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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, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_____ TO _____
Commission File No. 0-14147
QUESTAR PIPELINE COMPANY
(Exact name of registrant as specified in its charter)
State of Utah 87-0307414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
79 South State Street, P.O. Box 11450, Salt Lake City, Utah 84147
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (801) 324-2400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933:
9 7/8% Debentures due 2020
9 3/8% Debentures due 2021
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X
No
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant as of March 21, 1997. $0.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of March 21, 1997. 6,550,843
shares of Common Stock, $1.00 par value. (All shares are owned by
Questar Regulated Services Company.)
Registrant meets the conditions set forth in General Instruction
(J)(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K
Report with the reduced disclosure format.
TABLE OF CONTENTS
Heading Page
PART I
Items 1.
and 2. BUSINESS AND PROPERTIES
General.....................................................
Transmission System.........................................
Transportation Service......................................
Storage.....................................................
Regulatory Environment......................................
Competition.................................................
Employees...................................................
Relationships with Affiliates...............................
Item 3. LEGAL PROCEEDINGS..............................................
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS...............................................
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................................
Item 6. (Omitted)......................................................
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION...................
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA...........................................................
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...........................................
PART III
Items
10-13. (Omitted)......................................................
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K........................................
SIGNATURES..............................................................
FORM 10-K
ANNUAL REPORT, 1996
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
General
Questar Pipeline Company (Questar Pipeline or the Company) is an
interstate pipeline company that is engaged in the transportation and
storage of natural gas in the Rocky Mountain states of Utah, Wyoming,
and Colorado. During 1996, the Company spun-down its gathering assets
to Questar Gas Management Company (Questar Gas Management). As a
"natural gas company," the Company is subject to regulation by the
Federal Energy Regulatory Commission (the FERC) pursuant to the Natural
Gas Act of 1938, as amended, and certain other federal legislation.
As an open-access pipeline, Questar Pipeline transports gas for
affiliated and unaffiliated customers. It also owns and operates the
Clay Basin storage facility, which is a large underground storage
project in northeastern Utah, and other underground storage operations
in Utah and Wyoming. The Company is involved in two partnerships,
Overthrust Pipeline Company (Overthrust), and TransColorado Gas
Transmission Company (TransColorado).
In mid-1996, Questar Pipeline and its affiliate Mountain Fuel
Supply Company (Mountain Fuel) were placed under the same management
team of officers and linked together to form the Regulated Services
segment of Questar Corporation (Questar). Questar is a publicly-owned
integrated energy supplier. This reorganization was completed as of
January 1, 1997, when both entities became subsidiaries of Questar
Regulated Services Company (Regulated Services) and specified employees
from both the Company and Mountain Fuel were transferred to the new
parent.
The Company has significant business relationships with its
affiliates, particularly Mountain Fuel. Mountain Fuel, a regulated
local distribution company that serves over 618,200 customers in Utah,
southwestern Wyoming, and southeastern Idaho, has reserved approximately
800,000 decatherms (Dth) per day of firm transportation capacity on the
Company's transmission system and reserved storage capacity at Clay
Basin and smaller storage reservoirs. (A Dth is an amount of heat
energy equal to 10 therms or one million British thermal units (Btu).
In the Company's system, each thousand cubic feet of gas (Mcf) equals
approximately 1.07 Dth.) Questar Pipeline transports natural gas owned
by Mountain Fuel and produced from properties operated by Wexpro Company
(Wexpro), another affiliate, as well as some natural gas volumes
purchased directly by Mountain Fuel from field producers and other
suppliers. The Company also transports volumes that are marketed by
Questar Energy Trading Company (Questar Energy), another affiliated
entity.
The following diagram sets forth the corporate structure of the
Company and certain affiliates:
Questar Corporation
Questar Regulated Services Company
Questar Pipeline Company
Mountain Fuel Supply Company
Entrada Industries Inc.
Wexpro Company
Questar Gas Management Company
Celsius Energy Company
Questar Energy Trading Company
Universal Resources Corporation
Questar Energy Services Inc.
Questar InfoComm Inc.
The major activities of Questar Pipeline are described in more
detail below:
Transmission System
The Company's transmission system is strategically located in the
Rocky Mountains near large reserves of natural gas. It is referred to
as a "hub and spoke" system, rather than a "long-line" pipeline, because
of its physical configuration, multiple interconnections to other
interstate pipeline systems, and access to major producing areas.
Questar Pipeline's transmission system has connections with the pipeline
systems of Colorado Interstate Gas Company (CIG); the middle segment of
the Trailblazer Pipeline System (Trailblazer) owned by Wyoming
Interstate Company, Ltd. (WIC); Northwest Pipeline Corporation
(Northwest Pipeline); Williams Natural Gas Company (Williams); and Kern
River Gas Transmission Company (Kern River). These connections have
opened markets outside Mountain Fuel's service area and allow the
Company to transport gas for others.
The Company's transmission system includes 1,731 miles of
transmission lines that interconnect with other pipelines and that link
various producers of natural gas with Mountain Fuel's distribution
facilities in Utah and Wyoming. (This total transmission mileage
includes pipelines associated with the Company's storage fields and tap
lines used to serve Mountain Fuel.) The system includes two major
segments, often referred to as the northern and southern systems, which
are linked together. The northern segment extends from northwestern
Colorado through southwestern Wyoming into northern Utah; the southern
segment of the transmission system extends from western Colorado to
Payson, in central Utah.
The Company's pipelines, compressor stations, regulator stations,
and other transmission-related facilities are constructed on properties
held under long-term easements, rights of way, or fee interests
sufficient for the conduct of its business activities.
In addition to the transmission system described above, Questar
Pipeline has a 36 percent interest and is the operating partner in
Overthrust, a general partnership that was organized in 1979 to
construct, own, and operate the Overthrust segment of Trailblazer.
(During 1996, the Company's ownership interest increased from 18 percent
to 36 percent as a result of purchasing the interest of Columbia Gulf
Transmission Company.) Trailblazer is a major 800-mile pipeline that
transports gas from producing areas in the Rocky Mountains to the
Midwest. The 88-mile Overthrust segment is the western-most of
Trailblazer's three segments. Since gas production from the Overthrust
area is generally shipped on the Kern River pipeline to California, the
Overthrust segment is currently underutilized.
Questar Pipeline owns and operates a major compressor complex near
Rock Springs, Wyoming, that compresses volumes of gas from the Company's
transmission system for delivery to the WIC segment of the Trailblazer
system and to CIG. The complex has become a major delivery point on
Questar Pipeline's system. Five of the Company's major natural gas
lines are connected to the system at the complex. In addition, both of
CIG's Wyoming pipelines and the WIC segment are connected to the
complex.
The Company and its partners are continuing to pursue a project
announced in 1990 to build and operate the proposed TransColorado
pipeline. (Questar TransColorado, Inc., the Company's wholly owned
subsidiary, is the named partner.) Questar Pipeline's partners are
affiliates of El Paso Natural Gas Company and KN Energy, Inc. The
proposed pipeline is 292 miles in length and would extend from the
Piceance Basin in western Colorado to northwestern New Mexico, where it
would interconnect with other major pipeline systems. As designed, the
pipeline could transport up to 300 million cubic feet (MMcf) of gas per
day from western Colorado and other producing basins in Wyoming and Utah
to California and midwestern and southwestern markets. This project has
received the necessary environmental clearance and regulatory approvals.
It is moving forward in phases in response to shipper demand and market
opportunities.
Transportation Service
Questar Pipeline's largest transportation customer is Mountain
Fuel. During 1996, the Company transported 100,161 thousand decatherms
(MDth) for Mountain Fuel, compared to 79,872 MDth in 1995. These
transportation volumes include Mountain Fuel's cost-of-service gas
produced by Wexpro, as well as volumes purchased by Mountain Fuel
directly from field producers and other suppliers.
Prior to September 1, 1993, the Company purchased gas for resale
to Mountain Fuel, its only sale-for-resale customer. As of that date,
Questar Pipeline discontinued sale-for-resale service, and Mountain Fuel
converted its firm sales capacity to firm transportation capacity.
Mountain Fuel has reserved capacity of about 800,000 Dth per day, or
approximately 72 percent of Questar Pipeline's reserved daily capacity.
Mountain Fuel paid an annual reservation charge of approximately $45.8
million to the Company in 1996, which includes reservation charges
attributable to firm and "no-notice" transportation. Mountain Fuel only
needs its total reserved capacity during peak-demand situations. When
it is not fully utilizing its capacity, Mountain Fuel releases the
capacity to others, primarily industrial transportation customers and
marketing entities, and receives revenue credits from the Company, which
were approximately $9.1 million during 1996.
Questar Pipeline's transportation agreement with Mountain Fuel
expires on June 30, 1999. While it is too soon to predict whether
Mountain Fuel will continue to need this same firm transportation
capacity on the Company's transmission system, it is clear that
design-day requirements for Mountain Fuel's firm sales and
transportation customers are growing rapidly.
Questar Pipeline recovers approximately 96 percent of its
transmission cost of service through reservation charges from firm
transportation customers. In other words, these customers pay for
access to transportation capacity, rather than for the volumes actually
transported. Consequently, the Company's throughput volumes do not have
a significant effect on its short-term operating results. Questar
Pipeline's transportation revenues are not significantly affected by
fluctuating demand based on the vagaries of weather or gas prices.
The Company's total system throughput increased from 270,654 MDth
in 1995 to 276,383 MDth in 1996. Most of this increase was attributable
to expanded transportation volumes for Mountain Fuel. The total
throughput increase was also attributable to increased volumes for other
affiliated customers, which expanded from 38,839 MDth in 1995 to 44,327
MDth in 1996. Questar Pipeline's transportation volumes for
nonaffiliated customers declined from 151,943 MDth in 1995 to 131,895
MDth in 1996.
Questar Pipeline's transmission system is an open-access system
and has been since September of 1988. The FERC's Order No. 636 and the
Company's tariff provisions require it to transport gas on a
nondiscriminatory basis when it has available transportation capacity.
It is permitted, as of February 1, 1996, to retain the first $800,000 in
revenues associated with interruptible transportation services, and to
retain 50 percent of the revenues between $800,000 and $1.2 million and
25 percent of the revenues in excess of $1.2 million. Since most of its
costs are collected through reservation charges from firm customers,
Questar Pipeline has agreed to share interruptible transportation
revenues with these customers.
Questar Pipeline will continue to develop and build new lines and
related facilities that will allow it to meet customer needs or to
improve transportation services. During 1997, the Company plans to
begin construction of a new 20-inch diameter line extending from Clay
Basin to Coleman Station in southwestern Wyoming. This project, which
will be built in phases and is scheduled to be finished in 1998, will
significantly expand Questar Pipeline's capacity to move gas north from
the storage reservoir and its southern system. The Company is also
building a new pipeline into the Ferron area of eastern Utah, which is
the site of a large project to produce gas from coal seams.
Storage
Questar Pipeline operates a major storage facility at Clay Basin
in northeastern Utah. This storage reservoir has been operational since
1977; open-access storage service has been available at Clay Basin since
June of 1991. The Company's storage facilities are certificated by the
FERC and its rates for storage service (based on operating costs and
investment in plant plus an allowed rate of return) are subject to the
approval of the FERC.
The Clay Basin facility, which was significantly expanded in 1995,
is certificated for 46.3 billion cubic feet (Bcf) of working gas
capacity and a total capacity of 110 Bcf. (Working gas is gas that is
injected and withdrawn.) As a result of this expansion, Clay Basin's
maximum deliverability increased to 765 MMcf per day.
Clay Basin's firm storage capacity is fully subscribed by
customers under long-term agreements. Mountain Fuel currently has 12.5
Bcf of working gas capacity at Clay Basin. Other large customers
include Northwest Pipeline; Washington Natural Gas Company, a
distribution utility in Washington; and BC Gas Inc., a distribution
utility in British Columbia. Storage service is important to
distribution companies that need to match annual gas purchases with
fluctuating customer demand, improve service reliability, and avoid
imbalance penalties.
Questar Pipeline currently offers interruptible storage service at
Clay Basin. Effective January 1, 1997, it received regulatory approval
to remove some constraints formerly applicable to interruptible storage
service and hopes to expand interruptible services. The Company also
intends to allow firm storage service customers the right to transfer
their injection and withdrawal rights to other parties.
Questar Pipeline also owns and operates three smaller storage
reservoirs. These projects were developed specifically to serve
Mountain Fuel's needs, and Mountain Fuel reserves 100 percent of their
working gas capacity. These small reservoirs are used primarily to
supplement Mountain Fuel's gas supply needs on peak days.
Regulatory Environment
The Company is a natural gas company under the Natural Gas Act and
is subject to the jurisdiction of the FERC as to rates and charges for
storage and transportation of gas in interstate commerce, construction
of new storage and transmission facilities, extensions or abandonments
of service and facilities, accounts and records, and depreciation and
amortization policies. Questar Pipeline holds certificates of public
convenience and necessity granted by the FERC for the transportation and
underground storage of natural gas in interstate commerce and for the
facilities required to perform such operations.
Questar Pipeline, in common with other interstate pipelines, chose
to terminate its sale-for-resale function when it implemented FERC Order
No. 636. To comply with Order No. 636, as amended, the Company
restructured its tariff provisions to provide for firm and interruptible
transportation and storage service, no-notice transportation service, a
capacity release mechanism for shippers and a straight fixed-variable
(SFV) rate methodology. It was also required to discontinue use of firm
upstream capacity in its own name, to provide flexible receipt and
delivery points for firm transportation customers, and to provide an
interactive electronic bulletin board to assist with the administration
of the new provisions.
A settlement agreement in the Company's 1995 general rate case was
approved by the FERC effective February 1, 1996. Under the terms of
this settlement, Questar Pipeline was permitted to collect rates that
reflected an annualized revenue increase of approximately $5.9 million,
to earn a return on equity of 11.75 percent, and to retain specified
revenues associated with interruptible transportation and storage
services.
Questar Pipeline does not currently plan to file a general rate
case in 1997. It, however, will continue to review its revenues and
costs as it adds new facilities that are not included in its rate base
and makes expenditures to comply with regulatory mandates.
During 1997, the Company expects to spend $2.8 million to comply
with the standards originally proposed by the Gas Industry Standards
Board (GISB) and mandated by the FERC. These requirements, commonly
known as the GISB standards, are designed to facilitate the seamless
transportation of gas volumes on pipeline systems and deal with such
issues as nominations, confirmations, priority of service, allocation,
balancing, and invoicing. Questar Pipeline is required to comply with
some standards by June 1, 1997, to have an Internet web site by August
1, 1997, and to implement a second round of standards by November 1,
1997.
The FERC has adopted specific criteria for determining when
"rolled-in" rates (rather than incremental rates) are appropriate.
Under the FERC's policy, rolled-in rates will generally be approved if
rates to existing customers will not increase by more than five percent
and if specified system-wide operational and financial benefits can be
demonstrated. The FERC, however, can impose at-risk conditions on new
projects even if it approves rolled-in rate treatment for them and can
require additional support in subsequent rate cases to continue
rolled-in treatment.
In conjunction with its 1995 general rate case, Questar Pipeline
received rolled-in rate treatment for some facilities that were
previously certificated as at-risk facilities. The FERC, however, did
not remove the at-risk designation formerly placed on them. Questar
Pipeline has again requested the FERC to remove the at-risk condition on
these facilities. The Company, when contemplating future expansion
projects, must evaluate the risk of having shareholders, not customers,
absorb any underrecovery of costs if incremental revenues for a new
project do not cover the costs of such project, versus the risk of
losing transportation volumes to competitors.
Under the Natural Gas Pipeline Safety Act of 1968, as amended, the
Company is subject to the jurisdiction of the Department of
Transportation (DOT) with respect to safety requirements in the design,
construction, operation and maintenance of its transmission and storage
facilities. The Company also complies with the DOT's drug and alcohol
testing regulations.
In addition to the regulations discussed above, Questar Pipeline's
activities in connection with the operation and construction of
pipelines and other facilities for transporting or storing natural gas
are subject to extensive environmental regulation by state and federal
authorities, including state air quality control boards and the
Environmental Protection Agency. These compliance activities increase
the cost of planning, designing, installing and operating facilities.
Competition
Competition for Questar Pipeline's transportation and storage
services has intensified in recent years. Regulatory changes have
significantly increased customer flexibility and responsibility to
directly manage their gas supplies. The Company actively competes with
other interstate pipelines for transportation volumes throughout the
Rocky Mountain region.
The Company has two key assets that contribute to its continued
success. It has a strategically located and integrated transmission
system with interconnections to major pipeline systems and with access
to major producing areas and markets. Questar Pipeline has the Clay
Basin storage facility, a storage reservoir that has been successfully
operated since 1977, that has been expanded in response to interest from
customers, and that is fully subscribed by firm-service customers under
contracts that are generally long-term in nature.
Questar Pipeline has established partnerships with others to
acquire expertise, share risks, and expand opportunities. Both the
Overthrust pipeline and the proposed TransColorado pipeline involve
partners.
Employees
As of December 31, 1996, the Company had 352 employees, compared
to 467 as of the end of 1995. (This decrease reflects the transfer of
approximately 108 employees when gathering assets and activities were
spun down to Questar Gas Management.) As of the date of this report,
Questar Pipeline has 169 employees, reflecting the transfer of employees
to Regulated Services and Questar InfoComm, Inc. (Questar InfoComm.)
None of these employees is represented under collective bargaining
agreements. The Company participates in the comprehensive benefit plans
of Questar and pays the share of costs attributable to its employees
covered by such plans. Questar Pipeline's employee relations are
generally deemed to be satisfactory.
Relationships with Affiliates
There are significant business relationships between the Company
and its affiliates, particularly Mountain Fuel. These relationships are
described above. See Note 8 to the financial statements for additional
information concerning transactions between the Company and its
affiliates.
The Company obtains data processing and communication services
from another affiliate, Questar InfoComm, under the terms of a written
agreement. Regulated Services, the Company's parent, has employees who
perform engineering, accounting, marketing, budget, tax, and legal
services for both Questar Pipeline and Mountain Fuel. Questar also
provides certain administrative services, benefit plans, public
relations, financial, audit, and tax, to the Company and other members of
the consolidated group. A proportionate share of the costs associated
with such services is directly billed or allocated to Questar Pipeline.
ITEM 3. LEGAL PROCEEDINGS
Questar Pipeline is involved in various legal and regulatory
proceedings. While it is not currently possible to predict or determine
the outcome of these proceedings, it is the opinion of management that
the outcome will not have a material adverse effect on the Company's
financial position or liquidity.
The Company, Questar, Mountain Fuel and other affiliates are
defendants in a lawsuit that was recently filed by a producer in
Wyoming's federal district court. This lawsuit involves some of the
same take-or-pay and tax reimbursement claims that are the subject of a
case against Mountain Fuel that has not yet been reduced to a final
judgement in the same court. The new lawsuit, however, also involves
claims of fraud and antitrust violations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company, as the wholly owned subsidiary of a reporting person,
is entitled to omit the information requested in this Item.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's outstanding shares of common stock, $1.00 par value,
are currently owned by Regulated Services. Information concerning the
dividends paid on such stock and the Company's ability to pay dividends
is reported in the Statements of Shareholder's Equity and Notes to
Financial Statements included in Item 8.
ITEM 6. SELECTED FINANCIAL DATA
The Company, as the wholly owned subsidiary of a reporting person,
is entitled to omit the information requested in this Item.
ITEM 7. MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Questar Pipeline conducts natural-gas transmission and storage
operations. Following is a summary of operating income and
operating information:
Year Ended December 31,
1996 1995 1994
(Dollars In Thousands)
OPERATING INCOME
Revenues
Transportation $67,656 $61,749 $61,844
Storage 34,280 31,276 27,620
Other 2,242 1,747 1,645
Total revenues 104,178 94,772 91,109
Operating expenses
Operating and maintenance 39,959 34,003 31,949
Depreciation and amortization 14,206 12,911 12,053
Other taxes 2,519 3,370 3,621
Total expenses 56,684 50,284 47,623
Operating income $47,494 $44,488 $43,486
OPERATING STATISTICS
Natural gas transportation volumes (in Mdth)
For unaffiliated customers 131,895 151,943 129,250
For Mountain Fuel 100,161 79,872 75,941
For other affiliated customers 44,327 38,839 45,093
Total transportation 276,383 270,654 250,284
Transportation revenue (per dth) $0.24 $0.23 $0.25
Clay Basin storage, working gas-
volumes (in Bcf) 46.3 46.3 41.8
A rate increase and expanded firm gas-storage activities
resulted in higher revenues in 1996 when compared with 1995.
Questar Pipeline filed for a rate increase with the Federal
Energy Regulatory Commission (FERC) on July 31, 1995. The
Company began collecting revenues under the new rate
structure, subject to refund, February 1, 1996. The FERC
approved a rate settlement July 1, 1996 which included a
stated return on equity of 11.75% and allowed Questar Pipeline
to collect a greater share of costs from firm-transportation
customers. The new rate structure adds approximately $5.9
million to annual revenues.
A majority of Questar Pipeline's transportation capacity has
been reserved by firm-transportation customers. Approximately
88% of firm-transportation capacity was reserved at year-end
1996, however all of city gate capacity is fully subscribed.
Mountain Fuel has reserved transportation capacity from
Questar Pipeline of approximately 800,000 decatherms per day,
or about 72% of the total reserved daily-transportation
capacity through 1999. Firm-transportation customers can
release capacity to third parties when it is not required for
their own needs. Interruptible-transportation revenues have
been lower in 1996 and 1995 as a result of a shift by
customers from interruptible-transportation service to a
higher-quality capacity-release service.
Storage revenues increased $3,004,000 in 1996. In addition to
a rate increase, firm-storage capacity increased from 41.8 Bcf
to 46.3 Bcf in May 1995, resulting in higher revenues in 1996
from a full 12 months of billings to customers. Storage
revenues increased $3,656,000 in 1995 as a result of
increased capacity at the Clay Basin storage reservoir.
Storage capacity at year-end 1996 was 100% subscribed, with
some contracts extending through the year 2025. Mountain Fuel
has reserved 27% of firm-storage capacity through 2019. In
1997, Questar Pipeline began offering a more flexible-
interruptible-storage service. Interruptible service will
utilize capacity that is temporarily not required by
firm-service customers. Questar Pipeline will retain 25% of
the interruptible-storage revenues and credit the remaining
75% to firm-storage customers.
Operating and maintenance expenses increased 18% in 1996 when
compared with 1995 as a result of an expansion of transmission
operations. Expenses increased 6% in 1995 when compared with
1994 primarily due to the costs associated with increased
transportation volumes. Questar Pipeline initiated
cost-containment measures with an affiliated company, Mountain
Fuel, through the sharing of common services. Questar
Pipeline and Mountain Fuel were made subsidiaries of recently
formed Questar Regulated Services Company (Regulated
Services). Regulated Services was organized in 1996 to
provide administrative, financial, technical and related
services to Mountain Fuel and Questar Pipeline.
Depreciation expense was 10% higher in 1996 when compared to
1995 and 7% higher in 1995 when compared to 1994 as a result
of Questar Pipeline's capital expenditures. Other taxes
decreased in 1996 when compared with 1995 due to settlements
with local taxing agencies that reduced property taxes.
Interest and other income was $1,274,000 higher in 1996 when
compared with 1995. Project costs incurred in 1995, including
$1.2 million expended in an unsuccessful bid for another
pipeline, were not repeated in 1996.
Questar Pipeline purchased an 18% interest in the Overthrust
Pipeline partnership from Columbia Gulf Transmission Company
in 1996, bringing its ownership in the transmission line to
36%. The Company's share of Overthrust Pipeline's 1995
operating results were $1.2 million before income tax.
Operating results were improved by a shipper's buyout of a
transportation contract.
The effective income tax rate was 37.2% in 1996, 35.1% in 1995
and 32.8% in 1994. A 1994 reversal of $1,245,000 of income
tax expense previously expensed resulted in a lower effective
income tax rate. The adjustment resulted from the exclusion
from taxable income of the transportation revenues recorded on
cushion-gas transported into storage.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash provided from operating activities was $46,710,000 in
1996, $36,991,000 in 1995 and $31,179,000 in 1994. Net cash
provided from operating activities increased 26% in 1996 when
compared with 1995 and 19% in 1995 when compared with 1994.
The upward trend in cash flow resulted from higher net income,
an increase in noncash expenses and more cash flow generation
from working capital accounts.
Investing Activities
Following is a summary of capital expenditures for 1996, 1995
and a forecast of 1997 expenditures:
1997
Estimated 1996 1995
(In Thousands)
Transmission system $24,600 $18,173 $15,216
Storage 1,700 1,466 2,500
Partnerships 5,300 2,890 506
General 3,200 1,279 4,924
Discontinued operations 1,576
$34,800 $23,808 $24,722
Questar Pipeline's 1996 capital expenditures included
replacement and expansion of sections of gas mainlines,
completion of the Clay Basin storage project and cushion-gas
injection, storage well workovers and an additional 18%
interest in Overthrust Pipeline.
Financing Activities
The Company funded 1996 capital expenditures and regular
dividend payments primarily with cash flow provided from
operations. The proceeds of a note collected from a former
subsidiary were dividended to Questar. In 1995, cash flow
provided from operations plus the collection of a note
receivable from a former subsidiary financed 1995 capital
expenditures and dividend payments. Forecasted 1997 capital
expenditures of $34.8 million are expected to be financed with
cash flow provided from operations and borrowings from
Questar.
Questar makes loans to the Company under a short-term
borrowing arrangement. Outstanding short-term notes payable
to Questar totaled $11,800,000 at December 31, 1996 with an
interest rate of 5.63% and $15,200,000 at December 31, 1995
with an interest rate of 6.01%. The Company has a short-term
line-of-credit arrangement with a bank under which it may
borrow up to $200,000. The line has interest rates below the
prime interest rate and is renewable in 1997. There were no
amounts borrowed under this arrangement at either December 31,
1996 or 1995. Questar Pipeline guarantees $9 million of
long-term debt borrowed by Blacks Fork Gas Processing Company.
Questar Pipeline's capital structure at year-end 1996 was 42%
long-term debt and 58% common shareholder's equity. Moody's
and Standard and Poor's have rated the Company's long-term
debt A-1 and A+, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are included in Part IV, Item
14, herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not changed its independent auditors or had any
disagreements with them concerning accounting matters and financial
statement disclosures within the last 24 months.
PART III
The Company, as the wholly owned subsidiary of a reporting person,
is entitled to omit all information requested in Part III (Items 10-13).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a)(1)(2) Financial Statements and Financial Statement Schedules.
The financial statements identified on the List of Financial Statements
are filed as part of this Report.
(a)(3) Exhibits. The following is a list of exhibits required to
be filed as a part of this Report in Item 14(c).
Exhibit No. Exhibit
2.*1 Agreement of Transfer among Mountain Fuel Supply Company,
Entrada Industries, Inc. and Mountain Fuel Resources, Inc.,
dated July 1, 1984. (Exhibit No. 2. to Registration
Statement No. 2-96102 filed February 27, 1985.)
3.* Restated Articles of Incorporation dated November 17, 1995.
(Exhibit No. 3. to Form 10-K Annual Report for 1995.)
3.3.* Bylaws (as amended on August 11, 1992). (Exhibit No. 3. to
Form 10-Q Report for quarter ended June 30, 1992.)
4.1.* Indenture dated June 1, 1990, for 9-7/8% Debentures due
2020, with Morgan Guaranty Trust Company of New York as
Trustee. (Exhibit No. 4. to Form 10-Q Report for quarter
ended June 30, 1990.)
4.2.* Indenture dated as of June 1, 1991, for 9-3/8% Debentures
due June 1, 2021, with Morgan Guaranty Trust Company of New
York as Trustee. (Exhibit No. 4. to Form 10-Q Report for
quarter ended June 30, 1991.)
10.1.*1 Overthrust Pipeline Company General Partnership Agreement
dated September 20, 1979, as amended and restated as of
October 11, 1982, and as amended August 21, 1991, among CIG
Overthrust, Inc., Columbia Gulf Transmission Company;
Mountain Fuel Resources, Inc.; NGPL-Overthrust Inc.;
Northern Overthrust Pipeline Company; and Tennessee
Overthrust Gas Company. (Exhibit No. 10.4. to Form 10-K
Annual Report for 1985, except that the amendment dated
August 21, 1991, is included as Exhibit No. 10.4. to Form
10-K Annual Report for 1992.)
10.2.*1 Data Processing Services Agreement effective July 1, 1985,
between Questar Service Corporation and Mountain Fuel
Resources, Inc. (Exhibit No. 10.11. to Form 10-K Annual
Report for 1988.)
10.3.*2 Questar Pipeline Company Annual Management Incentive Plan,
as amended February 13, 1996. (Exhibit No. 10.3. to Form
10-K Annual Report for 1995.)
10.4.* Partnership Agreement for the TransColorado Gas Transmission
Company dated June 30, 1990 and as amended and restated
September 25, 1995, between KN TransColorado, Inc., El Paso
TransColorado, Inc., and Questar TransColorado, Inc.
(Exhibit No. 10.4. to Form 10-K Annual Report for 1995.)
10.5.*3 Firm Transportation Service Agreement with Mountain Fuel
Supply Company under Rate Schedule T-1 dated August 10,
1993, for a term from November 2, 1993 through June 30,
1999. (Exhibit No. 10.5. to Form 10-K Annual Report for
1993.)
10.6.*3 Storage Service Agreement with Mountain Fuel Supply Company
under Rate Schedule FSS, for 3.5 Bcf of working gas capacity
at Clay Basin, with a term from September 1, 1993, through
August 31, 2008. (Exhibit No. 10.6. to Form 10-K Annual
Report for 1993.)
10.7.*3 Storage Service Agreement with Mountain Fuel Supply Company
under Rate Schedules FSS, for 3.5 Bcf of working gas
capacity at Clay Basin with a term from September 1, 1993,
through August 31, 2013. (Exhibit No. 10.7. to Form 10-K
Annual Report for 1993.)
10.8.*3 Storage Service Agreement with Mountain Fuel Supply Company
under Rate Schedule FSS, for 5.5 Bcf of working gas capacity
at Clay Basin, with a term from May 15, 1994 through May 14,
2019. (Exhibit No. 10.8. to Form 10-K Annual Report for
1995.)
10.10.*2 Questar Pipeline Company Deferred Compensation Plan for
Directors, as amended and restated February 13, 1996.
(Exhibit No. 10.10. to Form 10-K Annual Report for 1995.)
10.11. Agreement for the Transfer of Assets between Questar
Pipeline Company and Questar Gas Management Company, as
amended, effective March 1, 1996.
22. Subsidiary Information.
24. Power of Attorney.
27. Financial Data Schedule.
_______________
*/ Exhibits so marked have been filed with the Securities and
Exchange Commission as part of the indicated filing and are incorporated
herein by reference.
1/ The documents listed here have not been formally amended to refer
to the Company's current name. They still refer to the Company as
Mountain Fuel Resources, Inc.
2/ Exhibit so marked is management contract or compensation plan or
arrangement.
3/ Agreement incorporates specified terms and conditions of Questar
Pipeline's FERC Gas Tariff, First Revised Volume No. 1. The tariff
provisions are not filed as part of the exhibit, but are available upon
request.
(b) The Company did not file a Current Report on Form 8-K during
the last quarter of 1996.
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a) (1) and (2), and (d)
LIST OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 1996
QUESTAR PIPELINE COMPANY
SALT LAKE CITY, UTAH
FORM 10-K -- ITEM 14 (a) (1) AND (2)
QUESTAR PIPELINE COMPANY
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following financial statements of Questar Pipeline Company are
included in Item 8:
Statements of income -- Years ended December 31, 1996,
1995 and 1994
Balance sheets -- December 31, 1996 and 1995
Statements of cash flows -- Years ended December 31, 1996,
1995 and 1994
Statements of shareholder's equity -- Years ended December
31, 1996, 1995 and 1994
Notes to financial statements
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
Report of Independent Auditors
Shareholders and Board of Directors
Questar Pipeline Company
We have audited the accompanying consolidated balance sheets of
Questar Pipeline as of December 31, 1996 and 1995, and the related
consolidated statements of income and common shareholders' equity
and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Questar Corporation and subsidiaries at December 31,
1996 and 1995, and the consolidated results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 7 to the financial statements, Questar
Pipeline Company changed its method of accounting for
postemployment benefits in 1994.
/s/ ERNST & YOUNG LLP
Salt Lake City, Utah
February 7, 1997
QUESTAR PIPELINE COMPANY
STATEMENTS OF INCOME
Year Ended December 31,
1996 1995 1994
(In Thousands)
REVENUES
From unaffiliated customers $38,837 $36,780 $30,928
From affiliates - Note 8 65,341 57,992 60,181
TOTAL REVENUES 104,178 94,772 91,109
OPERATING EXPENSES
Operating and maintenance - Note 8 39,959 34,003 31,949
Depreciation 14,206 12,911 12,053
Other taxes 2,519 3,370 3,621
TOTAL OPERATING EXPENSES 56,684 50,284 47,623
OPERATING INCOME 47,494 44,488 43,486
INCOME FROM UNCONSOLIDATED
AFFILIATES 182 1,220 229
OTHER INCOME - Note 8 1,798 524 943
DEBT EXPENSE (13,416) (13,472) (13,107)
INCOME BEFORE INCOME TAXES 36,058 32,760 31,551
INCOME TAXES - Note 5 13,415 11,492 10,337
INCOME FROM CONTINUING
OPERATIONS 22,643 21,268 21,214
DISCONTINUED OPERATIONS - Questar
Gas Management Company - Note 2 1,495 3,380 4,615
NET INCOME $24,138 $24,648 $25,829
See notes to financial statements.
QUESTAR PIPELINE COMPANY
BALANCE SHEETS
ASSETS
December 31,
1996 1995
(In Thousands)
CURRENT ASSETS
Cash and short-term investments $2,550 $1,013
Notes receivable from Questar
Gas Management 16,692
Accounts receivable 6,852 7,665
Accounts receivable from affiliates 931 6,041
Federal income tax receivable 446
Inventories, at lower of average
cost or market 2,301 2,310
Prepaid expenses and deposits 1,938 2,157
TOTAL CURRENT ASSETS 15,018 35,878
PROPERTY, PLANT AND EQUIPMENT
Transmission 297,144 289,059
Storage 211,273 212,492
General and intangible 38,274 37,001
Construction work in progress 16,020 9,279
562,711 547,831
Less allowances for depreciation 194,396 183,840
NET PROPERTY, PLANT AND EQUIPMENT 368,315 363,991
OTHER ASSETS
Investment in discontinued operations 27,755
Investment in unconsolidated
affiliates 14,347 9,084
Income taxes recoverable from
customers - Note 5 3,930 3,948
Unamortized costs of reacquired debt 2,837 3,131
Other 4,303 4,824
25,417 48,742
$408,750 $448,611
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31,
1996 1995
(In Thousands)
CURRENT LIABILITIES
Notes payable to Questar - Note 3 $11,800 $15,200
Accounts payable and accrued expenses
Accounts payable 10,762 8,531
Accounts payable to affiliates 2,089 1,537
Federal income taxes 353
Other taxes 896 1,289
Accrued interest 1,076 1,076
Total accounts payable and
accrued expenses 14,823 12,786
TOTAL CURRENT LIABILITIES 26,623 27,986
LONG-TERM DEBT - Notes 3 and 4 134,544 134,525
DEFERRED CREDITS 4,322 5,346
DEFERRED INCOME TAXES - Note 5 58,768 56,149
COMMITMENTS AND CONTINGENCIES - Note 6
SHAREHOLDER'S EQUITY
Common stock - par value $1 per share;
authorized 25,000,000 shares; issued
and outstanding 6,550,843 shares 6,551 6,551
Additional paid-in capital 82,034 82,034
Retained earnings 95,908 136,020
184,493 224,605
$408,750 $448,611
See notes to financial statements.
QUESTAR PIPELINE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
Additional
Common Paid-in Retained
Stock Capital Earnings
(In Thousands)
Balance at January 1, 1994 $6,551 $57,034 $122,543
Capital contribution 25,000
1994 net income 25,829
Cash dividends (18,000)
Balance at December 31, 1994 6,551 82,034 130,372
1995 net income 24,648
Cash dividends (19,000)
Balance at December 31, 1995 6,551 82,034 136,020
1996 net income 24,138
Cash and other dividends (64,250)
Balance at December 31, 1996 $6,551 $82,034 $95,908
See notes to financial statements.
QUESTAR PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
(In Thousands)
OPERATING ACTIVITIES
Net income $24,138 $24,648 $25,829
Depreciation 16,291 14,547 13,678
Deferred income taxes 388 (163) 1,047
Income from partnerships (182) (1,220) (229)
Income from discontinued operations (1,495) (3,380) (4,615)
39,140 34,432 35,710
Changes in operating assets and
liabilities
Accounts receivable 5,923 1,530 (4,045)
Federal income taxes (799) 1,433 (1,322)
Inventories 9 (275) (189)
Prepaid expenses and deposits 219 207 (442)
Accounts payable and accrued
expenses 2,783 (395) 695
Other (565) 59 772
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 46,710 36,991 31,179
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (20,958) (22,640) (48,221)
Investment in discontinued
operations (1,576)
Other investments (2,850) (506) (614)
Total capital expenditures (23,808) (24,722) (48,835)
Proceeds from (costs of) disposition
of property, plant and equipment 343 (2,822) 2,665
NET CASH USED IN INVESTING
ACTIVITIES (23,465) (27,544) (46,170)
FINANCING ACTIVITIES
Capital contribution 25,000
Change in note receivable
from Questar Gas Management 16,692 8,518 (3,502)
Change in notes payable to
Questar Corp. (3,400) 600 11,600
Payment of dividends (35,000) (19,000) (18,000)
NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES (21,708) (9,882) 15,098
Change in cash and
short-term investments 1,537 (435) 107
Beginning cash and
short-term investments 1,013 1,448 1,341
ENDING CASH AND SHORT-TERM
INVESTMENTS $2,550 $1,013 $1,448
Questar Pipeline transferred 100% of its ownership in Questar Gas
Management to Questar in 1996 in the form of a dividend of
shares. The $29,250,000 transfer was a noncash transaction and
is excluded from the Statements of Cash Flows.
See notes to financial statements.
QUESTAR PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Accounting Policies
Business: Questar Pipeline Company (the Company or Questar
Pipeline) is a wholly-owned subsidiary of Questar Regulated
Services Company (Regulated Services). Regulated Services is a
holding company and wholly-owned subsidiary of Questar
Corporation (Questar). Regulated Services was organized in 1996
and provides administrative functions for its two subsidiaries,
Questar Pipeline and Mountain Fuel Supply Company (Mountain
Fuel). Significant accounting policies are presented below.
Regulation: The Company is regulated by the Federal Energy
Regulatory Commission (FERC) which establishes rates for the
transportation and storage of natural gas. The FERC also
regulates, among other things, the extension and enlargement or
abandonment of jurisdictional natural gas facilities. Regulation
is intended to permit the recovery, through rates, of the cost of
service including a rate of return on investment. The financial
statements are presented in accordance with regulatory
requirements. Methods of allocating costs to time periods, in
order to match revenues and expenses, may differ from those of
nonregulated businesses because of cost allocation methods used
in establishing rates.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts of assets and liabilities and disclosure of contingent
liabilities reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Revenue Recognition: Revenues are recognized in the period that
services are provided or products are delivered. Questar
Pipeline periodically collects revenues subject to possible
refunds pending final orders from the FERC. The Company
establishes reserves for revenues collected subject to refund.
Property, Plant and Equipment: Property, plant and equipment is
stated at cost. The provision for depreciation is based upon
rates, which will systematically charge the costs of assets over
their estimated useful lives. The costs of property, plant and
equipment are depreciated in the financial statements using the
straight-line method, ranging from 3 to 33% per year and
averaging 3.7% in 1996.
Credit Risk: The Company's primary market area is the Rocky
Mountain region of the United States. The Company's exposure to
credit risk may be impacted by the concentration of customers in
this region due to changes in economic or other conditions. The
Company's customers may be affected differently by changing
conditions. Management believes that its credit-review
procedures and loss reserves have adequately provided for usual
and customary credit-related losses. The carrying amount of
trade receivables approximates fair value.
Investment in Unconsolidated Affiliates: The Company has a 36%
partnership interest in the Overthrust Pipeline Company, and is
the operator of the Overthrust Segment of the Trailblazer
Pipeline System. The Company is a one-third partner in
TransColorado Gas Transmission Company, which plans to construct
a pipeline from the Piceance Basin in Colorado to connections
with other pipelines in northern New Mexico. The Company
accounts for its investment in these partnerships using the
equity method.
Income Taxes: Questar Pipeline records cumulative increases in
deferred taxes as income taxes recoverable from customers. The
Company has adopted procedures with its regulatory commissions to
include under-and over-provided deferred taxes in customer rates
on a systematic basis. Questar Pipeline uses the deferral method
to account for investment tax credits as required by the FERC.
The Company's operations are consolidated with those of Questar
and its subsidiaries for income tax purposes. The income tax
arrangement between Questar Pipeline and Questar provides that
amounts paid to or received from Questar are substantially the
same as would be paid or received by the Company if it filed a
separate return. Questar Pipeline also receives payment for tax
benefits used in the consolidated tax return even if such
benefits would not have been usable had the Company filed a
separate return.
Reacquisition of Debt: Gains and losses on the reacquisition of
debt are deferred and amortized as debt expense over the
remaining life of the issue in order to match regulatory
treatment.
Allowance for Funds Used During Construction: The Company
capitalizes the cost of capital during the construction period of
plant and equipment. This amounted to $542,000 in 1996, $330,000
in 1995 and $976,000 in 1994.
Cash and Short-Term Investments: Short-term investments consist
principally of Euro-time deposits and repurchase agreements with
maturities of three months or less.
Note 2 - Discontinued Operations - Gathering Division Spin Down
and Transfer
Questar Pipeline transferred approximately $55 million of
gas-gathering assets to Questar Gas Management Company, a wholly
owned subsidiary. The transfer was approved by the FERC February
28, 1996 and was effective March 1, 1996. Questar Gas Management
was subsequently transferred to the nonregulated Market Resources
group of Questar on July 1, 1996. The transaction was in the
form of a stock dividend payable to Questar with no gain or loss
recorded. Questar Pipeline's financial statements for 1995 and
1994 were restated, reflecting gas-gathering operations as a
discontinued business segment.
Note 3 - Debt
Questar makes loans to the Company under a short-term borrowing
arrangement. Outstanding short-term notes payable to Questar
totaled $11,800,000 at December 31, 1996 with an interest rate of
5.63% and $15,200,000 at December 31, 1995 with an interest rate
of 6.01%. The Company has a short-term line-of-credit arrangement
with a bank under which it may borrow up to $200,000. The line
has interest rates below the prime interest rate and is renewable
in 1997. There were no amounts borrowed under this arrangement at
either December 31, 1996 or 1995. Questar Pipeline guarantees $9
million of long-term debt borrowed by Blacks Fork Gas Processing
Company.
The details of long-term debt at December 31 were as follows:
1996 1995
(In Thousands)
9 3/8% debentures due 2021 $85,000 $85,000
9 7/8% debentures due 2020 50,000 50,000
Total long-term debt outstanding 135,000 135,000
Less unamortized debt discount 456 475
$134,544 $134,525
Sinking fund redemption of the 9 7/8% debt begins in 2001 in the
amount of $2,500,000. There are no debt provisions restricting
the payment of dividends. Cash paid for interest on debt was
$13,227,000 in 1996, $13,192,000 in 1995, and $13,065,000 in
1994.
Note 4 - Financial Instruments
The carrying amounts and estimated fair values of the Company's
financial instruments at December 31 were as follows:
1996 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and short-term investments $2,550 $2,550 $1,013 $1,013
Financial liabilities
Short-term loans 11,800 11,800 15,200 15,200
Long-term debt 134,544 150,938 134,525 158,256
The Company used the following methods and assumptions in
estimating fair values: (1) Cash and short-term investments and
short-term loans - the carrying amount approximates fair value;
(2) Long-term debt - the fair value of long-term debt is based on
quoted market prices.
Note 5 - Income Taxes
The components of income taxes charged to income for years ended
December 31 were as follows:
1996 1995 1994
(In Thousands)
Federal
Current $11,663 $10,695 $9,555
Deferred 700 101 118
State
Current 998 684 644
Deferred 54 12 20
$13,415 $11,492 $10,337
The difference between income tax expense and the tax computed by
applying the statutory federal income tax rate to income from
continuing operations before income taxes is explained as
follows:
1996 1995 1994
(In Thousands)
Income before income taxes $36,058 $32,760 $31,551
Federal income taxes at statutory rate $12,620 $11,466 $11,043
State income taxes, net of federal income
tax benefit 703 456 439
Prior years' tax settlement 146 (162)
Tax adjustment on revenues from cushion
gas transported into storage (1,245)
Other (54) (268) 100
Income tax expense $13,415 $11,492 $10,337
Effective income tax rate 37.2% 35.1% 32.8%
Significant components of the Company's deferred tax liabilities
and assets at December 31 were as follows:
1996 1995
(In Thousands)
Deferred tax liabilities
Property, plant and equipment $54,550 $51,881
Income taxes recoverable from customer 1,450 1,487
Unamortized debt reacquisition costs 1,050 1,159
Pension costs 644 519
Other 1,882 1,971
Total deferred tax liabilities 59,576 57,017
Deferred tax assets 808 868
Net deferred tax liabilities $58,768 $56,149
Cash paid for income taxes was $13,797,000 in 1996, $10,268,000
in 1995 and $11,688,000 in 1994.
Note 6 - Rate Matters, Litigation and Commitments
Questar Pipeline filed for a rate increase with the FERC on July
31, 1995. The Company began collecting revenues under the new
rate structure, subject to refund, February 1, 1996. The FERC
approved a rate settlement July 1, 1996. The settlement included
a stated return on equity of 11.75% and allowed the Company to
collect a greater share of costs from firm transportation
customers. As a result of the new rate structure, Questar
Pipeline is expected to add approximately $5.9 million to annual
revenues.
There are various legal proceedings against the Company. While
it is not currently possible to predict or determine the outcome
of these proceedings, it is the opinion of management that the
outcome will not have a material adverse effect on the Company's
results of operations, financial position or liquidity.
Note 7 - Employment Benefits
Pension Plan: Substantially all Company employees are covered by
Questar's defined benefit pension plan. Benefits are generally
based on years of service and the employee's 36-month period of
highest earnings during the ten years preceding retirement. It
is Questar's policy to make contributions to the plan at least
sufficient to meet the minimum funding requirements of applicable
laws and regulations. Plan assets consist principally of equity
securities and corporate and U.S. government debt obligations.
Pension cost was $974,000 in 1996, $867,000 in 1995 and $927,000
in 1994.
Questar Pipeline's portion of plan assets and benefit obligations
is not determinable because the plan assets are not segregated or
restricted to meet the Company's pension obligations. If the
Company were to withdraw from the pension plan, the pension
obligation for the Company's employees would be retained by the
pension plan. At December 31, 1996, Questar's fair value of plan
assets exceeded the accumulated benefit obligation.
Postretirement Benefits Other Than Pensions: The Company pays a
portion of health-care costs and life insurance costs for
employees who retired prior to January 1, 1993. The plan changed
for employees hired after January 1, 1993, to link the
health-care benefits to years of service and to limit Questar's
monthly health care contribution per individual to 170% of the
1992 contribution. Employees hired after December 31, 1996, do
not qualify for benefits under this plan. The Company's policy
is to fund amounts allowable for tax deduction under the Internal
Revenue Code. Plan assets consist of equity securities,
corporate and U.S. government debt obligations, and insurance
company general accounts. The Company is amortizing the
transition obligation over a 20-year period, which began in
1992. Costs of postretirement benefits other than pensions were
$666,000 in 1996, $788,000 in 1995 and $853,000 in 1994. The FERC
allows rate-recovery of future postretirement benefits costs to
the extent that pipeline companies contribute the amounts to an
external trust. As part of its 1996 general rate settlement,
Questar Pipeline began making contributions to an external trust
fund in 1996 for an amount of future postretirement costs and
will recover costs at December 1995 over a three-year period.
The Company's portion of plan assets and benefit obligations
related to postretirement medical and life insurance benefits is
not determinable because the plan assets are not segregated or
restricted to meet the Company's obligations.
Postemployment Benefits: The Company recognizes the net present
value of the liability for postemployment benefits, such as
long-term disability benefits and health-care and life-insurance
costs, when employees become eligible for such benefits.
Postemployment benefits are paid to former employees after
employment has been terminated but before retirement benefits are
paid. The Company accrues both current and future costs.
Beginning in 1996, the FERC allowed Questar Pipeline to recover
postemployment costs measured at December 1995 in future rates
over a three-year period.
Employee Investment Plan: The Company participates in Questar's
Employee Investment Plan (ESOP), which allows eligible employees
to purchase Questar common stock or other investments through
payroll deduction. The Company makes contributions of Questar
common stock to the ESOP of approximately 75% of the employees'
purchases and contributes an additional $200 of common stock in
the name of each eligible employee. The Company's expense and
contribution to the plan was $531,000 in 1996, $515,000 in 1995
and $456,000 in 1994.
Note 8 - Related Party Transactions
Questar Regulated Services was organized in 1996 and provides
shared services for its two subsidiaries, Mountain Fuel and
Questar Pipeline. These include business, technical and financial
support, as well as planning and business development. Services
and the subsequent billings will begin in 1997.
The Company receives a substantial portion of its revenues from
Mountain Fuel Supply Company. Revenues received from Mountain
Fuel amounted to $61,146,000 or 59% in 1996, $54,096,000 or 57%
in 1995 and $56,200,000 or 62% in 1994. The Company also
received revenues from other affiliated companies totaling
$4,195,000 in 1996, $3,896,000 in 1995 and $3,981,000 in 1994.
Questar performs certain administrative functions for the
Company. The Company was charged for its allocated portion of
these services which totaled $3,045,000 in 1996, $2,644,000 in
1995, and $2,831,000 in 1994. These costs are included in
operating and maintenance expenses and are allocated based on
each company's proportional share of revenues, net of gas costs;
property, plant and equipment; and payroll. Management believes
that the allocation method is reasonable.
Questar InfoComm Inc is an affiliated company that provides data
processing and communication services to Questar Pipeline. The
Company paid Questar InfoComm $7,155,000 in 1996, $7,542,000 in
1995 and $7,036,000 in 1994.
Questar Pipeline has a 15-year lease for space in an office
building located in Salt Lake City, Utah, that is owned by
affiliated company, Interstate Land. The lease begins in the
fourth quarter of 1997 when remodeling of the building is
scheduled for completion. The annual lease payment for the next
five years, beginning in 1998, is $576,000.
The Company received interest income from affiliated companies of
$609,000 in 1996, $1,998,000 in 1995 and $2,022,000 in 1994. The
Company incurred debt expense to Questar of $158,000 in 1996,
$272,000 in 1995 and $134,000 in 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 26th day of March, 1997.
QUESTAR PIPELINE COMPANY
(Registrant)
By /s/ D. N. Rose
D. N. Rose
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the date
indicated.
/s/ D. N. Rose President & Chief Executive Officer;
D. N. Rose Director (Principal Executive Officer)
/s/ S. E. Parks Vice President, Treasurer and Chief
S. E. Parks Financial Officer (Principal
Financial Officer)
/s/ G. H. Robinson Vice President and Controller
G. H. Robinson (Principal Accounting Officer)
*R. D. Cash Chairman of the Board; Director
*U. Edwin Garrison Director
*A. J. Marushack Director
*G. L. Nordloh Director
*D. N. Rose Director
March 26, 1997 *By /s/ D. N. Rose
Date D. N. Rose, Attorney in Fact
EXHIBIT INDEX
Exhibit
Number Exhibit
2.*1 Agreement of Transfer among Mountain Fuel Supply Company,
Entrada Industries, Inc. and Mountain Fuel Resources, Inc.,
dated July 1, 1984. (Exhibit No. 2. to Registration
Statement No. 2-96102 filed February 27, 1985.)
3.* Restated Articles of Incorporation dated November 17, 1995.
(Exhibit No. 3. to Form 10-K Annual Report for 1995.)
3.3.* Bylaws (as amended on August 11, 1992). (Exhibit No. 3. to
Form 10-Q Report for quarter ended June 30, 1992.)
4.1.* Indenture dated June 1, 1990, for 9-7/8% Debentures due
2020, with Morgan Guaranty Trust Company of New York as
Trustee. (Exhibit No. 4. to Form 10-Q Report for quarter
ended June 30, 1990.)
4.2.* Indenture dated as of June 1, 1991, for 9-3/8% Debentures
due June 1, 2021, with Morgan Guaranty Trust Company of New
York as Trustee. (Exhibit No. 4. to Form 10-Q Report for
quarter ended June 30, 1991.)
10.1.*1 Overthrust Pipeline Company General Partnership Agreement
dated September 20, 1979, as amended and restated as of
October 11, 1982, and as amended August 21, 1991, among CIG
Overthrust, Inc., Columbia Gulf Transmission Company;
Mountain Fuel Resources, Inc.; NGPL-Overthrust Inc.;
Northern Overthrust Pipeline Company; and Tennessee
Overthrust Gas Company. (Exhibit No. 10.4. to Form 10-K
Annual Report for 1985, except that the amendment dated
August 21, 1991, is included as Exhibit No. 10.4. to Form
10-K Annual Report for 1992.)
10.2.*1 Data Processing Services Agreement effective July 1, 1985,
between Questar Service Corporation and Mountain Fuel
Resources, Inc. (Exhibit No. 10.11. to Form 10-K Annual
Report for 1988.)
10.3.*2 Questar Pipeline Company Annual Management Incentive Plan,
as amended February 13, 1996. (Exhibit No. 10.3. to Form
10-K Annual Report for 1995.)
10.4.* Partnership Agreement for the TransColorado Gas Transmission
Company dated June 30, 1990 and as amended and restated
September 25, 1995, between KN TransColorado, Inc., El Paso
TransColorado, Inc., and Questar TransColorado, Inc.
(Exhibit No. 10.4. to Form 10-K Annual Report for 1995.)
10.5.*3 Firm Transportation Service Agreement with Mountain Fuel
Supply Company under Rate Schedule T-1 dated August 10,
1993, for a term from November 2, 1993 through June 30,
1999. (Exhibit No. 10.5. to Form 10-K Annual Report for
1993.)
10.6.*3 Storage Service Agreement with Mountain Fuel Supply Company
under Rate Schedule FSS, for 3.5 Bcf of working gas capacity
at Clay Basin, with a term from September 1, 1993, through
August 31, 2008. (Exhibit No. 10.6. to Form 10-K Annual
Report for 1993.)
10.7.*3 Storage Service Agreement with Mountain Fuel Supply Company
under Rate Schedules FSS, for 3.5 Bcf of working gas
capacity at Clay Basin with a term from September 1, 1993,
through August 31, 2013. (Exhibit No. 10.7. to Form 10-K
Annual Report for 1993.)
10.8.*3 Storage Service Agreement with Mountain Fuel Supply Company
under Rate Schedule FSS, for 5.5 Bcf of working gas capacity
at Clay Basin, with a term from May 15, 1994 through May 14,
2019. (Exhibit No. 10.8. to Form 10-K Annual Report for
1995.)
10.10.*2 Questar Pipeline Company Deferred Compensation Plan for
Directors, as amended and restated February 13, 1996.
(Exhibit No. 10.10. to Form 10-K Annual Report for 1995.)
10.11. Agreement for the Transfer of Assets between Questar
Pipeline Company and Questar Gas Management Company, as
amended, effective March 1, 1996.
22. Subsidiary Information.
24. Power of Attorney.
27. Financial Data Schedule.
_______________
*/ Exhibits so marked have been filed with the Securities and
Exchange Commission as part of the indicated filing and are incorporated
herein by reference.
1/ The documents listed here have not been formally amended to refer
to the Company's current name. They still refer to the Company as
Mountain Fuel Resources, Inc.
2/ Exhibit so marked is management contract or compensation plan or
arrangement.
3/ Agreement incorporates specified terms and conditions of Questar
Pipeline's FERC Gas Tariff, First Revised Volume No. 1. The tariff
provisions are not filed as part of the exhibit, but are available upon
request.
(b) The Company did not file a Current Report on Form 8-K during
the last quarter of 1996.