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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, 2004 OR

[  ]

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

Commission File No. 0-14147

QUESTAR PIPELINE COMPANY

(Exact name of registrant as specified in its charter)

State of Utah

 87-0307414

(State or other jurisdiction of

       (I.R.S. Employer

  incorporation or organization)

     Identification No.)

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

  84145-0360

(Address of principal executive offices)

     (Zip code)

Registrant's telephone number, including area code:

           (801) 324-5555

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

None

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

None

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   ___ 

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

Aggregate market value of the voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second quarter (June 30, 2004) $0.

On February 28, 2005, 4,309,427 shares of the registrant's Common Stock, $1.00 par value. (All shares are owned by Questar Regulated Services.)

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

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TABLE OF CONTENTS

Heading

      Page #

PART I

Item 1.

BUSINESS

General

Glossary of Commonly Used Terms

SEC Filings and Website Information

Risk Management

Customers, Growth and Competition

Regulation

Clay Basin Storage Gas

Environmental Matters

Employees

Item 2.

PROPERTIES

Item 3.

LEGAL PROCEEDINGS

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF

SECURITY HOLDERS (omitted)

PART II

Item 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Item 6.

SELECTED FINANCIAL DATA (omitted)

Item 7.

MANAGEMENT'S 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

ON ACCOUNTING AND FINANCIAL DISCLOSURE

Item 9A.

CONTROLS AND PROCEDURES

Item 9B.

OTHER INFORMATION

PART III

Item 10.

DIRECTORS AND EXECUTIVE OFFICERS

OF THE REGISTRANT (omitted)

Item 11.

EXECUTIVE COMPENSATION (omitted)

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND STOCKHOLDERS MATTERS (omitted)

Item 13.

CERTAIN RELATIONSHIPS AND RELATED

TRANSACTIONS (omitted)

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV

Item 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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 (Act) of 1934 as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding the Company's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “believe,” “forecast,” or “continue” or t he negative thereof or variations thereon or similar terminology. Although these statements are made in good faith and are reasonable representations of Questar Pipeline Company (Questar Pipeline or the Company) 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:

Questar Pipeline’s natural gas-transportation and storage operations are regulated by the Federal Energy Regulatory Commission (FERC) under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. The FERC has authority to: (1) set rates for natural gas transmission, storage, and related services; (2) set rules governing business relationships between the pipeline subsidiary and its affiliates; (3) approve new pipeline and storage-facility construction; and (4) establish policies and procedures for accounting, purchase, sale, abandonment and other activities. FERC policies may adversely affect Questar Pipeline profitability.

Questar Pipeline and its subsidiaries are subject to federal, state and local environmental, health and safety laws and regulations. Environmental laws and regulations are complex, change frequently and tend to become more onerous over time. In addition to the costs of compliance, the Company may incur substantial costs to take corrective actions at both owned and previously owned facilities. Accidental spills and leaks requiring cleanup may occur in the ordinary course of business. As standards change, the Company may incur significant costs in cases where past operations followed practices that were considered acceptable at the time but that now require remedial work to meet current standards. Failure to comply with these laws and regulations may result in fines, significant costs for remedial activities, or injunctions.

Questar Pipeline and its subsidiaries must comply with numerous and complex regulations governing their activities on federal and state lands in the Rocky Mountain region, notably the National Environmental Policy Act, the Endangered Species Act, and the National Historic Preservation Act. Federal and state agencies frequently impose conditions on the Company’s activities. These restrictions tend to become more stringent over time, and can limit or prevent the Company from transporting and storing natural gas.

Questar Pipeline must incur significant costs to comply with new federal pipeline-safety regulations enacted in December 2002. The Company may also be affected by possible future regulations requiring the tracking, reporting and reduction of greenhouse-gas emissions.

