemed to be satisfactory.
Relationships with Affiliates
There are significant business relationships between the Company and its
affiliates, particularly Mountain Fuel and Universal Resources. These
relationships are described above. See Note G to the financial statements for
additional information concerning transactions between the Company and its
affiliates.
The Company obtains data processing and communication services from
another affiliate, Questar InfoComm, Inc., under the terms of a written
agreement. Questar InfoComm worked closely with the Company to develop the
electronic bulletin board that is currently being used by Questar Pipeline and
its customers. Questar, the Company's parent, provides certain administrative
services--personnel, legal, public relations, financial, audit, and tax--to
the Company and other members of the consolidated group. A proportionate
share of the costs associated with such services is directly billed or
allocated to Questar Pipeline.
ITEM 3. LEGAL PROCEEDINGS
Questar Pipeline is involved in various legal and regulatory
proceedings. While it is not currently possible to predict or determine the
outcome of these proceedings, it is the opinion of management that the outcome
will not have a material adverse effect on the Company's financial position or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company, as the wholly owned subsidiary of a reporting person, is
entitled to omit the information requested in this Item.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's outstanding shares of common stock, $1.00 par value, are
currently owned by Questar. Information concerning the dividends paid on such
stock and the Company's ability to pay dividends is reported in the Statements
of Shareholder's Equity and Notes to Financial Statements included in Item 8.
ITEM 6. SELECTED FINANCIAL DATA
The Company, as the wholly owned subsidiary of a reporting person, is
entitled to omit the information requested in this Item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
RESULTS OF OPERATIONS
Following is a summary of operating income and operating information for the
Company's operations:
Year Ended December 31,
1995 1994 1993
(Dollars In Thousands)
OPERATING INCOME
Revenues
Transportation $61,749 $61,844 $51,590
Gathering 21,644 23,641 20,386
Storage 31,276 27,620 14,698
Sales for resale 81,813
Other 2,686 2,503 3,141
Total revenues 117,355 115,608 171,628
Operating expenses
Natural gas purchases 56,022
Operating and maintenance 44,634 42,778 48,356
Depreciation and amortization 16,614 15,453 14,084
Other taxes 4,170 4,499 3,915
Total expenses 65,418 62,730 122,377
Operating income $51,937 $52,878 $49,251
OPERATING STATISTICS
Natural gas volumes (in Mdth)
Transportation
For unaffiliated customers 151,943 129,250 113,589
For Mountain Fuel 79,872 75,941 65,061
For other affiliated customers 38,839 45,093 35,599
Total transportation 270,654 250,284 214,249
Sales for resale to Mountain Fuel 24,337
Total system throughput 270,654 250,284 238,586
Gathering
For unaffiliated customers 39,028 39,800 34,348
For Mountain Fuel 31,691 32,098 44,432
For other affiliated customers 5,949 12,085 13,988
Total gathering 76,668 83,983 92,768
Clay Basin storage working gas-
volumes (in Bcf) 46.3 41.8 31.0
Natural gas revenue (per dth)
Transportation $0.23 $0.25 $0.24
Gathering 0.28 0.28 0.22
Sales for resale 3.36
Natural gas purchase cost (per dth) 2.28
Revenues were 2% higher in 1995 compared with 1994 after decreasing 33% from
1993 to 1994. The 1995 rise was the result of increased storage activities at
Questar Pipeline's Clay Basin storage reservoir. Questar Pipeline began a
program in 1993 to expand firm-storage service offered at its Clay Basin storage
facility and completed the program in May 1995 with the signing of contracts for
an additional 4.5 Bcf of firm-storage capacity. Working-gas storage capacity
increased from 31 Bcf in 1993 to 46.3 Bcf in May 1995. Storage capacity at
year-end 1995 was 100% subscribed with contractual terms extending up to 29
years. Storage revenues increased $3,656,000 in 1995 and $12,922,000 in 1994.
Increased capacity and the associated service at Clay Basin were responsible for
all of the 1995 increase in revenues and $3,400,000 of the 1994 increase. The
remaining 1994 change in storage revenues was a result of unbundling and
reclassifying peaking-storage service from sales-for-resale revenues. Peaking
storage is designed to meet peak daily demand requirements of Mountain Fuel.
Lower revenues from gas gathering and interruptible transmission activities
partially offset the higher storage revenues in 1995 as compared with 1994.
Weak gas prices in the Rocky Mountain region caused producers to reduce gas
production. Gas gathering revenues decreased 8% in 1995 after increasing 16% in
1994. Questar Pipeline has expanded its gas gathering operations in the past
several years in the Birch Creek, Bruff and Henry areas of southwestern Wyoming.
The primary cause of a $56,020,000 decrease in Questar Pipeline's revenues
reported in 1994 compared with 1993 was the termination of sales-for-resale
activities under the regulations of FERC Order No. 636. This order unbundled
the components of sales-for-resale, transmission, gathering and storage into
separate activities. Also as a result of Order No. 636, short-term changes in
firm-transportation volumes do not have a significant impact on current
operating results because about 96% of the cost of service is recovered equally
each month in the reservation component of rates.
