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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, 1997 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_____ TO _____
Commission File No. 0-14147
QUESTAR PIPELINE COMPANY
(Exact name of registrant as specified in its charter)
State of Utah 87-0307414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 East First South, P.O. Box 45360, Salt Lake City, Utah 84145-0360
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:(801) 324-5555
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933:
9 7/8% Debentures due 2020
9 3/8% Debentures due 2021
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [x] No
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant as of March 23, 1998. $0.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of March 23, 1998. 6,550,843
shares of Common Stock, $1.00 par value. (All shares are owned by
Questar Regulated Services Company.)
Registrant meets the conditions set forth in General Instruction
(J)(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K
Report with the reduced disclosure format.
TABLE OF CONTENTS
Heading Page
PART I
Items 1.
and 2. BUSINESS AND PROPERTIES
General
Transmission System
Transportation Service
Storage
Regulatory Environment
Competition
Employees
Relationships with Affiliates
Item 3. LEGAL PROCEEDINGS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Item 6. (Omitted)
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
Items
10-13. (Omitted)
PART IV
Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
SIGNATURES
FORM 10-K
ANNUAL REPORT, 1997
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
General
Questar Pipeline Company ("Questar Pipeline" or the "Company") is
an interstate pipeline company that is engaged in the transportation
and storage of natural gas in the Rocky Mountain states of Utah,
Wyoming, and Colorado. The Company is an affiliate of Questar
Corporation ("Questar"), an integrated energy services holding
company. As a "natural gas company," the Company is subject to
regulation by the Federal Energy Regulatory Commission (the "FERC")
pursuant to the Natural Gas Act of 1938, as amended, and certain other
federal legislation.
As an open-access pipeline, Questar Pipeline transports gas for
affiliated and unaffiliated customers. It also owns and operates the
Clay Basin storage facility, which is a large underground storage
project in northeastern Utah, and other underground storage operations
in Utah and Wyoming. The Company is involved in two partnerships,
Overthrust Pipeline Company ("Overthrust"), and TransColorado Gas
Transmission Company ("TransColorado"). During 1997, Questar Pipeline
increased its percentage interest in both partnerships.
Questar Pipeline and its affiliate Questar Gas Company (formerly
Mountain Fuel Supply Company, "Questar Gas"), comprise Questar's
Regulated Services unit. The Company's parent is Questar Regulated
Services Company ("Regulated Services"). All three companies are
managed by the same group of officers, but the Company does have a
separate general manager.
The Company has significant business relationships with its
affiliates, particularly Questar Gas, a regulated local distribution
company that serves over 641,000 customers in Utah, southwestern
Wyoming, and southeastern Idaho. Questar Gas has reserved
approximately 800,000 decatherms ("Dth") per day of firm
transportation capacity on the Company's transmission system and
reserved storage capacity at Clay Basin and smaller storage
reservoirs. (A Dth is an amount of heat energy equal to 10 therms or
one million British thermal units ("Btu"). In the Company's system,
each thousand cubic feet of gas ("Mcf") equals approximately 1.07
Dth.) Questar Pipeline transports natural gas owned by Questar Gas
and produced from properties operated by Wexpro Company ("Wexpro"),
another affiliate, as well as some natural gas volumes purchased
directly by Questar Gas from field producers and other suppliers. The
Company also transports volumes that are marketed by Questar Energy
Trading Company ("Questar Energy"), another affiliated entity.
The following diagram sets forth the corporate structure of the
Company and certain affiliates:
Questar Corporation
Entrada Industries, Inc.
Wexpro Company
Universal Resources Corporation
Celsius Energy Company
Questar Energy Trading Company
Questar Gas Management Company
Questar Energy Services, Inc.
Questar Regulated Services Company
Questar Pipeline Company
Questar Gas Company
Questar InfoComm, Inc.
The major activities of Questar Pipeline are described in more
detail below:
Transmission System
The Company's transmission system is strategically located in the
Rocky Mountains near large reserves of natural gas. It is referred to
as a "hub and spoke" system, rather than a "long-line" pipeline,
because of its physical configuration, multiple interconnections to
other interstate pipeline systems, and access to major producing
areas. Questar Pipeline's transmission system has connections with
the pipeline systems of Colorado Interstate Gas Company ("CIG"); the
middle segment of the Trailblazer Pipeline System ("Trailblazer")
owned by Wyoming Interstate Company, Ltd. ("WIC"); The Williams
Companies, Inc. ("Williams"); and Kern River Gas Transmission Company
("Kern River"). These connections have opened markets outside Questar
Gas's service area and allow the Company to transport gas for others.
The Company's transmission system includes 1,763 miles of
transmission lines that interconnect with other pipelines and that
link various producers of natural gas with Questar Gas's distribution
facilities in Utah and Wyoming. (This total transmission mileage
includes pipelines associated with the Company's storage fields and
tap lines used to serve Questar Gas.) The system includes two major
segments, often referred to as the northern and southern systems,
which are linked together. The northern segment extends from
northwestern Colorado through southwestern Wyoming into northern Utah;
the southern segment of the transmission system extends from western
Colorado to Payson, in central Utah.
The Company's pipelines, compressor stations, regulator stations,
and other transmission-related facilities are constructed on
properties held under long-term easements, rights of way, or fee
interests sufficient for the conduct of its business activities.
In addition to the transmission system described above, Questar
Pipeline has a 54 percent interest and is the operating partner in
Overthrust, a general partnership that was organized in 1979 to
construct, own, and operate the Overthrust segment of Trailblazer.
Trailblazer is a major 800-mile pipeline that transports gas from
producing areas in the Rocky Mountains to the Midwest. The 88-mile
Overthrust segment is the western-most of Trailblazer's three
segments. Although the Overthrust segment is currently underutilized,
the Company and its remaining partners are reviewing opportunities,
including backhauling, to increase its value. The Overthrust
partnership agreement requires unanimous consent of all partners on
major operating and financial issues.
Questar Pipeline owns and operates a major compressor complex
near Rock Springs, Wyoming, that compresses volumes of gas from the
Company's transmission system for delivery to the WIC segment of the
Trailblazer system and to CIG. The complex has become a major
delivery point on Questar Pipeline's system. Five of the Company's
major natural gas lines are connected to the system at the complex.
In addition, both of CIG's Wyoming pipelines and the WIC segment are
connected to the complex.
