Back to GetFilings.com

#

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, 2003 OR

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____

Commission File No. 0-14147

QUESTAR PIPELINE COMPANY

(Exact name of registrant as specified in its charter)

State of Utah

      87-0307414

(State or other jurisdiction of

           (I.R.S. Employer

 incorporation or organization)

         Identification No.)

180 East 100 South, P.O. Box 45360, Salt Lake City, Utah

      84145-0360

(Address of principal executive offices)

        (Zip code)

Registrant’ telephone number, including area code:

(801) 324-5555

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933:

Medium Term Notes, Series A, 5.85% to 7.55% due 2008 to 2018

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  Ö_ 

No   _  

State the aggregate market value of the voting stock held by nonaffili­ates of the registrant as of February 27, 2004.  $0.

Indicate the number of shares outstanding of each of the registrant’classes of common stock, as of February 27, 2004:  6,550,843 shares of Common Stock, $1.00 par value.  (All shares are owned by  Questar Regulated Services Company.)

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)  Yes             No    Ö   

Registrant meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K Report with the reduced disclosure format.

#

TABLE OF CONTENTS

Heading

PART I

Item 1.

BUSINESS

General

Customers, Growth and Competition

Regulation

Employees

Item 2.

PROPERTIES

Item 3.

LEGAL PROCEEDINGS

Item 4.

(OMITTED)

PART II

Item 5.

MARKET FOR REGISTRANT’ COMMON EQUITY

AND RELATED STOCKHOLDER MATTERS

Item 6.

(OMITTED)

Item 7.

MANAGEMENT’ DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATION

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT

MARKET RISK

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Item.

CONTROLS AND PROCEDURES

PART III

Items

10-13.

(Omitted)

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV

Item 15

EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND

REPORTS ON FORM 8-K

SIGNATURES

FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933, as amended, and Section 21(e) of the Securities Exchange Act of 1934, as amended (Exchange Act). All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding the company’s future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, could, expect, intend, project, estimate, anticipate, believe, forecast, or continue or the negative thereof or variations thereon or similar terminology. Although these statements are made in good faith and are reasonable representatio ns of the company’s expected performance at the time, actual results may vary from management’s stated expectations and projections due to a variety of factors.

Important assumptions and other significant factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements include: changes in general economic conditions; changes in gas and oil prices and supplies; changes in rate-regulatory policies; creditworthiness of counterparties to hedging contracts; rate of inflation and interest rates; assumptions used in business combinations; weather and other natural phenomena; the effect of environmental regulation; changes in customers’ credit ratings; competition from other forms of energy, other pipelines and storage facilities; the effect of accounting policies issued periodically by accounting standard-setting bodies; terrorist attacks or acts of war; changes in the business or financial condition of Questar Pipeline Company (“Questar Pipeline” or the “Company”); and changes in credit rating s for the Company and/or its affiliates.

FORM 10-K

ANNUAL REPORT, 2003

PART I

ITEM 1.  Business.

General

Questar Pipeline is an interstate pipeline company that transports natural gas in the Rocky Mountain states of Utah, Wyoming and Colorado and stores gas volumes in Utah and Wyoming. As a natural gas company under the Natural Gas Act of 1938, the Company is regulated by the Federal Energy Regulatory Commission (FERC) as to rates and charges for storage and transportation of natural gas in interstate commerce, construction of new facilities, extensions or abandonments of service and facilities.

Questar Pipeline is a wholly-owned subsidiary of Questar Regulated Services Company (“Regulated Services”), which is a wholly-owned subsidiary of Questar Corporation (“Questar”). The Company has significant relationships with Questar Gas Company (“Questar Gas”) and shares common officers with it and Regulated Services. The following chart illustrates Questar Pipeline’s relationships with its affiliates.

Questar Pipeline’s core transmission system is strategically located in the Rocky Mountain area 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 connections to other major pipeline systems and access to six major producing areas. In addition to this core system, the Company, through a subsidiary, also owns and operates the Southern Trails Pipeline, a 488-mile line that extends from the Rio Blanco hub in the San Juan Basin to just past the California state line.

Questar Pipeline operates the Clay Basin storage facility, which is the largest underground torage reservoir in the Rocky Mountain region. Through a subsidiary, the Company also owns gathering lines and a processing plant in Price, Utah that removes carbon dioxide from coalbed-methane gas.

Customers, Growth and Competition

Questar Pipeline’s system was originally built to serve retail distribution markets in Utah, and Questar Gas remains the Company’s largest single transportation customer. During 2003, Questar Pipeline transported 105.7 million decatherms (MMdth) for Questar Gas, compared to 111.7 MMdth in 2002. Questar Gas has reserved firm-transportation capacity of about 951 thousand decatherms (Mdth) per day on an ongoing basis or about 60 percent of Questar Pipelines reserved capacity, during the three coldest months of the year. The Company’s primary transportation agreement with Questar Gas will not expire until June 30, 2017.

Given its strategic location and connections to other systems, Questar Pipeline also transported 256.1 MMdth for nonaffiliated customers and delivered such volumes to pipelines owned by Kern River Pipeline, Northwest Pipeline, Colorado Interstate Gas, TransColorado, WIC and other systems. Questar Pipeline’s tariff provides a higher hydrocarbon dew point specification than other systems, which requires less processing by producers before natural gas volumes are delivered to the Company’s system. Kern River and Northwest both require lower dew point gas, which means that Questar Pipeline must blend lower dew point processed gas with wet gas and in some instances isolate processed gas for delivery to such lines, which increases its operational costs.

During 2003 Questar Pipeline increased its capacity for deliveries to Kern River by 150 Mdth per day through the Roberson Creek interconnect in southwestern Wyoming. Questar Pipeline also completed its Tie Line 112 expansion in late 2003. Questar Gas holds long-term contracts for 52 Mdth per day on this new line, which is expandable to 180 Mdth per day with additional compression. Tie Line 112 provided critical incremental supplies and operating flexibility during a period of record demand in early 2004.

Rocky Mountain producers and marketers want capacity on transmission systems that move gas to California (Kern River), the Pacific Northwest (Northwest Pipeline) or Midwestern markets (Trailblazer Pipeline, Colorado Interstate Gas). Questar Pipeline provides access for many producers to the systems. Some parties, including Questar Gas Management Company (Gas Management), an affiliate of the Company, are building gathering lines that allow producers to make direct connections to such pipeline systems. Questar Pipeline continues efforts to build or acquire pipelines that transport gas out of the Rocky Mountains.

The Company is unwilling to build significant new projects or expand its existing system without long-term contracts for capacity. Questar Pipeline has recently announced that it has sufficient market support for an expansion of its southern system in central Utah. This expansion, which is scheduled to be in service before the 2005-2006 heating season, will add a daily 102 Mdth of capacity, which is fully supported by long-term contracts. The Company is evaluating customer support for two additional projects.  A potential pipeline project would connect Piceance gas supplies with the Kanda hub in western Wyoming. Questar Pipeline is also assessing the feasibility of a gas storage project in western Wyoming. The Company will continue to expand its system on an incremental basis to serve the needs of its customers.

The eastern segment of the Southern Trails line was placed into service in mid-2002. Marketing constraints and California regulators continue to pose obstacles for Questar Pipeline’s efforts to develop the western segment of Southern Trails from the California border to Long Beach, California. The Company continues to be involved in discussions with interested parties to sell or develop the western segment.

Regulation

Questar Pipeline is subject to the jurisdiction of the FERC as to rates and facilities. Within the last year, it filed necessary tariff provisions to comply with the FERC’s segmentation rules and received regulatory permission to file revised tariff sheets to increase its fuel gas costs charged to shippers. Some shippers are protesting the increased fuel gas costs and are urging the FERC to suspend the tariff sheets pending a hearing or technical conference. Questar Pipeline also recently filed a request for clarification of Order No. 2004 issued by the FERC in November of 2003. This order establishes standards of conduct for transmission providers when dealing with energy affiliates. Gas Management and Questar Energy Trading Company are energy affiliates of Questar Pipeline. Questar Pipeline was actively involved in convincing the FERC to exempt local distribution companies such as Questar Gas from being labeled energy affiliates.

Questar Pipeline is also subject to the jurisdiction of the Department of Transportation (DOT) with respect to safety requirements in the design, construction and operation of its transmission and storage facilities. Questar Pipeline, in common with Questar Gas, is subject to the additional requirements of the Pipeline Safety Improvement Act of 2002. This act and rules issued by the DOT require interstate pipelines and local distribution companies to implement a 10-year program of risk analysis, pipeline assessment and remedial repair for transmission pipelines located in high-consequence areas such as populated areas. Questar Pipeline estimates that its annual cost to comply with the act will be about $1 million. After the initial 10-year assessment, the pipelines in high-consequence areas must be reassessed every seven years.

Employees

At year-end 2003 the Company had 126 employees. Regulated Services has 369 employees that support the Company and Questar Gas.

ITEM 2.  PROPERTIES.

Questar Pipeline has a maximum capacity of 1,933 Mdth per day and firm-capacity commitments of 1,655 Mdth per day. Questar Pipeline’s transmission system includes 2,483 miles of transmission lines that interconnect with other pipelines. Its core system includes two segments, often referred to as the northern system and southern system. The northern system extends from northwestern Colorado through southwestern Wyoming into northern Utah, while the southern system extends from western Colorado to Elberta, Utah. The transmission mileage figure includes lines at storage fields and tap lines used to serve Questar Gas, the 488 miles of the Southern Trails system in service that is owned by a subsidiary and the 88 miles of Overthrust Pipeline owned by subsidiaries. The maximum daily capacity figures for Southern Trails and Overthrust are 88 Mdth and 899 Mdth, respectively. Questar Pipeline’s system ranges i n size from lines that are less than four inches in diameter to the Overthrust line that is 36 inches in diameter. Through a subsidiary, Questar Pipeline also owns and maintains 210 miles comprising the western segment of the Southern Trails system. Questar Pipeline has major compression sites, including a complex near Rock Springs, Wyoming, that compresses gas volumes from the transmission system for delivery to other pipelines, including systems that move gas volumes east.

Questar Pipeline also owns the Clay Basin storage facility in northeastern Utah, which has a capacity of 117.5 billion cubic feet (bcf), including 53.5 bcf of working gas, and several smaller storage aquifers in eastern Utah. Through a subsidiary, Questar Pipeline owns a processing plant in Price, Utah, with a daily capacity of 140 million cubic feet (MMcf) and related gathering lines.

ITEM 3.  LEGAL PROCEEDINGS.

There are various legal proceedings pending against the Company. Although it is too early to estimate the outcome of the various cases filed against Questar Pipeline and its affiliates, management believes that the outcome of these cases will not have a material adverse effect on the Company’s financial position, operating results or liquidity. Significant cases are discussed below.

The Company and its affiliates are involved in two separate lawsuits filed by Jack Grynberg, an independent producer.

The first case, United States ex rel. Grynberg v. Questar Corp., Civil No. 99-MD-1604, Consolidated Case MDL No. 1293 (D. Wyo.) involves claims filed by Grynberg under the Federal False Claims Act and is substantially similar to other cases filed against pipelines and their affiliates that have all been consolidated for discovery and pre-trial motions in Wyoming’s federal district court. The cases involve allegations of industry-wide mismeasurement of natural gas quantities on which royalty payments are due the federal government. The Questar defendants have been deposing Grynberg and currently plan to file a motion contending that the court has no jurisdiction over the case because Grynberg cannot satisfy the statutory requirements for jurisdiction.

The second case, Grynberg and L & R Exploration Venture v. Questar Pipeline Co., Civil No. 97CV0471 (D. Wyo.) was originally stayed pending the outcome of issues raised in other cases involving the parties. This case involves some of the same allegations that were heard in an earlier case between the parties, e.g., breach of contract, intentional interference with a contract, and has additional claims of antitrust violations and fraud. In June of 2001, the judge entered an order granting the motion for partial summary judgment filed by the Questar defendants dismissing the antitrust claims from the case, but has not ruled on other motions for summary judgment dealing with ratable take and fraud.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Company, as a wholly-owned subsidiary of a reporting company under the Exchange Act, is entitled to omit the information 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 under the Exchange Act, is entitled to omit the information requested in this Item.

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

RESULTS OF OPERATION

Questar Pipeline and subsidiaries (“Questar Pipeline”) provides interstate natural gas transmission, storage, processing and gathering services. Following is a summary of financial results and operating information:

Revenues

Natural gas-transmission revenues grew 10% in 2003 compared with 2002 and 14% in 2002 compared with 2001. Following is a summary of major changes in Questar Pipeline’s revenues:

Questar Pipeline expanded its transportation system in response to growing regional natural gas production and transportation demand. Questar Pipeline added new transportation contracts in 2003 for deliveries to the Kern River Pipeline (owned by MidAmerican Energy) at Roberson Creek and for increased deliveries to Questar Gas customers in northern Utah. The increase in 2002 contracts shown in the above table resulted from the November 2001 start up of Main Line 104. Main Line 104 interconnects with the Kern River Pipeline in central Utah and the Questar Gas system at Payson, Utah.

Questar Pipeline began service in June 2002 on the eastern segment of the Southern Trails Pipeline, which extends from New Mexico’s San Juan basin into California.

Questar Pipeline’s transportation system is nearly fully subscribed. As of December 31, 2003, Questar Pipeline had firm-transportation contracts of 1,655,000 dth per day compared to 1,543,000 dth per day a year earlier, a 7% year-on-year increase. Both years included 80,000 dth per day capacity on the eastern segment of Southern Trails. These contracts have varying terms and lengths. Questar Gas is Questar Pipeline’s largest transportation customer with contracts for 951,000 dth per day, including 50,000 dth per day for winter-peaking service. The majority of Questar Gas’s transportation contracts extend to 2017.

Questar Pipeline’s primary storage facility is Clay Basin in eastern Utah. This facility is 100% subscribed under long-term contracts. Questar Gas has contracted for 62% of firm-storage capacity at Clay Basin for terms extending from 2008 to 2019.

Questar Pipeline subsidiary, Questar Transportation Services, owns a processing plant near Price, Utah that was built in 1999 to process gas on behalf of Questar Gas. Questar Gas has contracted for 100% of the plant’s firm capacity and pays the cost of service for operating the plant. The net book value of the plant was approximately $15.4 million as of December 31, 2003.

Operating Expenses

Operating and maintenance expenses increased 7% in 2003 over 2002 following a 5% increase in 2002 over 2001. Higher expenses resulted from the startup of operations on the eastern segment of Southern Trails in June 2002. Reduced construction activity and related capitalization of labor costs resulted in higher operating expenses in 2003. In addition, employee benefits, insurance and pipeline-inspection costs were higher in 2003. Legal expenses were higher in 2002 than 2003 because of the TransColorado Pipeline litigation described below.

Depreciation and property-tax expense increased in 2003, reflecting increased pipeline investment. Capitalized financing costs related to construction were significantly lower in 2003.

TransColorado Litigation

Questar TransColorado, a Questar Pipeline subsidiary, sold its 50% interest in the TransColorado Pipeline in 2002 following successful resolution of a protracted legal dispute.

Interest and other income (loss)

In 2003 the sale of equipment resulted in a $724,000 pretax loss. Interest and other income was lower in 2002 when compared with 2001 because of an asset impairment and lower AFUDC (capitalized financing costs on construction projects). Questar Pipeline’s interest in the TransColorado Pipeline was written down by $3 million in anticipation of the sale. AFUDC was zero in 2003, $3.1 million in 2002 and $4.8 million in 2001.

Operations of unconsolidated affiliates

In 2002 Questar Pipeline sold its interest in the TransColorado Pipeline and acquired the remaining interest in Overthrust Pipeline. The Company’s share of the TransColorado partnership’s earnings was a pretax profit of $6.9 million in 2002 compared with a $2.2 million loss in 2001. TransColorado Pipeline operated near capacity in the second and third quarters of 2002 as a result of the wide basis differentials between gas prices in the Rockies and the San Juan Basin. Earnings from the Overthrust Pipeline partnership were $860,000 in 2002 and $1.1 million in 2001.

Debt expense

Debt expense decreased by 6% in 2003 compared with 2002 because of lower debt balances and interest rates. Debt expense increased 42% in 2002 compared to 2001 because of higher short-term debt. In October 2002, Questar Pipeline used the $105.5 million proceeds from the sale of TransColorado to reduce short-term debt.

Income taxes

The effective combined federal and state income tax rate was 36.9% in 2003, 35.4% in 2002 and 37.1% in 2001.

Net cash provided from operating activities increased 21% in 2003 compared with 2002 because of timing differences in settlements with vendors. Net cash provided from operating activities decreased 22% in 2002 compared with 2001 as a result of timing differences associated with payments to vendors.

Investing Activities

During 2003 Questar Pipeline completed Tie Line 112, which increased delivery capacity to Questar Gas. Questar Pipeline also completed an interconnection with Kern River at Roberson Creek, which increased delivery capacity into that pipeline. Following is a summary of capital expenditures for 2003, 2002 and a forecast for 2004 expenditures:

Financing Activities

In 2003 net cash provided from operating activities exceeded capital expenditures and dividends with the remainder used to repay debt. In 2002 net cash provided from operating activities and borrowings from Questar funded capital expenditures. Questar Pipeline used the proceeds from asset sales to repay $100 million of floating rate debt borrowed for a 12-month period. Forecasted 2004 capital expenditures are expected to be financed from net cash flow provided from operations and borrowing from Questar.

Questar makes loans to Questar Pipeline under a short-term borrowing arrangement. At December 31, Questar Pipeline owed Questar $49.5 million with an interest rate of 1.3% at 2003 and $74.8 million with an interest rate of 1.64% in 2002.

Questar Pipeline’s capital structure at year-end 2003 consisted of 55% long-term debt and 45% common shareholder’s equity. Moody’s and Standard & Poor’s rate Questar Pipeline’s long-term debt A2 and A+, respectively.

At December 31, 2003 the Company reported negative working capital of $40.8 million primarily as a result of short-term debt used to fund capital expenditures.

Contractual Cash Obligations and Other Commitments

Questar Pipeline enters into a variety of contractual cash obligations and other commitments in the course of ordinary business activities. The following table summarizes the Company’s significant contractual cash obligations:

Critical Accounting Policies, Assumptions and Estimates

Questar Pipeline’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of consolidated financial statements requires management to make assumptions and estimates that affect the reported results of operations and financial position. The following accounting policies may involve a higher degree of complexity and judgment on the part of management.

Rate Regulation

Regulatory agencies establish rates for the transportation and storage of natural gas. The regulatory agencies also regulate, among other things, the extension and enlargement or abandonment of jurisdictional natural gas facilities. Regulation is intended to permit the recovery, through rates, of the cost of service, including a return on investment. Questar Pipeline follows Statement of Financial Accounting Standards (SFAS) 71, Accounting for the Effects of Certain Types of Regulation, that requires the recording of regulatory assets and liabilities by companies subject to cost-based regulation. The Federal Energy Regulatory Commission (FERC) has accepted the recording of regulatory assets and liabilities.

Group Depreciation

Questar Pipeline uses group depreciation for the majority of its fixed assets. Under this policy, assets are depreciated in groups of similar assets rather than on an individual-asset basis. When an asset is retired, the original cost and a like amount of accumulated depreciation are removed from the books. The method typically increases depreciation expense over what would be recognized under the individual-asset method, and eliminates gains and losses when a group-depreciated asset is retired. Assets that can be separately identified, such as buildings, vehicles and computers, are depreciated on an individual-asset basis. The FERC accepted the use of group depreciation.

OTHER INFORMATION

Western Segment of Questar Southern Trails Pipeline

Questar Pipeline has invested approximately $52 million in the western segment of the Southern Trails Pipeline, which extends from the California-Arizona border to Long Beach. This investment consists of an allocation of the original price of the 16-inch-diameter line, relocation costs, and engineering costs.

Questar Pipeline has been actively pursuing various alternatives for the western segment including selling the pipeline and completing the conversion of the former liquids pipeline for natural gas service. Active discussions are being held with a party interested in acquiring the pipeline and completing the conversion to gas service. Questar Pipeline intends to complete the sale of the pipeline during 2004. If not, Questar Pipeline will continue to pursue other alternatives, including conducting an open season to determine market support for putting the pipeline into natural gas service.

FERC – Order No. 2004 on Standards of Conduct for Transmission Providers

In November 2003, the FERC issued final rules on nondiscriminatory standards when dealing with affiliated energy companies. The initial Notice of Proposed Rule Making (NOPR) would have included affiliated local-distribution companies (LDCs), such as Questar Gas, in the marketing-affiliate regulations. The final rule exempts LDCs from the regulations as long as they do not engage in off-system sales. As a policy, Questar Gas does not make off-system sales. The Company believes that the final order will not have a significant impact on operating costs.

FERC Rule on Quarterly Financial Reporting

The FERC issued a Rule on Quarterly Financial Reporting and Revision to the Annual Reports. The Rule, among other issues, requires a new quarterly filing of financial statements. The FERC has not previously required quarterly statements. The Company believes that the added burden of preparing quarterly reports for the FERC will not significantly increase operating costs.

Credit Risk

Questar Pipeline requests credit support, such as letters of credit and cash deposits, from companies that may pose unfavorable credit risks. These companies were current on their accounts as of the date of this report. Questar Pipeline’s largest customers are Questar Gas, Chevron-Texaco, Williams Energy Services, ConocoPhillips and Dominion Exploration and Production.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Questar Pipeline’s long-term debt has fixed rates. As the need arises, the Company borrows funds on a short-term basis with variable-interest rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements:

Report of Independent Auditors

Consolidated Statements of Income, three years ended December 31, 2003

Consolidated Balance Sheets at December 31, 2003 and 2002

Consolidated Statements of Shareholder’s Equity, three years ended

December 31, 2003

Consolidated Statements of Cash Flows, three years ended December 31, 2003

Notes to Financial Statements

All schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or Notes thereto.

Report of Independent Auditors

Board of Directors

Questar Pipeline Company

We have audited the accompanying consolidated balance sheets of Questar Pipeline Company and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Questar Pipeline Company and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.

As discussed in Notes 1 and 2 to the financial statements, Questar Pipeline Company and subsidiaries adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002 and Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003.

Salt Lake City, Utah

February 10, 2004

/s/Ernst & Young LLP

Ernst & Young LLP