Most of Questar Pipeline's transportation capacity has been reserved by
firm-transportation customers. Roughly 84% of firm-transportation capacity is
reserved for at least three years. Firm-transportation customers can release
that capacity to third parties when it is not required for their own needs.
Mountain Fuel has reserved transportation capacity from Questar Pipeline of
approximately 800,000 decatherms per day, or about 79% of the total reserved
daily transportation capacity. Interruptible-transportation revenues in 1995
decreased as a result of a shift by customers from interruptible-transportation
service to a higher priority capacity-release service.
Questar Pipeline filed a general rate case with the FERC on July 31, 1995,
seeking an increase in jurisdictional revenues. The request for additional
revenues was intended to recover the costs of enhanced service to customers,
meet regulatory requirements and collect costs associated with employee
postretirement benefits. By order issued August 31, 1995, Questar Pipeline's
rate filing was accepted with an effective date of February 1, 1996, subject to
refund. Questar Pipeline has submitted a settlement to the presiding
administrative law judge. The settlement would avoid a lengthy hearing process
if approved by the FERC.
Questar Pipeline concurrently filed a plan with the FERC to transfer about $53
million of gathering assets, net of accumulated depreciation, to Questar Gas
Management Company, a wholly-owned subsidiary. The FERC approved the transfer
February 28, 1996.
In December 1995, Questar Pipeline announced it would not complete the purchase
of Tennessee Gas Pipeline Company's 50% interest in the Kern River Gas
Transmission Company following a Federal Trade Commission decision to oppose
the transaction. The $1.2 million cost of the unsuccessful bid was expensed in
1995 and included in other expense.
Questar Pipeline, through a partnership, is a 50% owner of a gas processing
plant in southwestern Wyoming. The Blacks Fork Processing plant, which cost $20
million to build, began operations in the second quarter of 1995 and Questar
Pipeline's share of earnings before taxes was $314,000. Questar Pipeline
operating results also include its 18% share or $1.2 million of earnings before
income taxes reported by Overthrust Pipeline Company. A significant portion of
Overthrust Pipeline's 1995 earnings was due to a shipper's buyout of a
transportation contract.
The Company did not purchase gas for resale after August 31, 1993. Operating
and maintenance expenses increased 4% in 1995 when compared with 1994 primarily
due to the costs associated with increased transportation volumes. Operating
and maintenance expenses decreased 12% in 1994 because of eliminating volume and
fuel usage costs associated with the resale of natural gas. Depreciation expense
was 8% higher in 1995 when compared to 1994 and 10% higher in 1994 when compared
to 1993 as a result of Questar Pipeline's capital expenditures. Other expense
in 1995, 1994 and 1993 includes the reduction in value of certain investments.
The effective income tax rate was 35.3% in 1995, 33.6% in 1994 and 35.6% in
1993. A 1994 reversal of $1,245,000 of income tax expense previously expensed
resulted in a lower effective income tax rate in 1994. The adjustment resulted
from the exclusion from taxable income of the transportation revenues recorded
on cushion gas transported into storage.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, that becomes
effective for the Company January 1, 1996. Statement No. 121 requires the
Company to review for impairment, assets that are held and used whenever events
or changes in circumstances indicate that an asset's carrying value may not be
recoverable. If impairment is indicated, the Company must reduce the carrying
value of the asset in question. The Company will adopt Statement No. 121 in 1996
and does not expect a significant effect to either operating results or
financial position.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash provided from operating activities increased 15% in 1995 after
decreasing 42% in 1994. Net cash provided from operating activities was
$45,650,000 in 1995, $39,675,000 in 1994 and $68,548,000 in 1993. The increase
in 1995 compared with 1994 was due primarily to collection of receivables. The
decrease in cash flow in 1994 compared with 1993 was due largely to changes in
business as a result of adopting FERC Order No. 636. Balances in receivables
and payables decreased, and gas stored underground was transferred to Mountain
Fuel.
Investing Activities
Following is a summary of capital expenditures for 1995, 1994 and a forecast of
1996 expenditures:
1996
Estimated 1995 1994
(In Thousands)
Transmission lines $22,400 $15,216 $1,878
Gathering facilities 6,200 3,050 9,392
Clay Basin cushion gas and expansion 1,300 2,500 42,196
Partnerships 4,800 2,082 614
General and other 6,200 4,924 4,147
$40,900 $27,772 $58,227
Questar Pipeline's 1995 capital expenditures included replacement of sections of
gas mainlines, completion of the Clay Basin storage project and cushion-gas
injection, and expansion of the gathering system.
Financing Activities
The Company funded its 1995 capital expenditures primarily with cash provided
from operations and borrowings from Questar. Forecasted 1996 capital
expenditures of $40.9 million are expected to financed with cash provided from
operations and borrowings from Questar.
