KN ordered to send $100 million down the pipe to Questar
A local judge has ordered more than $100 million paid to an energy company after deciding it largely abided by its contract with a second firm in constructing a gas pipeline.
In what is believed to be the largest civil award in Garfield County history, 9th Judicial District Judge Thomas Ossola ordered KN TransColorado to pay more than $127 million to Questar Corp. to buy out Questar’s share of the 300-mile TransColorado pipeline, which originates in the Piceance Creek Basin northwest of Rifle.
Questar was entitled under the terms of the partnership contract to demand such a buyout. But KN sued Questar, contending the contract should be rescinded because Questar secretly built a second, competing pipeline. KN sought $500 million in damages.
Ossola rejected KN’s contention and sided with Questar, which countersued to force acceptance of the buyout. But the judge found that Questar failed to make good on a promise to provide gas compression at the Piceance Creek end of the TransColorado pipeline. He awarded KN $21.8 million to compensate for that failure.
But on KN’s larger allegation that Questar undermined the TransColorado partnership, Ossola showed little sympathy for KN, finding that it did much itself to harm the partnership.
“KNTCs is not entitled to rescission (of the contract), because it engaged in the same conduct, or worse, it accuses (Questar) of doing,” Ossola wrote in his judgment, handed down Monday.
This included secret dealings on KN’s part that even involved a plan to “slow down, stop, kill, destroy and restructure” the pipeline project, Ossola wrote.
“This court finds that both parties engaged in some level of conduct that was inconsistent with their being partners and maximizing the interest of the partnership.”
Both parties gave examples of conduct by the other that “that arguably could be evidence of unclean hands,” Ossola wrote.
The civil trial ran from April 1 to May 2.
Sandy Karp, a trial lawyer with Leavenworth and Karp in Glenwood Springs who helped represent Questar, said the verdict may be one of the biggest ever in Colorado.
While many such business lawsuits are settled to avoid the extra expense and added risk of a trial, Karp said Questar wanted a trial to clear its name of allegations that it had dealt dishonestly with KN.
“Principally what we wanted was exactly what we got from this judge,” Karp said.
Bill Allison, president of KNTC, said in a prepared statement, “We are disappointed that we did not achieve the total victory we sought. Nevertheless, we feel that the finding that Questar Pipeline Co. was obligated and failed to provide the necessary support to the project by its refusal to build compression is a significant vindication for KNTC.”
Ossola found that KN owed $114.8 million for the buyout, $2.7 million for cash contributions made since Questar attempted to exercise the buyout clause, $100,000 in loan origination fees paid by Questar due to KN’s failure to honor the clause, and $10.1 million in prejudgment interest.
The pipeline’s 2002 pre-tax cash flow is projected to be about $21 million, Allison said.
The award to Questar will be partially offset by the $21.8 million owed by Questar for failure to provide the promised gas compression.
Ossola additionally ruled, “Because both parties have failed to live up to their obligations, neither party should be entitled to attorney fees or costs associated with this litigation.”
Allison said attorneys were reviewing the 72-page opinion to determine whether they would recommend appeal.
The dispute between Questar and KN has its roots in a pipeline project that was originally projected to cost about $220 million to build, but ended up costing $340 million. Each party agreed to pay half the expense of construction.
The pipeline’s purpose is to carry natural gas from the Piceance Basin, along with the Uinta Basin in eastern Utah, to the San Juan Basin in northern New Mexico. But it has encountered financial difficulties that ran beyond construction costs.
KN argued that at the same time TransColorado was being planned, Questar secretly began construction on a natural gas pipeline called Main Line 104 in Utah, to gather gas from the Uinta Basin.
However, Ossola ruled that information on that pipeline was publicly available and the project did not directly compete with TransColorado.
The Main Line pipeline’s main purpose was to deliver gas to the Wasatch Front in Utah, while TransColorado was built to feed the national natural gas grid, Ossola wrote.
“There was no indication that shippers abandoned TransColorado in favor of the other pipeline or that it otherwise financially harmed the TransColorado project,” Ossola wrote.
He also said KN made statements to its own auditors showing it didn’t believe the Main Line pipeline harmed TransColorado.
Ossola found that while KN and Questar were partners in TransColorado, they remained competitors and had agreed to be allowed to continue to expand their businesses even if they competed with TransColorado.
Ossola said TransColorado’s financial problems had origins other than Questar’s second pipeline.
“TransColorado was unable to turn a profit long before Main Line 104 came on line,” he wrote.
Instead, he found, its basic profit premise failed to materialize. It had hoped to capitalize on gas being cheaper in the Piceance Basin than in the San Juan Basin, to cover the cost of shipping through its line.
However, that was based on an anticipated drop in San Juan production and a rise in Piceance Basin production. Instead, federal tax incentives kept San Juan production high, while Piceance Basin production didn’t increase due to high costs of drilling deep wells, according to Ossola.
“KNTC has failed to prove that the decline in its investment in TransColorado was the result of anything more than the natural, foreseeable consequence of KNTC’s risky business decisions. …” Ossola wrote.
Ossola also determined that KN attempted to “deliberately undermine” the pipeline’s success through such behavior as failing to disclose its own pipeline acquisitions and divesting itself of a project to bring gas supplies to TransColorado.
KN also told its auditors that TransColorado was in “excellent” condition and “ahead of schedule” financially.
Yet at the same time KN was negotiating a letter of understanding with Questar, it was formulating a plan to kill the project, according to Ossola.
Ossola said that even as KN was seeking a commitment from Questar to have its affiliates supply 100 cubic feet per day of gas to TransColorado, one of KN’s own affiliates terminated its own commitment for the same amount.
When Kinder Morgan bought KN Energy, the parent company of KNTC, in October 1999, it tried to divest itself of the TransColorado pipeline, Ossola noted.
Meanwhile, Questar exercised its buyout clause as the pipeline project began to go bad.
On the question of gas compression, Ossola found that KN had agreed to table discussion about installation of the compression, but never agreed that it would be installed at TransColorado’s expense.
That compression is crucial to the pipeline’s success, Ossola added.
He concluded, “This court does not conclude . that (Questar) breached its duty as a partner in any respect except as a result of its failure to provide compression. .”
Said Karp, “That’s a minor issue compared to the major issue about the (buyout clause) that was involved in the case.”
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