Questar Pipeline results may also be negatively affected by: changes in general economic conditions; changes in regulation; availability and economic viability of gas and oil properties; creditworthiness of counterparties; rate of inflation and interest rates; assumptions used in business combinations; weather and natural disasters; changes in customers' credit ratings; competition from other forms of energy, other pipelines and storage facilities; effects of accounting policies issued periodically by accounting standard-setting bodies; terrorist attacks or acts of war; changes in the business or financial condition of the Company; changes in credit ratings; and availability of financing.

FORM 10-K

ANNUAL REPORT, 2004

PART I

ITEM 1.  BUSINESS.

General

Questar Pipeline is an interstate pipeline company that provides natural gas-transportation and underground storage services in the Rocky Mountain states of Utah, Wyoming and Colorado. As a "natural gas company" under the Natural Gas Act of 1938, Questar Pipeline and certain subsidiary pipeline companies are regulated by the 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, accounting and other activities. The Company also provides gas-gathering and processing services.

Questar Pipeline is a wholly owned subsidiary of Questar Regulated Services Company (Regulated Services), which is a wholly owned subsidiary of Questar Corporation (Questar). It has significant relationships with Questar Gas Company (Questar Gas) and shares some officers in common with Regulated Services and Questar Gas. It also has relationships with Questar Market Resources, an affiliated company, and its subsidiaries.

Questar Pipeline and its subsidiaries own 2,497 miles of interstate pipeline with total daily capacity of 2,892 Mdth. Questar Pipeline's core-transmission system is strategically located in the Rocky Mountain area near large reserves of natural gas in major Rocky Mountain producing areas. Questar Pipeline transports natural gas from these producing areas to other major pipeline systems and to the Questar Gas distribution system. In addition to this core system, Questar Pipeline, through a subsidiary, owns and operates the Southern Trails Pipeline, a 488-mile line that extends from the Blanco hub in the San Juan Basin to just inside the California state line.

Questar Pipeline owns and operates the Clay Basin storage facility, the largest underground- storage reservoir in the Rocky Mountain region. Through a subsidiary, Questar Pipeline also owns gathering lines and a processing plant in Price, Utah, which provides heat-content-management services for Questar Gas and natural gas-gathering services for third parties.

Glossary of Commonly Used Terms

cf

One billion cubic feet, a common unit of measurement of natural gas.

Btu

One British thermal unit – a measure of the amount of energy required to raise the temperature of one pound of water from 59 degrees to 60 degrees Fahrenheit.

dth

Decatherms or ten therms. One dth equals one million Btu or approximately one Mcf.

gas

   All references to “gas” in this report refer to natural gas.

Mcf

   One thousand cubic feet.

Mdth

One thousand decatherms.

MMdth

   One million decatherms.

SEC Filings and Website Information

Questar Pipeline files annual, quarterly, and current reports with the Securities and Exchange Commission (SEC). Questar Pipeline also regularly files other documents with the SEC. Investors can read and copy any materials filed with the SEC at its Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, and can obtain information about the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0300. The SEC also maintains a website that contains information filed electronically that can be accessed over the Internet at www.sec.gov.

Investors can also access financial and other information for Questar Pipeline at the Company's website at www.questar.com. Questar's website contains Statements of Responsibility for Board Committees, Corporate Governance Guidelines and its Business Ethics Policy.

Questar and each of its reporting subsidiaries make available, free of charge, through the website copies of Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to such reports and all reports Access to these reports is provided as soon as reasonably practicable after such reports are electronically filed with the SEC.

Risk Management

Questar Pipeline faces risks from changes in regulatory practice, credit risk of firm-capacity holders, damage to pipelines from third parties or natural causes, and bypass by other pipelines or gathering lines. In its storage operations, Questar Pipeline faces risks associated with performance of storage reservoirs or storage facilities.

Questar Pipeline mitigates these risks by actively participating in FERC regulatory proceedings, monitoring customer credit ratings and exercising its tariff rights including the requirement of prepayments, marking underground pipelines, monitoring construction activities near its facilities, and monitoring the performance of underground-storage facilities.

Questar Pipeline faces risk of recontracting firm capacity as contract terms expire. Questar Pipeline’s transportation system is nearly fully subscribed and firm contracts had a weighted-average remaining life of 9.3 years as of December 31, 2004. All of Questar Pipeline’s storage capacity is fully subscribed with a weighted-average remaining life of 7.4 years as of December 31, 2004.