The Company has a short-term line-of-credit arrangement with a bank under which
it may borrow up to $200,000. The line has interest rates below the prime
interest rate and is renewable on an annual basis. No amounts were borrowed
under this arrangement at either December 31, 1995 or 1994. Questar loans funds
to the Company under a short-term borrowing arrangement. Outstanding short-term
notes payable to Questar totaled $15,200,000 with an interest rate of 6.01% at
December 31, 1995 and $14,600,000 with an interest rate of 6.11% at December 31,
1994.
Questar Pipeline's capital structure was 37% long-term debt and 63% common
shareholder's equity. Moody's and Standard and Poor's have rated the Company's
long-term debt A-1 and A+.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are included in Part IV, Item 14,
herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not changed its independent auditors or had any
disagreements with them concerning accounting matters and financial statement
disclosures within the last 24 months.
PART III
The Company, as the wholly owned subsidiary of a reporting person, is
entitled to omit all information requested in Part III (Items 10-13).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)(2) Financial Statements and Financial Statement Schedules. The
financial statements identified on the List of Financial Statements are filed
as part of this Report.
(a)(3) Exhibits. The following is a list of exhibits required to be
filed as a part of this Report in Item 14(c).
Exhibit No. Exhibit
2.*1 Agreement of Transfer among Mountain Fuel Supply Company, Entrada
Industries, Inc. and Mountain Fuel Resources, Inc., dated July 1,
1984. (Exhibit No. 2. to Registration Statement No. 2-96102
filed February 27, 1985.)
3. Restated Articles of Incorporation dated November 17, 1995.
3.3.* Bylaws (as amended on August 11, 1992). (Exhibit No. 3. to Form
10-Q Report for quarter ended June 30, 1992.)
4.1.* Indenture dated June 1, 1990, for 9-7/8% Debentures due 2020,
with Morgan Guaranty Trust Company of New York as Trustee.
(Exhibit No. 4. to Form 10-Q Report for quarter ended June 30,
1990.)
4.2.* Indenture dated as of June 1, 1991, for 9-3/8% Debentures due
June 1, 2021, with Morgan Guaranty Trust Company of New York as
Trustee. (Exhibit No. 4. to Form 10-Q Report for quarter ended
June 30, 1991.)
10.1.*1 Overthrust Pipeline Company General Partnership Agreement dated
September 20, 1979, as amended and restated as of October 11,
1982, and as amended August 21, 1991, among CIG Overthrust, Inc.,
Columbia Gulf Transmission Company; Mountain Fuel Resources,
Inc.; NGPL-Overthrust Inc.; Northern Overthrust Pipeline Company;
and Tennessee Overthrust Gas Company. (Exhibit No. 10.4. to Form
10-K Annual Report for 1985, except that the amendment dated
August 21, 1991, is included as Exhibit No. 10.4. to Form 10-K
Annual Report for 1992.)
10.2.*1 Data Processing Services Agreement effective July 1, 1985,
between Questar Service Corporation and Mountain Fuel Resources,
Inc. (Exhibit No. 10.11. to Form 10-K Annual Report for 1988.)
10.3.2 Questar Pipeline Company Annual Management Incentive Plan, as
amended February 13, 1996.
10.4. Partnership Agreement for the TransColorado Gas Transmission
Company dated June 30, 1990 and as amended and restated September
25, 1995, between KN TransColorado, Inc., El Paso TransColorado,
Inc., and Questar TransColorado, Inc.
10.5.*3 Firm Transportation Service Agreement with Mountain Fuel Supply
Company under Rate Schedule T-1 dated August 10, 1993, for a term
from November 2, 1993 to June 30, 1999. (Exhibit No. 10.5. to
Form 10-K Annual Report for 1993.)
10.6.*3 Storage Service Agreement with Mountain Fuel Supply Company under
Rate Schedule FSS, for 3.5 Bcf of working gas capacity at Clay
Basin, with a term from September 1, 1993, to August 31, 2008.
(Exhibit No. 10.6. to Form 10-K Annual Report for 1993.)
10.7.*3 Storage Service Agreement with Mountain Fuel Supply Company under
Rate Schedules FSS, for 3.5 Bcf of working gas capacity at Clay
Basin with a term from September 1, 1993, to August 31, 2013.
(Exhibit No. 10.7. to Form 10-K Annual Report for 1993.)
10.83 Storage Service Agreement with Mountain Fuel Supply Company under
Rate Schedule FSS, for 5.0 Bcf of working gas capacity at Clay
Basin, with a term from May 15, 1994 to May 14, 2019.
10.9.* Gas Gathering Agreement between Mountain Fuel Supply Company and
Questar Pipeline Company effective September 1, 1993. (Exhibit
No. 10.9 to Form 10-K Annual Report for 1994.)
10.102 Questar Pipeline Company Deferred Compensation Plan for
Directors, as amended and restated February 13, 1996.
22. Subsidiary Information.
25. Power of Attorney.
27. Financial Data Schedule.
_______________
* Exhibits so marked have been filed with the Securities and Exchange
Commission as part of the indicated filing and are incorporated herein by
reference.
1 The documents listed here have not been formally amended to refer to the
Company's current name. They still refer to the Company as Mountain Fuel
Resources, Inc.