During 1997, Questar Pipeline agreed to increase its ownership
interest in the TransColorado pipeline project to 50 percent. The
Company and its remaining partner, KN Energy, have ordered the pipe
and compression equipment currently intend to begin construction of
the second phase of the project during 1998 after the final
environmental clearances are obtained. The pipeline is approximately
292 miles in length and will extend from the Piceance Basin in western
Colorado, to Blanco, New Mexico, where it will connect with other
pipeline systems. (Questar Pipeline did not originally participate in
the first phase of the project, which was a 22-mile line between the
San Juan Basin and Blanco facilities, but will acquire El Paso Natural
Gas Company's 50 percent interest in the first phase upon completion
of the second phase.) As designed, the pipeline could transport up to
300 million cubic feet ("MMcf") of gas per day from western Colorado
and other producing basins to California and other markets.
TransColorado, which was first announced in 1990 and which has a
total projected cost of $240 million, involves risks associated with
the unwillingness of producers and other shippers to make long-term
transportation commitments.
Transportation Service
Questar Pipeline's largest transportation customer is its
affiliate, Questar Gas. During 1997, the Company transported 110.3
million decatherms ("MMDth") for Questar Gas, compared to 100.6 MMDth
in 1996. These transportation volumes include Questar Gas's
cost-of-service gas produced by Wexpro and volumes purchased by
Questar Gas directly from field producers and other suppliers.
Effective September 1, 1993, Questar Gas converted its firm sales
capacity to firm transportation capacity on the Company's transmission
system. Questar Gas has reserved capacity of about 800,000 Dth per
day, or approximately 70 percent of Questar Pipeline's reserved daily
capacity. Questar Gas paid an annual reservation charge of
approximately $49.6 million to the Company in 1997, which includes
reservation charges attributable to firm and "no-notice"
transportation. Questar Gas only needs its total reserved capacity
during peak-demand situations. When it is not fully utilizing its
capacity, Questar Gas releases the capacity to others, primarily
industrial transportation customers and marketing entities
Questar Pipeline's transportation agreement with Questar Gas
expires on June 30, 1999. The parties expect that the agreement will
be extended, given Questar Gas's growing firm transportation
requirements and the Company's competitive rates. Questar Gas, in
common with other retail distribution utilities, is preparing for an
environment in which transportation service may be unbundled from
sales service.
The Company recovers approximately 95 percent of its transmission
cost of service through reservation charges from firm transportation
customers. In other words, these customers pay for access to
transportation capacity, rather than for the volumes actually
transported. Consequently, the Company's throughput volumes do not
have a significant effect on its short-term operating results.
Questar Pipeline's transportation revenues are not significantly
affected by fluctuating demand based on the vagaries of weather or gas
prices. The Company's revenues may be adversely affected if the FERC
changes its basic regulatory scheme of "straight-fixed variable"
rates.
The Company's total system throughput decreased from 276.4 MMDth
in 1996 to 264.3 MMDth in 1997. Most of this decrease was
attributable to lower transportation volumes for nonaffiliated
customers, which declined from 131.9 MMDth in 1996 to 116.2 MMDth in
1997.
Questar Pipeline's transmission system is an open-access system
and has been since September of 1988. The FERC's Order No. 636 and
the Company's tariff provisions require it to transport gas on a
nondiscriminatory basis when it has available transportation capacity.
The Company does have limited opportunities for interruptible
transportation services.
Questar Pipeline will continue to develop and build new lines and
related facilities that will allow it to meet customers needs or
improve customer services. During 1997, it completed the first phase
of a project to build a 20-inch diameter line extending from Clay
Basin to Coleman Station in southwestern Wyoming. The final phase is
scheduled to be finished in 1998. The project has already
significantly expanded the Company's capacity to move gas north from
its storage facility at Clay Basin and its southern system and will
further expand it when the final phase is completed. Questar Pipeline
has expanded its capacity to transport production from the Ferron area
of eastern Utah, which is the site of a large project to produce gas
from coal seams into market areas. During 1998, the Company will
construct new compression facilities on its southern system in eastern
Utah that will add approximately 52 thousand decatherns ("MDth") per
day of firm capacity.
Storage
Questar Pipeline operates a major storage facility at Clay Basin
in northeastern Utah. This storage reservoir has been operational
since 1977 and has been providing open-access storage service since
June of 1991. The Company's storage facilities are certificated by
the FERC and its rates for storage service (based on operating costs
and investment in plant plus an allowed rate of return) are subject to
the approval of the FERC.
The Clay Basin facility is certificated for 46.3 billion cubic
feet ("Bcf") of working gas capacity and a total capacity of 110 Bcf.
(Working gas is gas that is injected and withdrawn.) Questar Pipeline
recently completed a successful open season to offer additional
working gas capacity of 5 Bcf, which was fully subscribed. It has
filed the necessary notice with the FERC to increase the facility's
total capacity to 117 Bcf and expects to inject the additional volumes
this summer.
Clay Basin's firm storage capacity is fully subscribed by
customers under long-term agreements. Questar Gas currently has 12.5
Bcf of working gas capacity at Clay Basin. Other large customers
include Williams; Washington Natural Gas Company, a distribution
utility in the state of Washington; and BC Gas Utility Ltd., a
distribution utility in British Columbia, Canada. Storage service is
important to distribution companies that need to match annual gas
purchases with fluctuating customer demand, improve service
reliability, and avoid imbalance penalties.
Questar Pipeline offers interruptible storage service at Clay
Basin and also allows firm storage service customers the right to
transfer their injection and withdrawal rights to other parties.
The Company also owns and operates three smaller storage
reservoirs. These projects were developed specifically to serve
Questar Gas's needs, and Questar Gas reserves 100 percent of their
working gas capacity. These small reservoirs are used primarily to
supplement Questar Gas's gas supply needs on peak days.
Regulatory Environment
The Company is a natural gas company under the Natural Gas Act
and is subject to the jurisdiction of the FERC as to rates and charges
for storage and transportation of gas in interstate commerce,
construction of new storage and transmission facilities, extensions or
abandonments of service and facilities, accounts and records, and
depreciation and amortization policies. Questar Pipeline holds
certificates of public convenience and necessity granted by the FERC
for the transportation and underground storage of natural gas in
interstate commerce and for the facilities required to perform such
operations.
Questar Pipeline does not currently plan to file a general rate
case in 1998. It, however, will continue to review its revenues and
costs as it adds new facilities that are not included in its rate base
and makes expenditures to comply with regulatory mandates.
In February of 1998, the FERC concluded an investigation of the
Company's gathering rates to Questar Gas for the period from November
1, 1988 through September 30, 1992. The FERC determined that Questar
Pipeline committed a technical violation of the applicable law, but
ruled that it was not appropriate to order refunds or assess fines.