Customers, Growth and Competition

Questar Gas remains Questar Pipeline's largest single transportation customer. During 2004, Questar Pipeline transported 116.5 MMdth for Questar Gas compared to 105.7 MMdth in 2003. Questar Gas has reserved firm-transportation capacity of 951 Mdth per day under long-term contracts, or about 60% of Questar Pipeline's reserved capacity, during the three coldest months of the year. Questar Pipeline's primary transportation agreement with Questar Gas will expire on June 30, 2017.

Questar Pipeline also transported 220.5 MMdth for nonaffiliated customers to other pipelines including Kern River Pipeline, Northwest Pipeline, Colorado Interstate Gas, TransColorado and WIC. Questar Pipeline may be adversely affected by proposals before the FERC to establish natural gas-quality standards, specifically for hydrocarbon dew point. 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 into Questar Pipeline's system. Other interstate pipelines require lower dew-point gas. As a consequence, Questar Pipeline must incur higher costs to blend lower dew-point-processed gas with wet gas and in some instances isolate processed gas for delivery to other pipelines. In effect, Questar Pipeline currently provides a bundled gas-transportation and dew-point-managem ent service for its shippers. Questar Pipeline may need to restructure its tariff to unbundle these services.

During 2005, Questar Pipeline will expand its southern system in central Utah. This expansion, scheduled to be in service by the fourth quarter of the year, will add 102 Mdth of daily capacity under long-term contracts. Questar Pipeline received FERC approval for the expansion in January 2005. During 2004 Questar Pipeline installed a lateral pipeline to a power plant near Mona, Utah. This lateral will be in service during the first quarter of 2005. These projects will add about $3.0 million to 2006 earnings, the first full year of operations.

During 2003, Questar Pipeline increased its capacity for deliveries to Kern River by 150 Mdth per day through a new interconnect at Roberson Creek 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, marketers and end users seek capacity on transmission systems that move gas to California (Kern River), the Pacific Northwest (Northwest Pipeline) and Midwestern markets (WIC, Colorado Interstate Gas). Questar Pipeline provides access for many producers to these third-party pipelines. Some parties, including Questar Gas Management, an affiliate of Questar Pipeline, are building gathering lines that allow producers to make direct connections to competing pipeline systems.

Questar Pipeline seeks to extend and expand its core pipeline and storage business. Questar Pipeline and other pipelines have proposed projects to connect Piceance Basin (northwest Colorado) gas supplies with pipelines moving gas east out of Wyoming. Questar Pipeline has also proposed a project to move gas from the Piceance and Uinta Basin west to Kern River. Questar Pipeline is conducting open seasons to assess possible market support for these new projects. Questar Pipeline is also assessing the feasibility of a gas-storage project in western Wyoming.

In mid-2002 a Questar Pipeline subsidiary placed the eastern segment of the Southern Trails Pipeline into service. The eastern segment extends from the San Juan Basin to the California border. Capacity on this segment is fully committed under contracts that expire in mid-2008. Current market rates for transportation between these receipt and delivery points are less than current contract rates. When the existing contracts expire, Questar Pipeline’s subsidiary may have to lower rates to recontract capacity on this pipeline, which would reduce revenues and earnings.

Questar Pipeline has thus far failed to secure long-term contracts for the western segment of Southern Trails, which extends from the California border to Long Beach, California. Questar Pipeline has been working with the Los Angeles Department of Water and Power (LADWP) to develop a gas pipeline to serve a power-generation facility. LADWP budgeted funds to acquire a gas pipeline and issued a request for proposal in October 2004. Questar Pipeline responded to this request with a proposal to complete conversion and sell the western segment to LADWP. On February 28, 2005, LADWP notified Questar Pipeline of its intent to pursue the proposal, although it is uncertain whether negotiations will be successful. Conversion of the segment and extension to LADWP’s power-generation facilities will require significant additional investment on the order of $45 to $55 million. Questar Pipeline is negoti ating with LADWP to insure that these costs are covered in any contract to put the line in service and sell the line to LADWP.