2 Exhibit so marked is management contract or compensation plan or
arrangement.
3 Agreement incorporates specified terms and conditions of Questar Pipeline's
FERC Gas Tariff, First Revised Volume No. 1. The tariff provisions are not
filed as part of the exhibit, but are available upon request.
(b) Questar Pipeline filed a Current Report on Form 8-K dated December
27, 1995, during the last quarter of 1995 to report that it would not
complete the purchase of Kern River Corporation.
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a) (1) and (2), and (d)
LIST OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 1995
QUESTAR PIPELINE COMPANY
SALT LAKE CITY, UTAH
FORM 10-K -- ITEM 14 (a) (1) AND (2)
QUESTAR PIPELINE COMPANY
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following financial statements of Questar Pipeline Company are included in
Item 8:
Statements of income -- Years ended December 31, 1995, 1994
and 1993
Balance sheets -- December 31, 1995 and 1994
Statements of cash flows -- Years ended December 31, 1995,
1994 and 1993
Statements of shareholder's equity -- Years ended December 31,
1995, 1994 and 1993
Notes to financial statements
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
Report of Independent Auditors
Board of Directors
Questar Pipeline Company
We have audited the balance sheets of Questar Pipeline Company as of December
31, 1995 and 1994, and the related statements of income, shareholder's equity,
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Questar Pipeline Company at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note F to the financial statements, Questar Pipeline Company
changed its method of accounting for postemployment benefits in 1994.
Ernst & Young LLP
Salt Lake City, Utah
February 9, 1996
QUESTAR PIPELINE COMPANY
STATEMENTS OF INCOME
Year Ended December 31,
1995 1994 1993
(In Thousands)
REVENUES
From unaffiliated customers $43,316 $40,412 $41,354
From affiliates - Note G 74,039 75,196 130,274
TOTAL REVENUES 117,355 115,608 171,628
OPERATING EXPENSES
Natural gas purchases - Note G 56,022
Operating and maintenance - Note G 44,634 42,778 48,356
Depreciation 16,614 15,453 14,084
Other taxes 4,170 4,499 3,915
TOTAL OPERATING EXPENSES 65,418 62,730 122,377
OPERATING INCOME 51,937 52,878 49,251
INCOME FROM UNCONSOLIDATED
AFFILIATES 1,534 229 128
OTHER EXPENSE - NOTE G (1,886) (1,124) (139)
DEBT EXPENSE (13,472) (13,107) (13,114)
INCOME BEFORE INCOME TAXES 38,113 38,876 36,126
INCOME TAXES - Note D 13,465 13,047 12,851
NET INCOME $24,648 $25,829 $23,275
See notes to financial statements.
QUESTAR PIPELINE COMPANY
BALANCE SHEETS
ASSETS
December 31,
1995 1994
(In Thousands)
CURRENT ASSETS
Cash and short-term investments - Note C $1,677 $1,448
Accounts receivable 7,671 13,234
Accounts receivable from affiliates 6,174 2,002
Federal income tax receivable 1,080
Inventories, at lower of average
cost or market 2,858 2,583
Prepaid expenses and deposits 2,552 2,809
TOTAL CURRENT ASSETS 20,932 23,156
PROPERTY, PLANT AND EQUIPMENT
Transmission 289,059 273,673
Storage 212,492 210,162
Gathering 81,292 80,605
General and intangible 39,118 39,061
Construction work in progress 10,432 11,812
632,393 615,313
Less allowances for depreciation 212,898 203,008
NET PROPERTY, PLANT AND EQUIPMENT 419,495 412,305
OTHER ASSETS
Investment in unconsolidated affiliates 11,010 7,988
Income taxes recoverable
from customers - Note D 3,948 3,666
Unamortized costs of reacquired debt 3,131 3,426
Other 4,834 4,502
22,923 19,582
$463,350 $455,043
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31,
1995 1994
(In Thousands)
CURRENT LIABILITIES
Notes payable to Questar - Notes B and C $15,200 $14,600
Accounts payable and accrued expenses
Accounts payable 9,025 9,368
Accounts payable to affiliates 1,587 1,436
Federal income taxes 48
Other taxes 1,289 1,425
Accrued interest 1,076 1,076
Total accounts payable and
accrued expenses 13,025 13,305
TOTAL CURRENT LIABILITIES 28,225 27,905
LONG-TERM DEBT - Notes B and C 134,525 134,506
DEFERRED CREDITS 5,346 4,861
DEFERRED INCOME TAXES - Note D 70,649 68,814
COMMITMENTS AND CONTINGENCIES - Note E
SHAREHOLDER'S EQUITY
Common stock - par value $1 per share;
authorized 25,000,000 shares; issued
and outstanding 6,550,843 shares 6,551 6,551
Additional paid-in capital 82,034 82,034
Retained earnings 136,020 130,372
224,605 218,957
$463,350 $455,043
See notes to financial statements.