The order instituting the proceedings was issued by the FERC in May of
1997, contained allegations that the Company may have violated a
provision of the Natural Gas Act and its tariff by charging gathering
rates higher than the rates specified in its tariff, and asked Questar
Pipeline why it should not be obligated to refund the alleged
overcharge of approximately $3.4 million plus interest to Questar Gas.
During 1997 and 1998, the Company expects to spend $2.8 million
to comply with the standards originally proposed by the Gas Industry
Standards Board ("GISB") and mandated by the FERC. These
requirements, commonly known as the GISB standards, are designed to
facilitate the seamless transportation of gas volumes on pipeline
systems and deal with such issues as nominations, confirmations,
priority of service, allocation, balancing, and invoicing. The
Company is complying with some GISB standards and has obtained an
extension until June 1, 1998, to be in full compliance.
The FERC has adopted specific criteria for determining when
"rolled-in" rates (rather than incremental rates) are appropriate.
Under the FERC's policy, rolled-in rates will generally be approved if
rates to existing customers will not increase by more than five
percent and if specified system-wide operational and financial
benefits can be demonstrated. The FERC, however, can impose at-risk
conditions on new projects even if it approves rolled-in rate
treatment for them and can require additional support in subsequent
rate cases to continue rolled-in treatment.
Under the Natural Gas Pipeline Safety Act of 1968, as amended,
the Company is subject to the jurisdiction of the Department of
Transportation ("DOT") with respect to safety requirements in the
design, construction, operation and maintenance of its transmission
and storage facilities. The Company also complies with the DOT's drug
and alcohol testing regulations.
In addition to the regulations discussed above, Questar
Pipeline's activities in connection with the operation and
construction of pipelines and other facilities for transporting or
storing natural gas are subject to extensive environmental regulation
by state and federal authorities, including state air quality control
boards, the Bureau of Land Management, the Forest Service, the Corps
of Engineers, and the Environmental Protection Agency. These
compliance activities increase the cost of planning, designing,
installing and operating facilities.
Competition
Competition for Questar Pipeline's transportation and storage
services has intensified in recent years. Regulatory changes have
significantly increased customer flexibility and responsibility to
directly manage their gas supplies. The Company actively competes
with other interstate pipelines for transportation volumes throughout
the Rocky Mountain region.
The Company has two key assets that contribute to its continued
success. It has a strategically located and integrated transmission
system with interconnections to major pipeline systems and with access
to major producing areas and markets. Questar Pipeline also has the
Clay Basin storage facility, a storage reservoir that has been
successfully operated since 1977, that has been expanded in response
to interest from customers, and that is fully subscribed by
firm-service customers under contracts that are generally long-term in
nature. Questar Pipeline intends to take advantage of these assets by
increasing its "intra hub" capacity or its ability to quickly and
reliably move gas volumes between receipt and delivery points and by
expanding its storage capacity and services.
Questar Pipeline has established partnerships with others to
acquire expertise, share risks, and expand opportunities. Both the
Overthrust pipeline and the proposed TransColorado pipeline involve
partners.
Employees
As of December 31, 1997, the Company had 164 employees, compared
to 352 as of the end of 1996. (This decrease reflects the transfer of
employees to Regulated Services as of January 1, 1997.) None of these
employees is represented under collective bargaining agreements. The
Company participates in the comprehensive benefit plans of Questar and
pays the share of costs attributable to its employees covered by such
plans. Questar Pipeline's employee relations are generally deemed to
be satisfactory.
Relationships with Affiliates
There are significant business relationships between the Company
and its affiliates, particularly Questar Gas. Some of these
relationships are described above. See Note 8 to the financial
statements for additional information concerning transactions between
the Company and its affiliates.
The Company obtains data processing and communication services
from another affiliate, Questar InfoComm, under the terms of a written
agreement. Regulated Services, the Company's parent, has employees
who perform engineering, accounting, marketing, budget, tax,
regulatory affairs, and legal services for both Questar Pipeline and
Questar Gas. Questar also provides certain administrative
services, benefit plans, governmental affairs, financial, and audit, to
the Company and other members of the consolidated group. A
proportionate share of the costs associated with such services is
directly billed or allocated to Questar Pipeline.
ITEM 3. LEGAL PROCEEDINGS
Questar Pipeline is involved in various legal and regulatory
proceedings. While it is not currently possible to predict or
determine the outcome of these proceedings, it is the opinion of
management that the outcome will not have a material adverse effect on
the Company's financial position or liquidity.
The Company, Questar, Questar Gas and other affiliates are
defendants in a lawsuit that was filed by a producer in Wyoming's
federal district court. This lawsuit involves some of the same
take-or-pay and tax reimbursement claims that are the subject of a
case against Questar Gas that has not yet been reduced to a final
judgement in the same court. The second lawsuit, however, also
involves claims of antitrust violations against Questar Pipeline with
respect to storage service. It has been formally and indefinitely
stayed pending the entry of a final judgement in the first lawsuit.
See "Regulatory Environment" for a discussion of regulatory
proceedings involving the Company and the FERC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company, as the wholly owned subsidiary of a reporting
person, is entitled to omit the information requested in this Item.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's outstanding shares of common stock, $1.00 par
value, are currently owned by Regulated Services. Information
concerning the dividends paid on such stock and the Company's ability
to pay dividends is reported in the Statements of Shareholder's Equity
and Notes to Financial Statements included in Item 8.
ITEM 6. SELECTED FINANCIAL DATA
The Company, as the wholly owned subsidiary of a reporting
person, is entitled to omit the information requested in this Item.
ITEM 7. MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Questar Pipeline conducts natural-gas transmission and storage
operations. Following is a summary of financial results and
operating information:
Year Ended December 31,
1997 1996 1995
(Dollars In Thousands)
OPERATING INCOME
Revenues
Transportation $68,837 $67,656 $61,749
Storage 34,410 34,280 31,276
Other 2,190 2,242 1,747
Total revenues 105,437 104,178 94,772
Operating expenses
Operating and maintenance 37,334 39,959 34,003
Depreciation and amortization 14,797 14,206 12,911
Other taxes 2,816 2,519 3,370
Total expenses 54,947 56,684 50,284
Operating income $50,490 $47,494 $44,488
OPERATING STATISTICS
Natural gas transportation volumes (in Mdth)
For unaffiliated customers 116,215 131,895 151,943
For Questar Gas 110,311 100,161 79,872
For other affiliated customers 37,797 44,327 38,839
Total transportation 264,323 276,383 270,654
Transportation revenue (per dth) $0.26 $0.24 $0.23
Clay Basin storage, working gas-
volumes (in Bcf) 46.3 46.3 46.3
Revenues increased $1,259,000 or 1% in 1997 when compared with
1996 as a result of adding firm transportation contracts. The
new contracts cover several short-haul portions of the
pipeline. The increase in revenues reported in 1996 was due
to a rate increase and expanded firm gas-storage activities.
The Federal Energy Regulatory Commission approved rates which
included a stated return on equity of 11.75%.
At December 31, 1997, approximately 82% of Questar Pipeline's
transportation system was reserved by firm-transportation
customers under contracts with varying terms and lengths. The
remaining 18% of transportation system capacity, which has
multiple delivery points, is available for interruptible
transportation. Questar Gas has reserved transportation
capacity from Questar Pipeline of approximately 800,000 dth
per day, or about 70% of the total reserved
daily-transportation capacity at December 31, 1997. This
contract, which represents 80% of the demand charges collected
by Questar Pipeline, expires June 30, 1999. Negotiations are
under way to structure an agreement that would benefit both
companies. Management believes that any new contract will not
have a material impact on the results of operations, financial
position or cash flows of Questar Pipeline.
Storage revenues were flat in 1997 compared with 1996 after
increasing by 10% in 1996 from the year earlier. In addition
to a rate increase, the higher revenues resulted when Clay
Basin's firm-storage capacity increased from 41.8 Bcf to 46.3
Bcf in May 1995. Storage capacity at year-end 1997 was 100%
subscribed and about 76% of the contractual volumes had
remaining terms of at least 10 years. Questar Gas has reserved
27% of firm-storage capacity for at least 10 years. Questar
Pipeline intends to expand working gas capacity at Clay Basin
in 1998 by 5 Bcf at an estimated cost of $4 million. In an
open season sign-up conducted in January 1998, all potential
new capacity was pledged under long-term commitments. The
expansion is expected to add about $3 million in annual
revenues.
Questar Pipeline's operating and maintenance (O & M) expenses
decreased 7% in 1997 because of cost-containment measures and
reduced labor and related costs. Questar Pipeline along with
Questar Gas initiated cost-containment measures intended to
slow the increase of O & M expenses. Questar Gas and Questar
Pipeline in 1997 combined functions common to gas-distribution
and gas-transmission operations in order to eliminate
duplications. O & M expenses increased 18% in 1996 when
compared with 1995 caused by system expansion, one-time costs
associated with the spin-down of certain assets that were
eventually transferred in 1996 and issues in Questar
Pipeline's 1996 rate settlement.
Depreciation expense was 4% higher in 1997 when compared to
1996 and 10% higher in 1996 when compared to 1995 as a result
of Questar Pipeline's capital expenditures. Settlements of
disputed tax assessments with state and local governmental
agencies in 1996 resulted in reduced property taxes.
Questar Pipeline has a 50% ownership interest in a partnership
building Phase II of the TransColorado pipeline in western
Colorado. Upon completion of Phase II, Questar Pipeline will
complete an acquisition of El Paso Energy Corporation's 50%
interest in Phase I of the pipeline project completed in 1996,
making Questar Pipeline a 50% owner of the entire project. KN
Energy owns the other 50% interest. The 292-mile pipeline will
cost about $240 million when completed. Questar Pipeline
reported pretax earnings of $4,456,000 in 1997 from
capitalizing the interest and financing costs associated with
the pipeline project.
Questar Pipeline purchased an additional 18% interest in the
Overthrust Pipeline partnership in 1997, bringing its
ownership in the transmission line to 54%. Approval of all
partners is required for all substantive policy matters.
The effective income tax rate was 38.1% in 1997, 37.2% in 1996
and 35.1% in 1995.
Year 2000 Costs: Questar Pipeline has undertaken steps to
identify areas of concern and potential remedies, prioritize
needs, estimate costs and begin work either to repair or
replace data processing software and hardware affected by Year
2000 issues. The expense, associated with addressing Year
2000 related problems, is not expected to be material.
However, measurement of the cost has not been completed. The
solutions either involve replacement or repair of the affected
software or hardware systems. Some replacement or upgrade of
systems would take place in the normal course of business.
Several systems, key to Questar Pipeline's operations, have
been scheduled to be replaced through vendor supplied systems
before 2000. The costs of repairing existing systems is
expensed as incurred, while the costs of replacing systems is
capitalized and depreciated generally over a three- to
five-year period.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash provided from operating activities was $43,236,000 in
1997, $46,710,000 in 1996 and $36,991,000 in 1995. Net cash
provided from operating activities decreased 7% in 1997 when
compared with 1996 due primarily to construction costs that
had been incurred but not yet reimbursed by partners at
December 31.
Investing Activities
Following is a summary of capital expenditures for 1997, 1996
and a forecast of 1998 expenditures:
1998
Estimated 1997 1996
(In Thousands)
Transmission system $36,700 $19,622 $18,173
Storage 5,800 1,399 1,466
Partnerships 27,700 6,214 2,890
General 5,900 5,361 1,279
$76,100 $32,596 $23,808
Capital expenditures included new pipelines, replacement and
expansion of sections of existing gas mainlines and additional
investments in pipeline partnerships.
Financing Activities
Questar Pipeline funded 1997 capital expenditures and dividend
payments primarily with the proceeds from net cash provided
from operating activities and an increase in notes payable to
Questar. Forecasted 1998 capital expenditures of $76.1 million
are expected to be financed from net cash flow provided from
operations and borrowings from Questar.
Questar makes loans to Questar Pipeline under a short-term
borrowing arrangement. Outstanding short-term notes payable
to Questar at December 31 totaled $25,800,000 with an interest
rate of 6.02% in 1997 and $11,800,000 with an interest rate of
5.63% in 1996. Questar Pipeline has a short-term
line-of-credit arrangement with a bank under which it may
borrow up to $200,000. The line has interest rates below the
prime interest rate and is renewable in 1998. There were no
amounts borrowed under this arrangement at either December 31,
1997 or 1996. Questar Pipeline guarantees $9 million of
long-term debt borrowed by Blacks Fork Gas Processing Company.
Questar Pipeline's capital structure at year-end 1997 was 41%
long-term debt and 59% common shareholder's equity. Moody's
and Standard and Poor's have rated the Company's long-term
debt A1 and A+, respectively.
Forward Looking Statements
This annual report contains some forward looking statements
about future operations and expectations of Questar Pipeline.
Management believes they are reasonable representations of
Questar Pipeline's expected performance at this time. Actual
results may vary from management's stated expectations and
projections.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are included in Part IV, Item
14, herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The Company has not changed its independent auditors or had any
disagreements with them concerning accounting matters and financial
statement disclosures within the last 24 months.
PART III
The Company, as the wholly owned subsidiary of a reporting
person, is entitled to omit all information requested in Part III
(Items 10-13).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a)(1)(2) Financial Statements and Financial Statement
Schedules. The financial statements identified on the List of
Financial Statements are filed as part of this Report.
(a)(3) Exhibits. The following is a list of exhibits required
to be filed as a part of this Report in Item 14(c).
Exhibit No. Exhibit
2.*1 Agreement of Transfer among Mountain Fuel Supply Company,
Entrada Industries, Inc. and Mountain Fuel Resources, Inc.,
dated July 1, 1984. (Exhibit No. 2. to Registration
Statement No. 2-96102 filed February 27, 1985.)
3.* Restated Articles of Incorporation dated November 17, 1995.
(Exhibit No. 3. to Form 10-K Annual Report for 1995.)
3.3.* Bylaws (as amended on August 11, 1992). (Exhibit No. 3. to
Form 10-Q Report for quarter ended June 30, 1992.)
4.1.* Indenture dated June 1, 1990, for 9-7/8% Debentures due
2020, with Morgan Guaranty Trust Company of New York as
Trustee. (Exhibit No. 4. to Form 10-Q Report for quarter
ended June 30, 1990.)
4.2.* Indenture dated as of June 1, 1991, for 9-3/8% Debentures
due June 1, 2021, with Morgan Guaranty Trust Company of New
York as Trustee. (Exhibit No. 4. to Form 10-Q Report for
quarter ended June 30, 1991.)
10.1.* 1,2\Overthrust Pipeline Company General Partnership Agreement
dated September 20, 1979, as amended and restated as of
October 11, 1982, and as amended August 21, 1991, among CIG
Overthrust, Inc., Columbia Gulf Transmission Company;
Mountain Fuel Resources, Inc.; NGPL-Overthrust Inc.;
Northern Overthrust Pipeline Company; and Tennessee
Overthrust Gas Company. (Exhibit No. 10.4. to Form 10-K
Annual Report for 1985, except that the amendment dated
August 21, 1991, is included as Exhibit No. 10.4. to Form
10-K Annual Report for 1992.)
10.2.* \1 Data Processing Services Agreement effective July 1, 1985,
between Questar Service Corporation and Mountain Fuel
Resources, Inc. (Exhibit No. 10.11. to Form 10-K Annual
Report for 1988.)
10.3. 3\ Annual Management Incentive Plan adopted by Questar
Pipeline Company, Questar Gas Company, and Questar
Regulated Services Company.
10.4. Partnership Agreement for the TransColorado Gas
Transmission Company dated July 1, 1997, between KN
TransColorado, Inc. and Questar TransColorado, Inc.
10.5.* 4\ Firm Transportation Service Agreement with Mountain Fuel
Supply Company under Rate Schedule T-1 dated August 10,
1993, for a term from November 2, 1993 through June 30,
1999. (Exhibit No. 10.5. to Form 10-K Annual Report for
1993.)
10.6.* 4\ Storage Service Agreement with Mountain Fuel Supply Company
under Rate Schedule FSS, for 3.5 Bcf of working gas
capacity at Clay Basin, with a term from September 1, 1993,
through August 31, 2008. (Exhibit No. 10.6. to Form 10-K
Annual Report for 1993.)
10.7.* 4\ Storage Service Agreement with Mountain Fuel Supply Company
under Rate Schedules FSS, for 3.5 Bcf of working gas
capacity at Clay Basin with a term from September 1, 1993,
through August 31, 2013. (Exhibit No. 10.7. to Form 10-K
Annual Report for 1993.)
10.8.* 4\ Storage Service Agreement with Mountain Fuel Supply Company
under Rate Schedule FSS, for 5.5 Bcf of working gas
capacity at Clay Basin, with a term from May 15, 1994
through May 14, 2019. (Exhibit No. 10.8. to Form 10-K
Annual Report for 1995.)
10.10.* 3\ Questar Pipeline Company Deferred Compensation Plan for
Directors, as amended and restated February 13, 1996.
(Exhibit No. 10.10. to Form 10-K Annual Report for 1995.)
10.11.* Agreement for the Transfer of Assets between Questar
Pipeline Company and Questar Gas Management Company, as
amended, effective March 1, 1996. (Exhibit No. 10.11. to
Form 10-K Annual Report for 1996.)
22. Subsidiary Information.
24. Power of Attorney.
27. Financial Data Schedule.
_______________
*Exhibits so marked have been filed with the Securities and
Exchange Commission as part of the indicated filing and are
incorporated herein by reference.
1\The documents listed here have not been formally amended to
refer to the Company's current name. They still refer to the Company
as Mountain Fuel Resources, Inc.
2\The Overthrust Partnership Agreement has not been formally
amended to delete the names of Columbia Gulf Transmission Company and
Tennessee Overthrust Gas Company as partners.
3\Exhibit so marked is management contract or compensation plan or
arrangement.
4\Agreement incorporates specified terms and conditions of Questar
Pipeline's FERC Gas Tariff, First Revised Volume No. 1. The tariff
provisions are not filed as part of the exhibit, but are available
upon request.
(b) The Company did not file a Current Report on Form 8-K during
the last quarter of 1997.
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a) (1) and (2), and (d)
LIST OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 1997
QUESTAR PIPELINE COMPANY
SALT LAKE CITY, UTAH
FORM 10-K -- ITEM 14 (a) (1) AND (2)
QUESTAR PIPELINE COMPANY
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following financial statements of Questar Pipeline Company are
included in Item 8:
Statements of income -- Years ended December 31, 1997, 1996 and
1995
Balance sheets -- December 31, 1997 and 1996
Statements of cash flows -- Years ended December 31, 1997, 1996
and 1995
Statements of shareholder's equity -- Years ended December 31,
1997, 1996 and 1995
Notes to financial statements
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
Report of Independent Auditors
Board of Directors
Questar Pipeline Company
We have audited the accompanying balance sheets of
Questar Pipeline Company as of December 31, 1997
and 1996, and the related statements of income and
common shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the
financial position of Questar Pipeline Company at
December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Salt Lake City, Utah
February 9, 1998
QUESTAR PIPELINE COMPANY
STATEMENTS OF INCOME
Year Ended December 31,
1997 1996 1995
(In Thousands)
REVENUES
From unaffiliated customers $36,343 $38,837 $36,780
From affiliates - Note 8 69,094 65,341 57,992
TOTAL REVENUES 105,437 104,178 94,772
OPERATING EXPENSES
Operating and maintenance - Note 8 37,334 39,959 34,003
Depreciation 14,797 14,206 12,911
Other taxes 2,816 2,519 3,370
TOTAL OPERATING EXPENSES 54,947 56,684 50,284
OPERATING INCOME 50,490 47,494 44,488
INCOME FROM UNCONSOLIDATED
AFFILIATES 4,629 182 1,220
OTHER INCOME - Note 8 1,323 1,798 524
DEBT EXPENSE (13,536) (13,416) (13,472)
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES 42,906 36,058 32,760
INCOME TAXES - Note 5 16,338 13,415 11,492
INCOME FROM CONTINUING
OPERATIONS 26,568 22,643 21,268
DISCONTINUED OPERATIONS - Questar
Gas Management Company - Note 2 1,495 3,380
NET INCOME $26,568 $24,138 $24,648
See notes to financial statements.
QUESTAR PIPELINE COMPANY
BALANCE SHEETS
ASSETS
December 31,
1997 1996
(In Thousands)
CURRENT ASSETS
Cash and short-term investments $7,075 $2,550
Accounts receivable 9,535 6,852
Accounts receivable from affiliates 1,316 931
Federal income tax receivable 446
Inventories, at lower of average
cost or market 2,303 2,301
Prepaid expenses and deposits 2,035 1,938
TOTAL CURRENT ASSETS 22,264 15,018
PROPERTY, PLANT AND EQUIPMENT
Transmission 306,486 297,144
Storage 213,264 211,273
General and intangible 40,093 38,274
Construction work in progress 20,760 16,020
580,603 562,711
Less allowances for depreciation 202,427 194,396
NET PROPERTY, PLANT AND EQUIPMENT 378,176 368,315
OTHER ASSETS
Investment in unconsolidated
affiliates 26,977 14,347
Income taxes recoverable from
customers 4,552 3,930
Unamortized costs of reacquired debt 2,564 2,837
Other 3,031 4,303
37,124 25,417
$437,564 $408,750
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31,
1997 1996
(In Thousands)
CURRENT LIABILITIES
Notes payable to Questar - Note 3 $25,800 $11,800
Accounts payable and accrued expenses
Accounts payable 14,069 10,762
Accounts payable to affiliates 3,633 2,089
Federal income taxes 62
Other taxes 1,229 896
Accrued interest 1,076 1,076
Total accounts payable and
accrued expenses 20,069 14,823
TOTAL CURRENT LIABILITIES 45,869 26,623
LONG-TERM DEBT - Notes 3 and 4 134,563 134,544
OTHER LIABILITIES 4,523 4,322
DEFERRED INCOME TAXES - Note 5 62,298 58,768
COMMITMENTS AND CONTINGENCIES - Note 6
SHAREHOLDER'S EQUITY
Common stock - par value $1 per share;
authorized 25,000,000 shares; issued
and outstanding 6,550,843 shares 6,551 6,551
Additional paid-in capital 82,034 82,034
Retained earnings 101,726 95,908
190,311 184,493
$437,564 $408,750
See notes to financial statements.
QUESTAR PIPELINE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
Additional
Common Paid-in Retained
Stock Capital Earnings
(In Thousands)
Balance at January 1, 1995 $6,551 $82,034 $130,372
1995 net income 24,648
Cash dividends (19,000)
Balance at December 31, 1995 6,551 82,034 136,020
1996 net income 24,138
Cash and other dividends (64,250)
Balance at December 31, 1996 6,551 82,034 95,908
1997 net income 26,568
Cash dividends (20,750)
Balance at December 31, 1997 $6,551 $82,034 $101,726
See notes to financial statements.
QUESTAR PIPELINE COMPANY
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
(In Thousands)
OPERATING ACTIVITIES
Net income $26,568 $24,138 $24,648
Depreciation 15,886 16,291 14,547
Deferred income taxes 1,526 388 (163)
Income from unconsolidated affililates (4,629) (182) (1,220)
Income from discontinued operations (1,495) (3,380)
39,351 39,140 34,432
Changes in operating assets and liabilities
Accounts receivable (3,068) 5,923 1,530
Federal income taxes 508 (799) 1,433
Prepaid expenses and deposits (97) 219 207
Accounts payable and accrued expense 4,851 2,783 (395)
Other 1,691 (556) (216)
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 43,236 46,710 36,991
INVESTING ACTIVITIES
Capital expenditures
Purchase of property, plant
and equipment (26,382) (20,958) (22,640)
Investment in discontinued operations (1,576)
Other investments (6,214) (2,850) (506)
Total capital expenditures (32,596) (23,808) (24,722)
Proceeds from (costs of) disposition
of property, plant and equipment 635 343 (2,822)
NET CASH USED IN INVESTING
ACTIVITIES (31,961) (23,465) (27,544)
FINANCING ACTIVITIES
Change in notes receivable
from Questar Gas Management 16,692 8,518
Change in notes payable to
Questar Corp. 14,000 (3,400) 600
Payment of dividends (20,750) (35,000) (19,000)
NET CASH USED IN FINANCING
ACTIVITIES (6,750) (21,708) (9,882)
Change in cash and
short-term investments 4,525 1,537 (435)
Beginning cash and
short-term investments 2,550 1,013 1,448
ENDING CASH AND SHORT-TERM
INVESTMENTS $7,075 $2,550 $1,013
Questar Pipeline transferred 100% of its ownership in Questar Gas
Management to Questar in 1996 in the form of a dividend of
shares. The $29,250,000 transfer was a noncash transaction and
was excluded from the Statements of Cash Flows.
See notes to financial statements.
QUESTAR PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Accounting Policies
Business: Questar Pipeline Company (the Company or Questar
Pipeline) is a wholly-owned subsidiary of Questar Regulated
Services Company (Regulated Services). Regulated Services is a
holding company and wholly-owned subsidiary of Questar
Corporation (Questar). Regulated Services was organized in 1996
and provides administrative, accounting and engineering functions
for its two subsidiaries, Questar Pipeline and Questar Gas
Company (Questar Gas). Significant accounting policies are
presented below.
Regulation: Questar Pipeline is regulated by the Federal Energy
Regulatory Commission (FERC) which establishes rates for the
transportation and storage of natural gas. The FERC also
regulates, among other things, the extension and enlargement or
abandonment of jurisdictional natural gas facilities. Regulation
is intended to permit the recovery, through rates, of the cost of
service including a rate of return on investment. The financial
statements are presented in accordance with regulatory
requirements. Methods of allocating costs to time periods, in
order to match revenues and expenses, may differ from those of
nonregulated businesses because of cost allocation methods used
in establishing rates.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts of assets and liabilities and disclosure of contingent
liabilities reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Revenue Recognition: Revenues are recognized in the period that
services are provided or products are delivered. Questar
Pipeline periodically collects revenues subject to possible
refunds pending final orders from the FERC. The Company
establishes reserves for revenues collected subject to refund.
Cash and Short-Term Investments: Short-term investments consist
principally of repurchase agreements with maturities of three
months or less.
Investment in Unconsolidated Affiliates: Questar Pipeline has a
54% interest in the Overthrust Pipeline partnership, and is the
operator of the Overthrust Segment of the Trailblazer Pipeline
System. Approval of all partners is required for all substantive
policy matters. Questar Pipeline has a 50% ownership interest in
a partnership building Phase II of the TransColorado pipeline in
western Colorado. Upon completion of Phase II, Questar Pipeline
will complete an acquisition of El Paso Energy Corporation's 50%
interest in Phase I of the pipeline project completed in 1996,
making Questar Pipeline a 50% owner of the entire project. The
Company accounts for its investment in these partnerships using
the equity method.
Property, Plant and Equipment: Property, plant and equipment is
stated at cost. The provision for depreciation is based upon
rates, which will systematically charge the costs of assets over
their estimated useful lives. The costs of property, plant and
equipment are depreciated in the financial statements using the
straight-line method, ranging from 3 to 33% per year and
averaging 3.5% in 1997.
Allowance for Funds Used During Construction: The Company
capitalizes the cost of capital during the construction period of
plant and equipment. This amounted to $387,000 in 1997, $542,000
in 1996 and $330,000 in 1995.
Reacquisition of Debt: Gains and losses on the reacquisition of
debt are deferred and amortized as debt expense over the
remaining life of the issue in order to match regulatory
treatment.
Credit Risk: Questar Pipeline's primary market area is the Rocky
Mountain region of the United States. The Company's exposure to
credit risk may be impacted by the concentration of customers in
this region due to changes in economic or other conditions. The
Company's customers may be affected differently by changing
conditions. Management believes that its credit-review
procedures and loss reserves have adequately provided for usual
and customary credit-related losses.
Income Taxes: Questar Pipeline records cumulative increases in
deferred taxes as income taxes recoverable from customers. The
Company has adopted procedures with its regulatory commissions to
include under-and over-provided deferred taxes in customer rates
on a systematic basis. Questar Pipeline uses the deferral method
to account for investment tax credits as required by the FERC.
The Company's operations are consolidated with those of Questar
and its subsidiaries for income tax purposes. The income tax
arrangement between Questar Pipeline and Questar provides that
amounts paid to or received from Questar are substantially the
same as would be paid or received by the Company if it filed a
separate return. Questar Pipeline also receives payment for tax
benefits used in the consolidated tax return even if such
benefits would not have been usable had the Company filed a
separate return.
Reclassification: Certain reclassifications were made to the
1996 and 1995 financial statements to conform with the 1997
presentation.
Note 2 - Discontinued Operations - Gathering Division Spin Down
and Transfer
Questar Pipeline transferred approximately $55 million of
gas-gathering assets to Questar Gas Management Company, a wholly
owned subsidiary. The transfer was approved by the FERC February
28, 1996 and was effective March 1, 1996. Questar Gas Management
was subsequently transferred to the nonregulated Market Resources
group of Questar on July 1, 1996. The transaction was in the
form of a stock dividend payable to Questar with no gain or loss
recorded. Questar Pipeline's financial statements for 1996 and
1995 were restated, reflecting gas-gathering operations as a
discontinued business segment.
Note 3 - Debt
Questar makes loans to Questar Pipeline under a short-term
borrowing arrangement. Outstanding short-term notes payable to
Questar at December 31 totaled $25,800,000 with an interest rate
of 6.02% in 1997 and $11,800,000 with an interest rate of 5.63%
in 1996. Questar Pipeline has a short-term line-of-credit
arrangement with a bank under which it may borrow up to $200,000.
The line has interest rates below the prime interest rate and is
renewable in 1998. There were no amounts borrowed under this
arrangement at either December 31, 1997 or 1996. Questar Pipeline
guarantees $9 million of long-term debt borrowed by Blacks Fork
Gas Processing Company.
The details of long-term debt at December 31 were as follows:
1997 1996
(In Thousands)
9 3/8% debentures due 2021 $85,000 $85,000
9 7/8% debentures due 2020 50,000 50,000
Total long-term debt outstanding 135,000 135,000
Less unamortized debt discount 437 456
$134,563 $134,544
Sinking fund redemption of the 9 7/8% debt begins in 2001 in the
amount of $2,500,000 and in 2002 for the 9 3/8% debt in the
amount of $4,250,000. There are no debt provisions restricting
the payment of dividends. Cash paid for interest was $13,351,000
in 1997, $13,227,000 in 1996 and $13,192,000 in 1995.
Note 4 - Financial Instruments
The carrying amounts and estimated fair values of the Company's
financial instruments at December 31 were as follows:
1997 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and short-term investments $7,075 $7,075 $2,550 $2,550
Financial liabilities
Short-term loans 25,800 25,800 11,800 11,800
Long-term debt 134,563 150,675 134,544 150,938
The Company used the following methods and assumptions in
estimating fair values: (1) Cash and short-term investments and
short-term loans - the carrying amount approximates fair value;
(2) Long-term debt - the fair value of long-term debt is based on
quoted market prices.
Note 5 - Income Taxes
The components of income taxes charged to income for years ended
December 31 were as follows:
1997 1996 1995
(In Thousands)
Federal
Current $13,247 $11,663 $10,695
Deferred 1,273 700 101
State
Current 1,542 998 684
Deferred 276 54 12
$16,338 $13,415 $11,492
The difference between income tax expense and the tax computed by
applying the statutory federal income tax rate of 35% to income
from continuing operations before income taxes is explained as
follows:
1997 1996 1995
(In Thousands)
Income from continuing operations
before income taxes $42,906 $36,058 $32,760
Federal income taxes at statutory rate $15,017 $12,620 $11,466
State income taxes, net of federal
income tax benefit 1,204 703 456
Prior years' tax settlement 134 146 (162)
Other (17) (54) (268)
Income tax expense $16,338 $13,415 $11,492
Effective income tax rate 38.1% 37.2% 35.1%
Significant components of the Company's deferred tax liabilities
and assets at December 31 were as follows:
1997 1996
(In Thousands)
Deferred tax liabilities
Property, plant and equipment $58,131 $54,550
Other 4,767 5,026
Total deferred tax liabilities 62,898 59,576
Deferred tax assets 600 808
Net deferred tax liabilities $62,298 $58,768
Cash paid for income taxes was $13,844,000 in 1997, $13,797,000
in 1996 and $10,268,000 in 1995.
Note 6 - Rate Matters, Litigation and Commitments
There are various legal proceedings against Questar Pipeline.
While it is not currently possible to predict or determine the
outcome of these proceedings, it is the opinion of management
that the outcome will not have a material adverse effect on the
Company's results of operations, financial position or liquidity.
Note 7 - Employment Benefits
Pension Plan: Substantially all of Questar Pipeline's employees
are covered by Questar's defined benefit pension plan. Benefits
are generally based on years of service and the employee's
36-month period of highest earnings during the ten years
preceding retirement. It is Questar's policy to make
contributions to the plan at least sufficient to meet the minimum
funding requirements of applicable laws and regulations. Plan
assets consist principally of equity securities and corporate and
U.S. government debt obligations. Pension cost was $520,000 in
1997, $974,000 in 1996 and $867,000 in 1995.
Questar Pipeline's portion of plan assets and benefit obligations
is not determinable because the plan assets are not segregated or
restricted to meet the Company's pension obligations. If the
Company were to withdraw from the pension plan, the pension
obligation for the Company's employees would be retained by the
pension plan. At December 31, 1997, Questar's fair value of plan
assets exceeded the accumulated benefit obligation.
Postretirement Benefits Other Than Pensions: Questar Pipeline
pays a portion of health-care costs and life insurance costs for
employees who retired prior to January 1, 1993. The plan changed
for employees hired after January 1, 1993, to link the
health-care benefits to years of service and to limit Questar's
monthly health care contribution per individual to 170% of the
1992 contribution. Employees hired after December 31, 1996, do
not qualify for postretirement medical benefits under this plan.
The Company's policy is to fund amounts allowable for tax
deduction under the Internal Revenue Code. Plan assets consist
of equity securities, and corporate and U.S. government debt
obligations. The Company is amortizing the transition obligation
over a 20-year period, which began in 1992. Costs of
postretirement benefits other than pensions were $257,000 in
1997, $666,000 in 1996, and $788,000 in 1995. The FERC allows
rate-recovery of future postretirement benefits costs to the
extent that pipeline companies contribute the amounts to an
external trust. As part of its 1996 general rate settlement,
Questar Pipeline began making annual contributions of $1,187,000
to an external trust fund.
Questar Pipeline's portion of plan assets and benefit obligations
related to postretirement medical and life insurance benefits is
not determinable because the plan assets are not segregated or
restricted to meet the Company's obligations.
Postemployment Benefits: Questar Pipeline recognizes the net
present value of the liability for postemployment benefits, such
as long-term disability benefits and health-care and
life-insurance costs, when employees become eligible for such
benefits. Postemployment benefits are paid to former employees
after employment has been terminated but before retirement
benefits are paid. The Company accrues both current and future
costs. Beginning in 1996, the FERC allowed Questar Pipeline to
recover $138,000 per year of postemployment costs in future rates
over a three-year period if funded in an external trust.
Employee Investment Plan: The Company participates in Questar's
Employee Investment Plan (ESOP), which allows eligible employees
to purchase Questar common stock or other investments through
payroll deduction. The Company makes contributions of Questar
common stock to the ESOP of approximately 75% of the employees'
purchases and contributes an additional $200 of common stock in
the name of each eligible employee. The Company's expense and
contribution to the plan was $348,000 in 1997, $531,000 in 1996
and $515,000 in 1995.
Note 8 - Related Party Transactions
Questar Regulated Services was organized in 1996 and provides
services common to its two subsidiaries, Questar Gas and Questar
Pipeline. Regulated Services began providing administrative,
technical and accounting support in 1997. Employees in these
functions from both companies were reassigned to Regulated
Services. Regulated Services charged Questar Pipeline
$12,895,000 in 1997. These costs are included in operating and
maintenance expenses, primarily, and are allocated based on
several methods dictated by the nature of the charges.
Management believes that the allocation methods are reasonable.
Questar Pipeline receives a substantial portion of its revenues
from Questar Gas Company. Revenues received from Questar Gas
amounted to $64,924,000 or 62% in 1997, $61,146,000 or 59% in
1996 and $54,096,000 or 57% in 1995. The Company also received
revenues from other affiliated companies totaling $4,166,000 in
1997, $4,195,000 in 1996 and $3,896,000 in 1995.
Questar performs certain administrative functions for Questar
Pipeline. The Company was charged for its allocated portion of
these services which totaled $2,748,000 in 1997, $3,045,000 in
1996 and $2,644,000 in 1995. These costs are included in
operating and maintenance expenses and are allocated based on
each affiliate's proportional share of revenues, net of gas
costs; property, plant and equipment; and payroll. Management
believes that the allocation method is reasonable.
Questar InfoComm Inc is an affiliated company that provides data
processing and communication services to Questar Pipeline. The
Company paid Questar InfoComm $9,458,000 in 1997, $7,155,000 in
1996 and $7,542,000 in 1995.
Questar Pipeline has a 15-year lease for space in an office
building located in Salt Lake City, Utah, that is owned by
affiliated company, Interstate Land. The annual lease payment for
the next five years, beginning in 1998, is $576,000.
The Company received interest income from affiliated companies of
$11,000 in 1997, $609,000 in 1996 and $1,998,000 in 1995. Questar
Pipeline incurred debt expense to Questar of $348,000 in 1997,
$158,000 in 1996 and $272,000 in 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 27th day
of March, 1998.
QUESTAR PIPELINE COMPANY
(Registrant)
By /s/ D. N. Rose
D. N. Rose
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ D. N. Rose President & Chief Executive Officer;
D. N. Rose Director (Principal Executive Officer)
/s/ S. E. Parks Vice President, Treasurer and Chief
S. E. Parks Financial Officer (Principal
Financial Officer)
/s/ G. H. Robinson Vice President and Controller
G. H. Robinson (Principal Accounting Officer)
*R. D. Cash Chairman of the Board; Director
*U. Edwin Garrison Director
*Marilyn S. Kite Director
*Scott S. Parker Director
*D. N. Rose Director
March 27, 1998 *By /s/ D. N. Rose
Date D. N. Rose, Attorney in Fact