Regulation

FERC Order No. 2004, which defines standards of conduct for transmission providers, became effective on September 22, 2004. These rigorous new affiliate rules are designed to ensure that transmission-system employees function independently from employees of marketing and energy affiliates. In addition, a transmission provider must treat all transmission customers on a nondiscriminatory basis and will not be allowed to operate its transmission system to benefit its marketing or energy affiliates. Based on clarification from the FERC, Questar Pipeline has determined that Questar Market Resources’ subsidiaries, except Questar Gas Management, are marketing or energy affiliates. Questar Gas is not an energy affiliate. Questar Pipeline and other Questar companies have adopted new procedures to comply with this order.

Questar Pipeline is required to comply with the Pipeline Safety Improvement Act of 2002. This act and rules issued by the Department of Transportation (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 population centers. Questar Pipeline filed a compliance plan with the FERC during 2004. Questar Pipeline estimates the annual compliance cost at $1 million, not including pipeline replacement, if necessary.

During the fourth quarter of 2004, Questar Pipeline received a FERC order in a case involving the annual Fuel Gas Reimbursement Percentage (FGRP). The FERC previously granted Questar Pipeline’s request to increase the FGRP effective January 1, 2004. In its order, the FERC approved the FGRP but also ruled that Questar Pipeline is required to credit to transmission customers proceeds from selling natural gas liquids recovered from its dew-point facilities at the Kastler plant in northeastern Utah. See Item 7. of this report for additional information about the FGRP.

Clay Basin Storage Gas

Questar Pipeline continues to investigate a potential discrepancy of up to 9 bcf between the book volume of cushion gas at Clay Basin and cushion-gas volumes implied by pressure-survey data obtained in recent field tests. The current book volume of the cushion gas is 61.5 bcf with a value of $99.7 million. Questar Pipeline has not determined if any gas is missing from the reservoir. Analysis to date has not revealed any leaks or gas migration out of the reservoir. Additional reservoir tests and analysis, including reservoir modeling, are under way to identify the cause and may continue for several years. See Item 7. of this report.

Environmental Matters

See Item 3. Legal Proceedings in this report for a discussion of the Company's environmental matters.

Employees

At January 1, 2005, the Company had 173 employees. All were located in the United States. None of these employees is represented under collective bargaining agreements.

ITEM 2.  PROPERTIES.

Questar Pipeline has a maximum capacity of 2,892 Mdth per day and firm-capacity commitments of 1,643 Mdth per day. Questar Pipeline's transmission system includes 2,497 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 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 included above for Southern Trails and Overthrust are 88 Mdth and 899 Mdth, respectively. Questar Pipeline' s system ranges in 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 210 miles of pipeline comprising the western segment of the Southern Trails system, although this segment has not been placed in service. 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 certificated capacity of 117.5 bcf, including 53.5 bcf of working gas, and several smaller storage aquifers in northeastern Utah and western Wyoming.

Questar Pipeline’s subsidiary, Questar Transportation Services, owns nonjurisdictional processing and gathering facilities located in central Utah. The processing facilities remove carbon dioxide from coal-seam gas to meet Questar Gas’s heat-content requirements. Questar Gas has contracted for the firm capacity at the facilities and pays cost of service for the processing. There are 42 miles of gathering lines used to gather coal-seam gas production and deliver it to Questar Pipeline’s transportation facilities.

ITEM 3.  LEGAL PROCEEDINGS.

Questar Pipeline is involved in a variety of pending legal disputes. Management believes that the outcome of these cases will not have a material adverse effect on financial position, operating results or liquidity. Questar Pipeline's regulatory proceedings involving fuel-gas reimbursement are discussed in Item 7. Other significant cases are discussed below.