QUESTAR PIPELINE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
Additional
Common Paid-in Retained
Stock Capital Earnings
(In Thousands)
Balance at January 1, 1993 $6,551 $57,034 $115,268
1993 net income 23,275
Cash dividends (16,000)
Balance at December 31, 1993 6,551 57,034 122,543
Capital contribution 25,000
1994 net income 25,829
Cash dividends (18,000)
Balance at December 31, 1994 6,551 82,034 130,372
1995 net income 24,648
Cash dividends (19,000)
Balance at December 31, 1995 $6,551 $82,034 $136,020
See notes to financial statements.
QUESTAR PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1995 1994 1993
(In Thousands)
OPERATING ACTIVITIES
Net income $24,648 $25,829 $23,275
Depreciation 18,250 17,078 15,979
Deferred income taxes 1,835 1,479 1,592
Income from unconsolidated affiliates (1,534) (229) (128)
43,199 44,157 40,718
Changes in operating assets
and liabilities
Accounts receivable 1,391 (4,045) 23,815
Federal income taxes 1,128 (1,322) (1,462)
Inventories (275) (189) 25,539
Prepaid expenses and deposits 257 (541) (75)
Accounts payable and accrued expenses (328) 879 (18,466)
Purchased-gas adjustments (3,441)
Other 278 736 1,920
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 45,650 39,675 68,548
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (25,690) (57,613) (47,216)
Other investments (2,082) (614) (364)
Total capital expenditures (27,772) (58,227) (47,580)
Proceeds from (costs of) disposition
of property, plant and equipment 751 59 (182)
CASH USED IN INVESTING
ACTIVITIES (27,021) (58,168) (47,762)
FINANCING ACTIVITIES
Capital contribution 25,000
Change in notes payable to Questar 600 11,600 (4,500)
Payment of dividends (19,000) (18,000) (16,000)
CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES (18,400) 18,600 (20,500)
Change in cash and
short-term investments 229 107 286
Beginning cash and
short-term investments 1,448 1,341 1,055
ENDING CASH AND SHORT-TERM
INVESTMENTS $1,677 $1,448 $1,341
See notes to financial statements.
QUESTAR PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
Note A - Summary of Accounting Policies
Business: Questar Pipeline Company (the Company or Questar Pipeline) is a
wholly-owned subsidiary of Questar Corporation (Questar). The Company's primary
activities are the transportation, gathering and storage of natural gas. Prior
to September 1993, Questar Pipeline was also engaged in the sale for resale of
natural gas. Significant accounting policies are presented below.
Regulation: The Company is regulated by the Federal Energy Regulatory
Commission (FERC) which establishes rates for the transportation and storage of
natural gas. The FERC also regulates, among other things, the extension and
enlargement or abandonment of jurisdictional natural gas facilities. Regulation
is intended to permit the recovery, through rates, of the cost of service
including a rate of return on investment. The financial statements are
presented in accordance with regulatory requirements. Methods of allocating
costs to time periods, in order to match revenues and expenses, may differ from
those of nonregulated businesses because of cost allocation methods used in
establishing rates.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets and liabilities and disclosure
of contingent liabilities reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Revenue Recognition: Revenues are recognized in the period that services are
provided or products are delivered. Questar Pipeline periodically collects
revenues subject to possible refunds pending final orders from the FERC. The
Company establishes reserves for revenues collected that it estimates may be
refunded.
Property, Plant and Equipment: Property, plant and equipment is stated at cost.
The provision for depreciation is based upon rates, which will amortize costs of
assets over their estimated useful lives. The costs of property, plant and
equipment are depreciated in the financial statements using the straight-line
method, ranging from 3 to 33% per year and averaging 3.7% in 1995. In March
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No.121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of. The Company will adopt Statement
No. 121 in 1996 and does not expect a significant effect to either operating
results or financial position.
Credit Risk: The Company's primary market area is the Rocky Mountain region of
the United States. The Company's exposure to credit risk may be impacted by the
concentration of customers in this region due to changes in economic or other
conditions. The Company's customers may be affected differently by changing
conditions. Management believes that its credit-review procedures and loss
reserves have adequately provided for usual and customary credit-related losses.
The carrying amount of trade receivables approximates fair value.
Investment in Unconsolidated Affiliates: The Company has an 18% partnership
interest in the Overthrust Pipeline Company, which is the operator of the
Overthrust Segment of the Trailblazer Pipeline System. The Company is a
one-third partner in the TransColorado Gas Transmission Company, which plans to
construct a pipeline from the Piceance Basin in Colorado to connections with
other pipelines in northern New Mexico. The Company owns 50% of the Blacks Fork
Gas Processing Company in southwestern Wyoming that operates a plant which
extracts ethane, propane, butane and gasoline from natural gas. The Company
accounts for its investment in these partnerships using the equity method.
Income Taxes: Questar Pipeline records cumulative increases in deferred taxes
as income taxes recoverable from customers. The Company has adopted procedures
with its regulatory commissions to include under-provided deferred taxes in
customer rates on a systematic basis. Questar Pipeline uses the deferral method
to account for investment tax credits as required by the FERC. The Company's
operations are consolidated with those of Questar and its subsidiaries for
income tax purposes. The income tax arrangement between Questar Pipeline and
Questar provides that amounts paid to or received from Questar are substantially
the same as would be paid or received by the Company if it filed a separate
return. Questar Pipeline also receives payment for tax benefits used in the
consolidated tax return even if such benefits would not have been usable had the
Company filed a separate return.
Reacquisition of Debt: Gains and losses on the reacquisition of debt are
deferred and amortized as debt expense over the remaining life of the issue in
order to match regulatory treatment.
Allowance for Funds Used During Construction: The Company capitalizes the cost
of capital during the construction period of plant and equipment. This amounted
to $330,000 in 1995, $976,000 in 1994 and $856,000 in 1993.
Cash and Short-Term Investments: Short-term investments consist principally of
Euro-time deposits and repurchase agreements with maturities of three months or
less.
Note B - Debt
The Company has a short-term line-of-credit arrangement with a bank under which
it may borrow up to $200,000. The line has interest rates below the prime
interest rate and is renewable on an annual basis. No amounts were borrowed
under this arrangement at either December 31, 1995 or 1994. Questar loans funds
to the Company under a short-term borrowing arrangement. Outstanding short-term
notes payable to Questar totaled $15,200,000 with an interest rate of 6.01% at
December 31, 1995 and $14,600,000 with an interest rate of 6.11% at December 31,
1994. Questar Pipeline guarantees $9 million of long-term debt borrowed by
Blacks Fork Gas Processing Company.
The details of long-term debt at December 31, were as follows:
1995 1994
(In Thousands)
9 3/8% debentures due 2021 $85,000 $85,000
9 7/8% debentures due 2020 50,000 50,000
Total long-term debt outstanding 135,000 135,000
Less unamortized debt discount 475 494
$134,525 $134,506
There are no maturities of long-term debt for the five years following December
31, 1995. Cash paid for interest on debt was $13,192,000 in 1995, $13,065,000
in 1994 and $13,018,000 in 1993.
Note C - Financial Instruments
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, were as follows:
1995 1994
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and short-term investments $1,677 $1,677 $1,448 $1,448
Financial liabilities
Short-term loans 15,200 15,200 14,600 14,600
Long-term debt 134,525 158,256 134,506 134,429
The Company used the following methods and assumptions in estimating fair
values: (1) Cash and short-term investments - the carrying amount approximates
fair value; (2) Short-term loans - the carrying amount approximates fair value;
(3) Long-term debt - the fair value of long-term debt is based on quoted market
prices.
Note D - Income Taxes
The components of income taxes charged to income for years ended December 31,
were as follows:
1995 1994 1993
(In Thousands)
Federal
Current $11,388 $10,571 $10,010
Deferred 1,413 1,436 1,512
State
Current 601 997 1,249
Deferred 63 43 80
$13,465 $13,047 $12,851
The difference between income tax expense and the tax computed by applying the
statutory federal income tax rate to income from continuing operations before
income taxes is explained as follows:
1995 1994 1993
(In Thousands)
Income before income taxes $38,113 $38,876 $36,126
Federal income taxes at statutory rate $13,340 $13,607 $12,644
State income taxes, net of federal
income tax benefit 454 691 892
Prior years' tax settlement (178) (692)
Tax adjustment on revenues from cushion
gas transported into storage (1,245)
Other (151) (6) 7
Income tax expense $13,465 $13,047 $12,851
Effective income tax rate 35.3% 33.6% 35.6%
Significant components of the Company's deferred tax liabilities and assets at
December 31, were as follows:
1995 1994
(In Thousands)
Deferred tax liabilities
Property, plant and equipment $66,364 $64,002
Income taxes recoverable from customers 1,487 1,914
Unamortized debt reacquisition costs 1,159 1,267
Pension costs 519 535
Other 1,988 3,263
Total deferred tax liabilities 71,517 70,981
Deferred tax assets 868 2,167
Net deferred tax liabilities $70,649 $68,814
Cash paid for income taxes was $11,946,000 in 1995, $14,404,000 in 1994 and
$12,404,000 in 1993.
Note E - Rate Matters, Litigation and Commitments
Questar Pipeline filed a general rate case with the FERC on July 31, 1995,
seeking an increase in jurisdictional revenues. The request for additional
revenues was intended to recover the costs of enhanced service to customers,
meet regulatory requirements and collect costs associated with employee
postretirement benefits. By order issued August 31, 1995, Questar Pipeline's
rate filing was accepted with an effective date of February 1, 1996, subject to
refund. Questar Pipeline has submitted a settlement to the presiding
administrative law judge. The settlement would avoid a lengthy hearing process
if approved by the FERC.
Questar Pipeline concurrently filed a plan with the FERC to transfer about $53
million of gathering assets, net of accumulated depreciation, to Questar Gas
Management Company, a wholly-owned subsidiary. The FERC approved the transfer
February 28, 1996.
There are various legal proceedings against the Company. While it is not
currently possible to predict or determine the outcome of these proceedings, it
is the opinion of management that the outcome will not have a material adverse
effect on the Company's results of operations, financial position or liquidity.