Grynberg.  Questar affiliates are involved in three 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 as In re Natural Gas Royalties Qui Tam Litigation, Consolidated Case MDL No. 1293 (D. Wyo.) involves qui tam claims filed by Grynberg under the federal False Claims Act and is substantially similar to the other cases filed against pipelines and their affiliates that have been consolidated for discovery and pre-trial discovery 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 finished deposing Grynberg and filed a motion contending that the court has no jurisdiction over the case because Grynberg cannot satisfy the statutory requirements for jurisdiction. In other words, the Questar defendants argue that Grynberg cannot claim to be the "original source" of the information on which the allegations are based and failed to provide any information to the government before public disclosures occurred.  

A special master has been handling the consolidated cases in order to expedite administrative matters. He held a hearing on the motions on March 17 and18, 2005.

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 2001 the judge entered an order granting the Company’s motion filed by Questar defendants for partial summary judgment dismissing the antitrust claims from the case, but has not ruled on other motions for summary judgment dealing with ratable take and fraud.

The parties to the third case, Grynberg v. Questar Pipeline Co., No. 99090729CN (Dist. Ct. Utah), recently agreed to stay the proceedings, pending the resolution of some issues in the Wyoming case described above. The Utah case was originally filed by Grynberg against Questar Pipeline and other named Questar defendants in September of 1999. The case involves claims that Questar Pipeline mismeasured the heat content of natural gas volumes attributable to Grynberg's working interest in several wells in southwestern Wyoming and committed fraud and breached fiduciary responsibilities owed him. The trial court judge granted summary judgment to the Questar defendants and dismissed Grynberg's claims. On appeal, the Utah Supreme Court substantially upheld the trial court's decision, but ruled that Grynberg was not collaterally estopped from presenting a contract-termination issue that had been previously ruled on by a Wyoming federal district court judge in the case described above and remanded the case to the trial court to determine whether any contractual claims remain.   

Environmental Matters.

Questar Pipeline received a Notice of Violation from the Colorado Department of Public Health and Environment, Air Pollution Control Division (APCD) dated February 3, 2005, in conjunction with its operation of a tank battery in Rio Blanco County, Colorado. Specifically, the Colorado agency alleged that Questar Pipeline violated applicable environmental regulations by failing to obtain the necessary permit and complying with the best available control technology. Questar Pipeline is involved in ongoing discussions with APCD. Questar Pipeline has not been advised of penalties and other assessments, but anticipates that these may exceed $100,000.

In addition, Questar Pipeline is listed as a "responsible party" at other sites involving hazardous wastes.

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

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

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Company’s outstanding shares of common stock, $1.00 par value, are currently owned by Regulated Services. Information concerning dividends paid on such stock and the Company’s ability to pay dividends is reported in the Consolidated Statements of Shareholder’s Equity and Notes to the Consolidated Financial Statements included in Item 8.

ITEM 6.  SELECTED FINANCIAL DATA.

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

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

Questar Pipeline provides FERC-regulated interstate natural gas transportation and storage, and nonjurisdictional processing and gathering services.

Questar Pipeline earned $27.6 million in 2004 compared with $30.2 million in 2003. The 2004 results were lower by $3.0 million after tax as a result of an order to credit to transportation customers certain revenues from the sale of liquids recovered from gas processing. A more detailed discussion of the FERC decision follows. Net income declined in 2003 compared with 2002 because increased operating expenses and lower capitalized costs for construction projects offset a 7% increase in transportation volumes and a 10% growth in revenues. The cumulative effect of implementing SFAS 143 reduced Questar Pipeline 2003 net income by $133,000. Following is a summary of financial results and operating information.

Revenues

Questar Pipeline’s revenues were flat in 2004 versus 2003 after increasing by 10% in 2003 versus 2002. Revenues include sales to affiliates. Following is a summary of major changes in Questar Pipeline’s revenues.

Questar Pipeline added new transportation capacity and contracts in 2003 for deliveries to Kern River Pipeline at Roberson Creek near the regional market hub at Opal, Wyoming, and for increased deliveries to Questar Gas. Questar Pipeline did not increase transportation capacity during 2004.

Questar Pipeline’s existing transportation system is nearly fully subscribed. As of December 31, 2004, Questar Pipeline had firm-transportation contracts of 1,643 Mdth per day compared with 1,655 Mdth per day as of December 31, 2003, and 1,543 Mdth per day as of December 31, 2002. The amounts include 80 Mdth per-day capacity on the eastern segment of Southern Trails, which was placed in service in June 2002. Questar Pipeline’s firm-transportation contracts had a weighted-average remaining life of 9.3 years as of December 31, 2004.  

Questar Gas is Questar Pipeline’s largest transportation customer with contracts for 951 Mdth per day, including 50 Mdth 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 was 100% contracted as of December 31, 2004. One contract expires in the first quarter of 2005 but is expected to be resold. In addition to Clay Basin, Questar Pipeline also owns and operates three smaller aquifer gas-storage facilities. Questar Pipeline’s firm-storage contracts had a weighted-average remaining life of 7.4 years as of December 31, 2004.

Questar Gas has contracted for 26% of firm-storage capacity at Clay Basin for terms extending from four to 15 years, and 100% of the firm-storage capacity at the aquifer facilities for terms extending for 15 years.

During the fourth quarter of 2004, the FERC issued an order to Questar Pipeline in a case involving the annual fuel-gas-reimbursement percentage As a result Questar Pipeline recorded a revenue reduction in 2004 of $4.7 million, which included $2.3 million for prior years, as a potential credit to customers. The FERC previously granted Questar Pipeline’s request to increase the FGRP effective January 1, 2004. In its order, the FERC approved the FGRP but also ruled that Questar Pipeline is required to credit to transmission customers proceeds from the sale of natural gas liquids recovered from its hydrocarbon dew-point facilities at the Kastler plant in northeastern Utah. Questar Pipeline has filed a request for rehearing with the FERC. Questar Pipeline believes that any credit to customers should be reduced by the plant’s cost of service. Until the issue is resolved, Questar Pipeline will continue to accrue a potential liability equal to any liquid revenues from the dew-point plant.

Questar Pipeline charges FERC-approved transportation and storage rates that are based on straight fixed-variable rate design. Under this rate design all fixed costs of providing service, including depreciation and return on investment, are recovered through a fixed-reservation charge per unit of contracted-transportation capacity, or a demand charge. About 95% of Questar Pipeline costs are fixed and recovered through these demand charges. Questar Pipeline’s earnings are driven primarily by demand revenues from firm shippers. Operating costs that vary based on throughput are recovered through volumetric charges. Since demand charges are based on contract levels and volumetric charges are about 5% of the total customer charge, period-to-period changes in firm-transportation volumes do not have a significant impact on earnings.

Questar Transportation Services, a subsidiary of Questar Pipeline, owns nonjurisdictional gathering lines and a processing plant near Price, Utah. Transportation Services built the plant in 1999 for Questar Gas to remove carbon dioxide from gas prior to delivery to Questar Pipeline. Questar Gas has contracted for 100% of the plant’s firm capacity and pays the cost of service for operating the plant.

Expenses

Operating and maintenance expenses increased 5% in 2004 compared with 2003 and 7% in 2003 compared with 2002. The increases were primarily due to higher employee-benefit costs, and higher costs associated with maintenance and continued marketing of the western segment of the Southern Trails Pipeline. Operating and maintenance expenses per dth transported were $0.156 in 2004 compared with $0.139 in 2003 and $0.137 in 2002.

Depreciation expense increased 8% in 2004 over 2003 and 18% in 2003 over 2002, reflecting increased pipeline investment.

Interest and other income (loss)

In 2003 the sale of equipment resulted in a $0.7 million pretax loss causing 2003 interest and other income to be lower compared to 2004 and 2002.

Earnings 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. Earnings from the Overthrust Pipeline were $0.9 million in 2002.

Debt Expense

Lower debt balances and lower interest rates in 2004 compared with 2003 and 2003 compared with 2002 resulted in a declining debt expense.