Note F - Employment Benefits
Pension Plan: Substantially all Company employees are covered by Questar's
defined benefit pension plan. Benefits are generally based on years of service
and the employee's 36-month period of highest earnings during the ten years
preceding retirement. It is Questar's policy to make contributions to the plan
at least sufficient to meet the minimum funding requirements of applicable laws
and regulations. Plan assets consist principally of equity securities and
corporate and U.S. government debt obligations. Pension cost was $1,123,000 in
1995, $1,201,000 in 1994 and $1,372,000 in 1993.
Questar Pipeline's portion of plan assets and benefit obligations is not
determinable because the plan assets are not segregated or restricted to meet
the Company's pension obligations. If the Company were to withdraw from the
pension plan, the pension obligation for the Company's employees would be
retained by the pension plan. At December 31, 1995, Questar's fair value of
plan assets exceeded the accumulated benefit obligation.
Postretirement Benefits Other Than Pensions: The Company pays a portion of the
health-care costs and all the life insurance costs for employees who retired
prior to January 1, 1993. The plan was changed for employees retiring after
January 1, 1993, to link the health-care benefit to years of service and to
limit the Company's monthly health-care contribution per individual to 170% of
the 1992 contribution. Employees hired after December 31, 1996, will not qualify
for benefits under this plan. The Company's policy is to fund amounts allowable
for tax deduction under the Internal Revenue Code. Plan assets consist of
equity securities, corporate and U.S. government debt obligations, and insurance
company general accounts. The Company is amortizing the transition obligation
over a 20-year period. Total costs of postretirement benefits other than
pensions were $1,044,000 in 1995, $1,130,000 in 1994 and $1,059,000 in 1993. The
Company expects to receive rate coverage of the jurisdictional portion of these
costs in its current rate case and has recorded a regulatory asset of $1,730,000
at December 31, 1995. The FERC issued an order granting rate recovery
methodology for SFAS No. 106 costs to the extent that the Company contributes
the amounts to an external trust.
The Company's portion of plan assets and benefit obligations related to
postretirement medical and life insurance benefits is not determinable because
the plan assets are not segregated or restricted to meet the Company's
obligations.
Postemployment Benefits: The Company recognizes the net present value of the
liability for postemployment benefits, such as long-term disability benefits and
health care and life insurance costs, when employees become eligible for such
benefits. Postemployment benefits are paid to former employees after employment
has been terminated but before retirement benefits are paid. The Company accrues
both current and future costs. The Company expects to receive rate coverage of
the jurisdictional portion of these costs as part of its current rate case. At
December 31, 1995, the Company had a $539,000 regulatory asset for
postemployment costs.
Employee Investment Plan: The Company participates in Questar's Employee
Investment Plan (ESOP), which allows eligible employees to purchase Questar
Corporation common stock or other investments through payroll deduction. The
Company makes contributions of Questar Corporation common stock to the ESOP of
approximately 75% of the employees' purchases and contributes an additional $200
of common stock in the name of each eligible employee. The Company's expense
and contribution to the plan was $667,000 in 1995, $591,000 in 1994 and $571,000
in 1993.
Note G - Related Party Transactions
The Company receives a substantial portion of its revenues from Mountain Fuel
Supply Company. Revenues received from Mountain Fuel amounted to $69,964,000 or
60% in 1995, $70,966,000 or 61% in 1994, and $124,807,000 or 73% in 1993. The
Company also received revenues from other affiliated companies totaling
$4,075,000 in 1995, $4,230,000 in 1994 and $5,072,000 in 1993.
Natural gas purchases include $4,844,000 from affiliated companies in 1993. The
Company did not purchase gas for resale after August 31, 1993.
Questar performs certain administrative functions for the Company. The Company
was charged for its allocated portion of these services which totaled $3,212,000
in 1995, $3,439,000 in 1994 and $3,408,000 in 1993. These costs are included in
operating and maintenance expenses and are allocated based on each company's
proportional share of revenues, net of gas costs; property, plant and equipment;
and payroll. Management believes that the allocation method is reasonable.
The Company terminated an operating service agreement on July 1, 1993, with
Wexpro Company (Wexpro), a wholly-owned subsidiary of Questar. Under that
agreement Wexpro operated certain gathering, compressor, measurement and other
production-related facilities owned by the Company. Those functions were
subsequently assumed by Company employees. The Company reimbursed Wexpro's
expenses with respect to such services and paid a fee equal to 15% of such
expenses. The Company paid Wexpro $3,443,000 in 1993 for such services.
Questar InfoComm Inc. is an affiliated company that provides data processing and
communication services to Questar Pipeline. The Company paid Questar InfoComm
$7,542,000 in 1995, $7,036,000 in 1994 and $6,607,000 in 1993.
The Company received interest income from affiliated companies of $22,000 in
1995, $225,000 in 1994 and $327,000 in 1993. The Company had debt expense to
affiliated companies of $272,000 in 1995, $134,000 in 1994 and $21,000 in 1993.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 28th day
of March, 1996.
QUESTAR PIPELINE COMPANY
(Registrant)
By /s/ A. J. Marushack
A. J. Marushack
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ A. J. Marushack President & Chief Executive Officer;
A. J. Marushack Director (Principal Executive
Officer)
/s/ S. E. Parks Vice President, Treasurer, and Chief
S. E. Parks Financial Officer (Principal
Financial Officer)
/s/ R. P. Ord Controller & Assistant Treasurer
R. P. Ord (Principal Accounting Officer)
*R. D. Cash Chairman of the Board; Director
*W. F. Edwards Director
*U. Edwin Garrison Director
*A. J. Marushack Director
*Neal A. Maxwell Director
*Mary Mead Director
March 28, 1996 *By /s/ A. J. Marushack
Date A. J. Marushack, Attorney in Fact
Exhibit List
Exhibit No. Exhibit
2.*1 Agreement of Transfer among Mountain Fuel Supply Company, Entrada
Industries, Inc. and Mountain Fuel Resources, Inc., dated July 1,
1984. (Exhibit No. 2. to Registration Statement No. 2-96102
filed February 27, 1985.)
3. Restated Articles of Incorporation dated November 17, 1995.
3.3.* Bylaws (as amended on August 11, 1992). (Exhibit No. 3. to Form
10-Q Report for quarter ended June 30, 1992.)
4.1.* Indenture dated June 1, 1990, for 9-7/8% Debentures due 2020,
with Morgan Guaranty Trust Company of New York as Trustee.
(Exhibit No. 4. to Form 10-Q Report for quarter ended June 30,
1990.)
4.2.* Indenture dated as of June 1, 1991, for 9-3/8% Debentures due
June 1, 2021, with Morgan Guaranty Trust Company of New York as
Trustee. (Exhibit No. 4. to Form 10-Q Report for quarter ended
June 30, 1991.)
10.1.*1 Overthrust Pipeline Company General Partnership Agreement dated
September 20, 1979, as amended and restated as of October 11,
1982, and as amended August 21, 1991, among CIG Overthrust, Inc.,
Columbia Gulf Transmission Company; Mountain Fuel Resources,
Inc.; NGPL-Overthrust Inc.; Northern Overthrust Pipeline Company;
and Tennessee Overthrust Gas Company. (Exhibit No. 10.4. to Form
10-K Annual Report for 1985, except that the amendment dated
August 21, 1991, is included as Exhibit No. 10.4. to Form 10-K
Annual Report for 1992.)
10.2.*1 Data Processing Services Agreement effective July 1, 1985,
between Questar Service Corporation and Mountain Fuel Resources,
Inc. (Exhibit No. 10.11. to Form 10-K Annual Report for 1988.)
10.3.2 Questar Pipeline Company Annual Management Incentive Plan, as
amended February 13, 1996.
10.4. Partnership Agreement for the TransColorado Gas Transmission
Company dated June 30, 1990 and as amended and restated September
25, 1995, between KN TransColorado, Inc., El Paso TransColorado,
Inc., and Questar TransColorado, Inc.
10.5.*3 Firm Transportation Service Agreement with Mountain Fuel Supply
Company under Rate Schedule T-1 dated August 10, 1993, for a term
from November 2, 1993 to June 30, 1999. (Exhibit No. 10.5. to
Form 10-K Annual Report for 1993.)
10.6.*3 Storage Service Agreement with Mountain Fuel Supply Company under
Rate Schedule FSS, for 3.5 Bcf of working gas capacity at Clay
Basin, with a term from September 1, 1993, to August 31, 2008.
(Exhibit No. 10.6. to Form 10-K Annual Report for 1993.)
10.7.*3 Storage Service Agreement with Mountain Fuel Supply Company under
Rate Schedules FSS, for 3.5 Bcf of working gas capacity at Clay
Basin with a term from September 1, 1993, to August 31, 2013.
(Exhibit No. 10.7. to Form 10-K Annual Report for 1993.)
10.83 Storage Service Agreement with Mountain Fuel Supply Company under
Rate Schedule FSS, for 5.0 Bcf of working gas capacity at Clay
Basin, with a term from May 15, 1994 to May 14, 2019.
10.9.* Gas Gathering Agreement between Mountain Fuel Supply Company and
Questar Pipeline Company effective September 1, 1993. (Exhibit
No. 10.9 to Form 10-K Annual Report for 1994.)
10.102 Questar Pipeline Company Deferred Compensation Plan for
Directors, as amended and restated February 13, 1996.
22. Subsidiary Information.
25. Power of Attorney.
27. Financial Data Schedule.
_______________
* Exhibits so marked have been filed with the Securities and Exchange
Commission as part of the indicated filing and are incorporated herein by
reference.
1 The documents listed here have not been formally amended to refer to the
Company's current name. They still refer to the Company as Mountain Fuel
Resources, Inc.
2 Exhibit so marked is management contract or compensation plan or
arrangement.
3 Agreement incorporates specified terms and conditions of Questar Pipeline's
FERC Gas Tariff, First Revised Volume No. 1. The tariff provisions are not
filed as part of the exhibit, but are available upon request.