Income Taxes

The effective combined federal and state income tax rate was 37.3% in 2004, 36.9% in 2003, and 35.4% in 2002.

Clay Basin Storage

Questar Pipeline continues to investigate a potential discrepancy of up to 9 bcf between the book volumes of cushion gas at Clay Basin and cushion-gas volumes implied by pressure-survey data obtained in recent field tests. The current book volume of the cushion gas is 61.5 bcf with a value of $99.7 million. Questar Pipeline has not determined if any gas is missing from the reservoir. Analysis to date has not revealed any leaks or gas migration out of the reservoir. Additional reservoir tests and analysis, including reservoir modeling, are under way to identify the cause of the potential discrepancy and may continue for several years. The gas may still be in the reservoir but not detectible with short-duration pressure surveys. Pressure-survey tests were conducted during October 2004 to evaluate the reservoir when it was nearly full. The preliminary results of these tests show that the discrepa ncy may not be significant. This potential discrepancy has not affected Questar Pipeline’s ability to meet its obligations to storage customers.

If Questar Pipeline determines that the discrepancy is due to changes in the physical conditions in the storage reservoir, the financial impact may include some additional investment in cushion gas to meet service obligations. If the discrepancy is due to lost-and-unaccounted-for-gas in the measurement process, Questar Pipeline would expense the cost of replacement gas and could file with the FERC to recover costs from customers.

New Long-Term Contracts

During first-quarter 2004 Questar Pipeline signed long-term contracts to support a $54 million expansion of its southern system. The expansion will add 102 Mdth per day of capacity from the Piceance and Uinta basins to the Kern River pipeline, a power-generation facility, and Questar Gas’s distribution system. Questar Pipeline will start construction in the summer of 2005 for a late-2005 in-service date. On January 21, 2005, the FERC granted a certificate for the expansion.

Questar Pipeline has a long-term contract supporting a $14 million extension from the west end of its Mainline 104 near Goshen, Utah, to a new power plant near Mona, Utah. Construction was completed in December 2004 on this 190-Mdth-per-day line and service should begin during the first quarter of 2005.

Southern Trails

The eastern segment of the Southern Trails line, which runs between the San Juan Basin and the California border, was placed into service in mid-2002. Capacity on this segment is fully contracted, although these contracts expire in mid-2008. At this time, market-transportation rates between the receipt and delivery points are less than current contract rates. Earnings on the eastern segment may decrease when these contracts expire.

The western segment of the Southern Trails line, which runs from the California-Arizona border to Long Beach, California, is currently not in service. Questar Pipeline’s investment is approximately $51 million. Additional investment would be required to complete the conversion of the pipeline from a liquid pipeline to a natural gas pipeline and make connections to customers. The Los Angeles Department of Water and Power budgeted funds to acquire a gas pipeline to serve a power-generation facility and issued a request for proposal on October 21, 2004. Questar Pipeline filed a response to the request in November 2004. On February 28, 2005, LADWP notified Questar Pipeline of its intent to pursue the proposal, although it is uncertain whether negotiations will be successful.

Regulation

FERC Order No. 2004, which defines standards of conduct for transmission providers, became effective on September 22, 2004. These standards of conduct are designed to ensure that employees engaged in transmission-system operations function independently from employees of marketing and energy affiliates. In addition, a transmission provider must treat all transmission customers on a non-discriminatory basis and must not operate its transmission system to preferentially benefit its marketing or energy affiliates. Questar Pipeline has determined that all Questar Market Resources subsidiaries except Questar Gas Management are marketing or energy affiliates. Questar Gas is not an energy or marketing affiliate. Questar Pipeline and other Questar companies have adopted new procedures to comply with this order.

Questar Pipeline is required to comply with the Pipeline Safety Improvement Act of 2002. This act and the rules issued by the Department of Transportation 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 densely populated locations. Questar Pipeline’s plan for complying with the act was filed with the DOT during 2004. Questar Pipeline estimates that its annual cost to comply with the act will be approximately $1 million, not including costs of pipeline replacement, if necessary.

Questar Pipeline made an annual FGRP filing with the FERC on November 30, 2004, requesting an increase in the FGRP to 2.6%. On December 30, 2004, the FERC approved the request on an interim basis subject to refund and final resolution of the 2004 FGRP proceeding. Several shippers have filed comments with the FERC protesting the FGRP level. Questar Pipeline is working with the protesting shippers to resolve this issue.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Net cash provided from operating activities increased 8% in 2004 compared with 2003 and increased 13% in 2003 compared with 2002. The increase in 2004 was driven primarily from lower accounts receivable and higher accounts payable. The 2003 increase was due primarily from timing differences in settlements with vendors.

Investing Activities

During 2004, Questar Pipeline completed a new pipeline extension to a power plant in Mona, Utah and began an expansion of its southern system. Following is a summary of capital expenditures for 2004 and 2003, and a forecast of 2005 expenditures:

Financing Activities

Net cash flow provided from operating activities exceeded the sum of net capital expenditures and dividends paid by $24.5 million in 2004 and $24.1 million in 2003. The Company used surplus cash flow generated from operations to repay short-term debt borrowed from Questar.

Short-term borrowings amounted to $28.0 million at December 31, 2004, compared with $49.5 million a year earlier. The weighted-average interest rate at December 31 was 2.42% in 2004 and 1.30% in 2003.

Questar Pipeline’s consolidated capital structure consisted of 56% combined short- and long-term debt and 44% common shareholder’s equity at December 31, 2004. A year earlier debt represented 58% and shareholder’s equity 42% of capitalization. Moody’s and Standard & Poor’s have rated Questar Pipeline senior-unsecured debt A2 and A+, respectively. Moody’s ratings are designated as stable while the Standard & Poor’s ratings carry a negative outlook qualifier.

At December 31, 2004, the Company reported negative working capital as a result of using short-term borrowings to finance capital expenditures.

Contractual Cash Obligations and Other Commitments

In the course of ordinary business activities, Questar Pipeline enters into a variety of contractual cash obligations and other commitments. The following table summarizes the significant contractual cash obligations as of December 31, 2004.

Critical Accounting Policies, Estimates and Assumptions

Questar Pipeline’s significant accounting policies are described in Note 1 accompanying the consolidated financial statements included in Item 8. of this report. The Company's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. 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

The FERC establishes rates for the storage and transportation of natural gas. The FERC also regulates, among other things, the extension and enlargement or abandonment of jurisdictional natural gas facilities. Regulation is intended to permit the recovery, through rates, of the cost of service, including a return on investment. Questar Pipeline follows 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 FERC has accepted the recording of regulatory assets and liabilities.

Recent Accounting Developments

Refer to Note 1 accompanying the consolidated financial statements in Item 8. for a discussion of recent accounting developments.

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

Questar Pipeline’s primary market-risk exposures arise from changes in demand for transportation and storage services and competition from other pipelines. The demand for transportation and storage services will vary based on changes in productive capacity in natural-gas reservoirs and changes in market demand for natural gas. The Company faces the risk that transportation, storage, processing and gathering contracts may not be obtained or renewed to recover the full cost of facilities.

Credit Risk

Questar Pipeline requests credit support, such as letters of credit and cash deposits, from those customers that pose unfavorable credit risks. All customers posing such concerns were current on their accounts at December 31, 2004. Questar Pipeline’s largest customers include Questar Gas, ChevronTexaco, Williams Energy Services, ConocoPhillips, PacifiCorp and Dominion Exploration and Production.

Interest-Rate Risk

Questar Pipeline’s long-term debt has fixed-interest rates. The fair value of fixed-rate debt changes as interest rates fluctuate. 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:

Page No.

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Income, three years ended December 31, 2004

Consolidated Balance Sheets at December 31, 2004 and 2003

Consolidated Statements of Common Shareholders' Equity, three years ended

December 31, 2004

Consolidated Statements of Cash Flows, three years ended December 31, 2004

Notes Accompanying Consolidated Financial Statements

Financial Statement Schedules: