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. 1-935
QUESTAR GAS COMPANY
(Exact name of registrant as specified in its charter)
State of Utah 87-0155877
(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 84145-360
(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:
Notes: Medium Term Notes, 6.85% to 8.43%,
due 2007 to 2024
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: 9,189,626 shares of
Common Stock, $2.50 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............................. 1
General.......................................... 1
Gas Distribution................................. 1
Gas Supply....................................... 3
Competition, Growth and Unbundling............... 4
Regulation....................................... 6
Relationships with Affiliates.................... 8
Employees........................................ 11
Environmental Matters............................ 11
Research and Development......................... 12
Item 3. LEGAL PROCEEDINGS................................... 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.................................... 13
PART II
Item 5. MARKET FOR REGISTRANT'S EQUITY
AND RELATED STOCKHOLDER MATTERS..................... 13
Item 6. OMITTED............................................. 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATION........................................... 14
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.................................. 18
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................ 18
PART III
Items OMITTED............................................. 18
10-13
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K............................. 18
SIGNATURES.................................................... 36
FORM 10-K
ANNUAL REPORT, 1997
PART I
ITEMS 1. and 2. BUSINESS AND PROPERTIES
General
Questar Gas Company (formerly Mountain Fuel Supply Company,
referred to as the "Company" or "Questar Gas") distributes natural gas
to more than 641,000 sales and transportation customers in Utah,
southwestern Wyoming, and a small section in southeastern Idaho. It
is part of the Regulated Services segment within Questar Corporation
("Questar"), which is a publicly-owned integrated provider of energy
services.
The Company, through a predecessor, began distributing natural
gas in 1929 when a pipeline was built to transport natural gas from
southwestern Wyoming to Salt Lake City, Utah. Between 1929 and the
present time, Questar Gas gradually expanded the boundaries of its
distribution system to include over 90 percent of Utah's population
and to capture a market share of over 90 percent for furnaces and
water heaters.
The Company has traditionally capitalized on two competitive
advantages, owning natural gas reserves and offering a full, range of
services to customers at reasonable prices. Questar Gas intends to
maintain its competitive position in its traditional service area,
even as deregulation and unbundling may open the area to other
players, and to take advantage of opportunities to expand its range of
activities.
Gas Distribution
As of December 31, 1997, Questar Gas was serving 641,696
residential, commercial, and industrial customers, a 3.8 percent
increase from the 618,231 customers served as of the end of 1996.
(Customers are defined in terms of active meters.) The Company
distributes gas to customers in the major populated area of Utah,
commonly referred to as the Wasatch Front, in which the Salt Lake
metropolitan area, Provo, Ogden, and Logan are located. It also
serves customers in eastern, central, and southwestern Utah with
Price, Roosevelt, Fillmore, Richfield, Cedar City, and St. George as
the primary cities. Approximately 96 percent of the Company's
customers are in Utah. The Company serves the communities of Rock
Springs, Green River, and Evanston in southwestern Wyoming and the
community of Preston in southeastern Idaho. Questar Gas has been
granted the necessary regulatory approvals by the Public Service
Commission of Utah ("PSCU"), the Public Service Commission of Wyoming
("PSCW"), and the Public Utilities Commission of Idaho ("PUCI") to
serve these areas. It also has long-term franchises granted by
communities and counties within its service area.
Questar Gas added 23,465 customers in 1997, which was the fourth
consecutive year in which the Company added at least 20,000 customers.
Most of the customer growth was attributable to new housing, although the
Company continues to add customers in its traditional and new service areas
that are converting to natural gas. The population of its service area in
Utah continues to grow faster than the national average. The Company expects
to add 15,000-20,000 customers each year until at least 2002, when Salt Lake
City hosts the Winter Olympics.
The Company's sales to residential and commercial customers are
seasonal, with a substantial portion of such sales made during the
heating season. The typical residential customer in Utah (defined as
a customer using 115 decatherms ("Dth") per year) uses more than 75
percent of his total gas requirements in the coldest six months of the
year. The Company's revenue forecasts used to set rates are based on
normal temperatures. Historically, revenues and resulting net income
have been affected by temperature patterns that are below or above
normal. As measured in degree days, temperatures in the Company's
service area were 6 percent warmer than normal; 1997 was the fourth
consecutive year in which temperatures have been warmer than normal.
The Company's sensitivity to weather and temperature conditions
has been ameliorated by adopting a weather normalization mechanism for
its general service customers in Utah and Wyoming. The mechanism,
which was in effect for all of 1997, adjusts the non-gas cost portion
of a customer's monthly bill as the actual degree days in the billing
cycle are warmer or colder than normal. This mechanism reduces the
sometimes dramatic fluctuations in any given customer's monthly bill
from year to year.
During 1997, Questar Gas sold 85.7 million decatherms ("MMDth")
of natural gas to residential and commercial customers, compared to
80.8 MMDth in 1996. (A Dth is an amount of heat energy equal to 10
therms or 1 million Btu. In the Company's system, each thousand cubic
feet ("Mcf") of gas equals approximately 1.07 Dth.) General service
sales to residential and commercial customers were responsible for
over 89 percent of the Company's total revenues in 1997.
Questar Gas has designed its distribution system and annual gas
supply plan to handle design-day demand requirements. The Company
periodically updates its design-day demand, which is the volume of gas
that firm customers could use during extremely cold weather. For the
1997-98 heating season, the Company used a design-day demand of
958,798 Dth for firm customers. Questar Gas is also obligated to have
pipeline capacity, but not gas supply, for firm transportation
customers. The Company's management believes that the distribution
system is adequate to meet the demands of its firm customers.
The Company's total industrial deliveries, including both sales
and transportation, increased during 1997, from 58.1 MMDth in 1996 to
60.8 MMDth in 1997.
The majority of interruptible sales service customers pay rates
based on the Company's weighted average cost of purchased gas, which
is periodically lower for some customers than the cost of purchasing
volumes directly from producers and paying transportation rates. The
Company also has an interruptible sales rate utilizing a dedicated gas
portfolio.
The Company's tariff permits industrial customers to make annual
elections for interruptible sales or transportation service. Questar
Gas has been providing transportation service since 1986. The
Company's largest transportation customers, as measured by revenue
contributions in 1997, are the Geneva Steel plant in Orem, Utah; the
Kennecott copper processing operations, located in Salt Lake County;
and the mineral extraction operations of Magnesium Corporation of
America in Tooele County west of Salt Lake.
Questar Gas owns and operates distribution systems throughout its
Utah, Wyoming and Idaho service areas and has a total of 19,256 miles
of street mains, service lines, and interconnecting pipelines. The
Company has consolidated many of its activities in its operations
center, warehouse and garage located in Salt Lake City, Utah. Questar
Gas continues to own field offices and service center facilities in
other parts of its service area. It has fee title to the properties
on which its operation and service centers are constructed. The mains
and service lines are constructed pursuant to franchise agreements or
rights-of-way.
Gas Supply
Questar Gas owns natural gas producing properties in Wyoming,
Utah and Colorado that are operated by Wexpro Company ("Wexpro") and
uses the gas produced from these properties for part of its base-load
demand. The Company's investment in these properties is included in
its utility rate base. Questar Gas has regulatory approval to reserve
"cost-of-service" gas for firm sales customers. During 1997,
approximately 45 percent of the Company's firm sales requirement was
satisfied with cost-of-service gas produced from over 550 wells in
more than 30 fields. (As defined, cost-of-service gas includes
related royalty gas.) The volumes produced from such properties are
transported for the Company by Questar Pipeline. See "Relationships
with Affiliates." During 1997, 44.0 MMDth of gas were delivered from
such properties, compared to 49.1 MMDth in 1996.
The Company estimates that it had reserves of 336.9 billion cubic
feet ("Bcf") of natural gas as of year-end 1997 compared to 359.9 Bcf
as of year-end 1996. (These reserve numbers do not include gas
attributed to royalty interest owners. Reserve numbers are typically
reported in volumetric units, such as Bcf, that don't reflect heating
values.) The average wellhead cost associated with gas volumes
produced from the Company's cost-of-service reserves was $1.32 per Dth
in 1997 (compared to $2.26 per Dth of purchased gas).
Some of the wells on the Company's producing properties qualify
for special tax credits, commonly referred to as "Section 29" or
"tight sands" tax credits. During 1997, Questar Gas, as the party
with the economic interest in the gas produced from such wells,
claimed $2.7 million in Section 29 tax credits. To qualify for the
special tax credits, production must flow from wells that meet
specified tight sands criteria and that commenced drilling prior to
January 1, 1993. Only gas volumes produced prior to January 1, 2003,
are eligible for the special tax credit.
Questar Gas stores up to 12.5 Bcf of gas at Clay Basin, a
base-load storage facility owned and operated by Questar Pipeline.
Gas is injected into the Clay Basin storage reservoir during the
summer and withdrawn during the heating season.
The Company has been directly responsible for all of its gas
acquisition activities since September 1, 1993. Questar Gas has a
balanced and diversified portfolio of approximately 42 gas supply
contracts with more than 21 suppliers located in the Rocky Mountain
states of Wyoming, Colorado, and Utah. It purchases gas on the spot
market and under contracts, primarily during the heating season. The
Company's gas purchase contracts have market-based provisions and are
either of short-duration or renewable on an annual basis upon
agreement of the parties. The Company's gas acquisition objective is
to obtain reliable, diversified sources of gas supply at competitive
prices. In the last semi-annual purchased gas cost filing, the
Company estimated that its 1998 average wellhead cost of field
purchased gas would be $1.83 per Dth. Although Questar Gas has
contracts with take-or-pay provisions, it currently has no material
take-or-pay liabilities.
Competition, Growth, and Unbundling
Questar Gas has historically enjoyed a favorable price comparison
with all energy sources used by residential and commercial customers
except coal and occasionally fuel oil. This historic price advantage,
together with the convenience and handling advantages associated with
natural gas and with the services provided in conjunction with natural
gas, has permitted the Company to retain over 90 percent of the
residential space heating and water heating markets in its service
area and to distribute more energy, in terms of Btu content, than any
other energy supplier to residential and commercial markets in Utah.
The Company continues to focus marketing efforts to develop
incremental load in existing homes and new construction. Most
households in its service area already use natural gas for space
heating and water heating. The Company's market share for other
secondary appliances, e.g., ranges and dryers, has historically been
less than 30 percent, which is significantly lower than its over 90
percent market share for furnaces and water heaters.
Questar Gas believes that it must maintain a competitive price
advantage in order to retain its residential and commercial customers
and to build incremental load by convincing current customers to
convert additional secondary appliances to natural gas. During 1997,
the Company's rates increased, primarily as a result of higher
purchased gas costs. The typical residential customer in Utah would
have an annual bill of $594.53, using rates as of January 1, 1998,
compared to an annual bill of $512.38, using rates in effect as of the
same date a year earlier. (The largest portion of this increase
reflects a surcharge to amortize an undercollection in the Company's
gas balancing account. The undercollection has been substantially
reduced, and the surcharge may be reduced or eliminated in future
filings.) The Company's 1998 rates, however, remain lower than they
were in 1985.
Historically, the Company's competitive position has been
strengthened as a result of owning natural gas producing properties
and satisfying as much as approximately 40-50 percent of its system
requirements with the cost-of-service gas produced from such
properties. Questar Gas has developed an annual gas supply plan that
provides for a judicious balance between cost-of-service gas and
purchased gas. The Company believes that it is important to continue
owning gas reserves, producing them in a manner that will serve the
best short- and long-term interests of its customers, and satisfying a
significant portion of its supply requirements with gas produced from
such properties.
No other distributor markets natural gas sales service in direct
competition with the Company in its service area, but marketing firms
are arranging direct purchase contracts between large users in the
Company's service area and producers. These customers cannot bypass
Questar Gas, but can take advantage of the open-access status of
either the pipeline systems owned by Questar Pipeline or Kern River
Gas Transmission Company ("Kern River"). The Company's sales rates
are competitive when compared to other energy sources, but are
periodically higher than the delivered price of spot-market gas
volumes transported through its system to large customers.
The Kern River pipeline, which was built to transport gas from
southwestern Wyoming to Kern County, California, runs through portions
of the Company's service area and can provide an alternative delivery
source to transportation customers. As of the date of this report,
Questar Gas has lost no industrial load as a result of the Kern River
line. The existence of the Kern River pipeline, however, coupled with
the open-access status of Questar Pipeline's transmission system, has
changed the nature of market conditions for the Company. Large
industrial customers in Utah's Wasatch Front area could acquire taps
on Kern River's system. The Company has a tap on the Kern River line
in Salt Lake County that enables it to obtain delivery of additional
peak-day supplies to meet increasing demand. The existence and
location of the Kern River pipeline system also made it possible for
the Company to extend service into new areas in rural Utah and to
develop a second source of supply for its central and southern Utah
system.
As of September 1, 1997, transportation customers are no longer
required to pay an additional charge if they don't use the Company's
upstream capacity on interstate pipelines. The cessation of this
charge, which had been approved by the PSCU for a transitional period,
could lead to discounted released capacity revenues and a reduction in
the revenues retained by the Company. Questar Gas, for Utah
rate-making purposes, currently retains 10 percent of released
capacity revenues (reduced from 20 percent effective February 18,
1997) and credits 90 percent of such revenues to its gas balancing
account.
Questar Gas and all local distribution companies are faced with
the challenges and opportunities posed by the unbundling and
restructuring of traditional utility services. As a local
distribution company, the Company owns and controls the lines through
which gas is delivered, supplies natural gas to residential customers,
measures the consumption of gas used by its customers, and bills for
consumption and related services. The services provided by Questar
Gas are packaged and priced as a "bundle." Most "unbundling"
discussions focus on commodity unbundling for residential and
commercial customers to separate the commodity supply from the
transportation service. (Industrial customers have enjoyed the
benefit of this supplier choice since 1986.) (See "Regulation" for a
discussion of the Company's program to offer supplier choice to its
Wyoming general service customers.)
Questar Gas has been reviewing the opportunities associated with
unbundling. The Company believes that it is well-positioned to
succeed in a competitive environment. Questar Gas is an efficient
natural gas company, a statement that is supported by such statistics
as an operating and maintenance expense of $159 per customer and an
overall customer satisfaction rating of 90 percent. Questar Gas
intends to maintain its competitive position within its own service
area and to take advantage of opportunities in new markets.
The Company changed its name from Mountain Fuel to Questar Gas as
part of a new branding strategy. The Company's management wanted to
avoid confusion concerning the Company's affiliation with other
Questar entities. The name change also reflects a recognition that
the competitive environment is changing.
Regulation
Questar Gas and all retail distribution companies have been
subject to governmental regulation as a substitute for competition.
Other regulated industries, airline, trucking, telecommunication,
financial service and interstate pipeline, have been and are being
deregulated, and competitive market forces are forcing these
industries to place more emphasis on operating efficiency. The
substitution of competition for regulation is causing Questar Gas and
other distribution companies to review their costs and reexamine their
commitment to providing sales service.
On November 26, 1997, Questar Gas filed an application with the
PSCW requesting permission to offer "supplier choice" to its general
service (residential and commercial) customers in Wyoming. The
Company's proposal, which has been approved by the PSCW, allows
customers the option of selecting, on an annual basis, a different
supplier of gas while purchasing transportation and associated
services from the Company. Customers can continue purchasing full
service (commodity, transportation, and associated services) from the
Company. The "open season" during which customers can select a new
commodity supplier began March 1, 1998 and runs through April 30,
1998. (Customers, in subsequent years, will have the month of April
in which to make an election.) Transportation service for customers
choosing an alternate supplier will begin June 1, 1998.
The Company has over 21,500 general service customers in Wyoming
and expects that a majority of them will continue to purchase full
service. (Questar Gas is not aware of any commodity supplier actively
soliciting general service customers in Wyoming.) The Wyoming
unbundling program should provide Questar Gas with valuable
information about customer preference should retail utility services
be unbundled in the Utah market.
The state of Utah and the PSCU are actively involved in reviewing
the restructuring and unbundling of telephone and electric utility
services. Questar Gas monitors legislative and regulatory activities
focused on the unbundling of other utility services and anticipates
that electric utility service will be unbundled before retail gas
distribution service. Given its attractive rates and high customer
service ratings, the Company does not believe that its residential
customers will push for rapid unbundling in Utah.
As a public utility, Questar Gas is subject to the jurisdiction
of the PSCU and PSCW. (The Company's customers in Idaho are served
under the provisions of its Utah tariff. Pursuant to a special
contract between the PUCI and the PSCU, the rates for the Company's
Idaho customers are regulated by the PSCU.) The Company's natural gas
sales and transportation services are provided under rate schedules
approved by the two regulatory commissions.
Questar Gas has consistently endeavored to balance the costs of
adding more than 20,000 customers each year with the cost savings
associated with reducing its labor costs and consolidating activities
and utilizing new technology. The Company currently does not expect
to file a general rate case application with the PSCU or the PSCW in
1998. It is currently authorized to earn a return on rate base of
10.4 percent in Wyoming and 10.22 to 10.34 percent in Utah.
Both the PSCU and the PSCW have authorized the Company to use a
balancing account procedure for changes in the cost of natural gas,
including supplier non-gas costs, and to reflect changes at least as
frequently as semi-annually. Questar Gas received regulatory approval
from the PSCU and the PSCW to adjust its rates in October of 1997 to
reflect unexpected purchased gas cost increases and to address the
undercollection in its balancing account. On an aggregate basis,
Questar Gas increased its 1997 revenues by $86.8 million in Utah and
$3.6 million in Wyoming to reflect gas cost increases. The Company
did not change its rates as of January 1, 1998, in either state.
The PSCU has not issued an order in a pending case involving the
Company's gathering rates paid to Questar Gas Management Company
("QGM"), an affiliate. QGM provides gathering services to Questar Gas
under a 1993 agreement that was transferred to it from Questar
Pipeline. The agreement specified that contract charges would be
redetermined as of September 1, 1997; the redetermination resulted in
lower rates on a prospective basis. The Utah Division of Public
Utilities (the "Division"), which is a state agency, claims that the
reduction in gathering charges should be extended retroactively to
March of 1996, when Questar Pipeline transferred the gathering assets
and agreement to QGM. The Division's claims involve approximately
$7.8 million.
The PSCU presided over public hearings to address the Division's
claims, and both parties have fully briefed the issues. The Company
believes that its gathering costs are reasonable and that it should
not be required to retroactively adjust such rates.
Responsibility for gas acquisition activities involves inherent
risks of regulatory scrutiny. In the past, the Company has been
involved in regulatory proceedings in which the prudence of its gas
supply activities has been challenged, but has successfully defended
its activities and has not incurred any significant disallowance of
gas costs.
Under Utah law, Questar Gas must report dividends paid on its
common stock to the PSCU and must allow at least 30 days between
declaring and paying dividends. The PSCU can investigate any dividend
declared by the Company to determine if payment of such dividend would
impair its capital or service obligations. The PSCW and the PUCI, but
not the PSCU, have jurisdiction to review the issuance of long-term
securities by the Questar Gas.
The Company has significant relationships with its affiliates.
The PSCU and PSCW have jurisdiction to examine these relationships and
the costs paid by the Company for services rendered by or goods
purchased from its affiliates. A settlement agreement involving
cost-of-service gas and defining certain contractual obligations
between the Company and Wexpro is monitored by the Division and its
agents.
The PSCU and PSCW have adopted regulations or issued orders that
affect the Company's business practices in such areas as main
extensions, credit and collection activities, and termination of
service standards.
Relationships with Affiliates
The Company has significant business relationships with
affiliated companies, particularly Questar Pipeline, Wexpro, QGM, and
Questar InfoComm, Inc. ("Questar InfoComm"). The following diagram
shows the corporate structure of the Company and its primary
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 Company's relationships with its primary affiliates are
described below.
Questar Pipeline Company. Questar Pipeline owns a two-pronged
transmission system running from southwestern Wyoming and western
Colorado into the Company's Utah service area. Questar Pipeline's
historic function as the Company's supplier ended September 1, 1993,
when Questar Pipeline's gas purchase contracts were transferred to
Questar Gas and when the Company converted its firm purchase capacity
entitlements to firm transportation service. Questar Gas has reserved
about 800,000 Dth per day or approximately 70 percent of Questar
Pipeline's total transmission capacity.
Questar Gas transports both cost-of-service gas and purchased gas
on Questar Pipeline's transmission system. (The Company also
transports gas volumes on the transmission systems owned by The
Williams Companies, Inc. and Colorado Interstate Gas Company. Questar
Gas purchases "city gate" gas supplies from transportation customers
on Kern River's system.) The Company releases its firm transportation
capacity, pursuant to capacity release procedures adopted by the
Federal Energy Regulatory Commission ("FERC"), when it does not need
such service for its sales customers. Because Questar Gas has
sufficient capacity on the system to meet peak-demand periods, it has
unused capacity for the balance of the year.
During 1997, Questar Pipeline transported 110.3 MMDth of gas for
Questar Gas, compared to 100.2 MMDth in 1996. Under Questar
Pipeline's "straight fixed-variable" rate schedules, Questar Gas is
obligated to pay demand charges for firm capacity, regardless of the
volumes actually transported. The Company, in 1997, paid
approximately $49.6 million in demand charges to Questar Pipeline for
firm transportation capacity and "no notice" transportation.
The Company's transportation agreement with Questar Pipeline
expires on June 30, 1999. The parties expect that the agreement will
be extended, given the Company's design-day requirements and Questar
Pipeline's competitive transportation rates.
Questar Gas purchases storage capacity at Clay Basin, a large
base-load storage facility operated by Questar Pipeline, and also has
peaking storage capacity at three additional storage reservoirs owned
by Questar Pipeline. The Company paid Questar Pipeline $13.5 million
in demand charges during 1997 in connection with storage services.
In mid-1996, Questar Pipeline and Questar Gas were placed under
the same management team of officers and linked to form the Regulated
Services unit of Questar. (Both companies retain separate general
managers.) This reorganization was completed as of January 1, 1997,
when both entities became subsidiaries of Questar Regulated Services
Company ("Regulated Services") and when employees performing specified
functions were transferred to Regulated Services.
Employees in all three entities share base and incentive
compensation plans and are expected to work closely together to
improve administrative efficiency and customer service. the Company's
administrative costs were lower in 1997 than would otherwise have been
experienced as a result of this reorganization.
Questar Gas Management Company. On March 1, 1996, Questar
Pipeline's gathering facilities were transferred to QGM, which
subsequently was moved to the Market Resources segment of Questar.
During 1997, QGM gathered 28.5 MMDth of natural gas for Questar Gas,
compared to 30.2 MMDth in 1996. During 1997, the Company paid $7.8
million for demand charges in conjunction with gathering services.
Under the terms of the gathering agreement between the parties, QGM
will gather gas volumes produced from cost-of-service properties for
the life of such properties and charge cost-of-service rates. As
previously noted, these charges were redetermined as of September
1997.
Wexpro Company. Wexpro, another company within Questar's Market
Resources segment, operates certain properties owned by Questar Gas.
Under the terms of a settlement agreement, which was approved by the
PSCU and PSCW and upheld by the Utah Supreme Court, the Company owns
gas produced from specified properties that were productive as of
August 1, 1981 (the effective date of the settlement agreement). Such
gas is reflected in rates at cost-of-service prices based on rates of
return established by the settlement agreement. In addition, Wexpro
conducts development gas drilling for Questar Gas on specified
properties and is reimbursed for its costs plus a current rate of
return of 21.69 percent (adjusted annually using a specified formula)
on its net investment in such properties, adjusted for working capital
and deferred taxes, if the wells are successful. Under the terms of
the settlement agreement, the costs of unsuccessful wells are borne by
Wexpro. The settlement agreement also permits Questar Gas to share
income from hydrocarbon liquids produced from certain properties
operated by Wexpro after Wexpro recovers its expenses and a specified
rate of return. The income received by Questar Gas from Wexpro is
used to reduce natural gas costs to its customers.
Wexpro conducts drilling activities in response to the needs of
Questar Gas or the demands from other working interest owners. During
1997, Wexpro's drilling activities resulted in additional reserves of
7.4 Bcf. Additional reserves did not replace the 37.5 Bcf of volumes
produced from the properties.
Other Affiliates. Other significant affiliates of Questar Gas
include Questar InfoComm and several additional companies within
Market Resources, the second primary business unit within Questar.
Questar InfoComm provides data processing and telecommunication
services for the Company and other affiliates. It owns and operates a
network of microwave facilities, all of which are located in the
Company's service area or near Questar Pipeline's transmission system.
Services are priced to recover operating expenses and a return on
investment. Questar InfoComm personnel are assisting Questar Gas with
the development and implementation of new computer systems, including
a new customer information system, and the maintenance of existing
systems. Questar Gas has a long-term lease for some space in an
office building located in Salt Lake City, Utah, that is owned by
another affiliate.
In addition to QGM and Wexpro, the Market Resources segment of
Questar includes Celsius Energy Company ("Celsius"), Questar Energy
Trading Company ("Questar Energy Trading"), Questar Energy Services,
Inc. ("Questar Energy Services"), and Universal Resources Corporation
("Universal Resources"). All of these companies are owned by Entrada
Industries, Inc. ("Entrada").
Celsius conducts oil and gas exploration and related development
activities in the Rocky Mountain area and western Canada (through a
Canadian subsidiary, Celsius Energy Resources Ltd.) Questar Energy
Trading markets gas volumes, including the majority of volumes
produced by Celsius, and is responsible for some of the contracts
providing gas to the Company's transportation customers. It is also
involved in the marketing of oil and other liquid hydrocarbons and
electricity. Questar Energy Services provides nonregulated services
and products. The Company provides some billing services to Questar
Energy Services. Finally, Universal Resources conducts oil and gas
exploration and related development activities primarily in the
Midcontinent region outside the Company's service area.
Entrada is a wholly owned subsidiary of Questar and is the direct
parent of all Market Resources entities. While Questar Gas and
Entrada are subject to common control by Questar, there is no direct
control of Entrada by the Company or of the Company by Entrada. See
"Legal Proceedings."
Questar, the Company's ultimate parent, provides certain
administrative services, e.g., public and government relations,
financial, and audit, to the Company and other members of the
consolidated group. Questar also sponsors the qualified and welfare
plans in which the Company's employees participate. Questar Gas is
responsible for a proportionate share of the costs associated with
these services and benefit plans.
Employees
As of December 31, 1997, the Company had 1,037 employees,
compared to 1,349 at year-end 1996. (The decrease reflects the
transfer of employees to Regulated Services as of January 1, 1998.
Regulated Services, the Company's parent, has 474 employees who
perform specified services, e.g., legal, accounting, budget,
regulatory affairs for Questar Gas and Questar Pipeline.) The
Company's employees are nonunion employees who are not represented
under collective bargaining agreements. Employee relations are
generally deemed to be satisfactory.
Environmental Matters
The Company is subject to the National Environmental Policy Act
and other federal and state legislation regulating the environmental
aspects of its operations. Although Questar Gas does not believe
that environmental protection laws and regulations will have any
material effect on its competitive position, it does believe that such
provisions have added and will continue to add to the Company's
expenditures and annual maintenance and operating expenses. See
"Legal Proceedings" for a discussion of litigation concerning
liability for contamination on property owned by Entrada.
Questar Gas has an obligation to treat waste water and monitor
the effectiveness of an underground slurry wall that was constructed
in 1988 at its operations center in Salt Lake City, Utah. The slurry
wall was built to contain contaminants from an abandoned coal
gasification plant that operated on the site from 1908 to 1929.
Questar Gas emphasizes the environmental advantages of natural
gas. The Company's marketing campaigns feature the clean-burning
characteristics of natural gas fireplaces. Natural gas vehicles are
also being encouraged on the basis of environmental considerations.
Research and Development
The Company conducts studies of gas conversion equipment, gas
piping, and engines using natural gas and has funded demonstration
projects using such equipment. The total dollar amount spent by the
Company on research activities is not material.
ITEM 3. LEGAL PROCEEDINGS
There are various legal proceedings pending that involve the
Company and its affiliates. While it is not feasible to predict or
determine the outcome of these proceedings, the Company's management
believes that the outcome will not have a material adverse effect on
the Company's financial position.
Questar Gas, as a result of acquiring Questar Pipeline's gas
purchase contracts, is responsible for any judgment rendered against
Questar Pipeline resulting from an adverse jury verdict in a case
heard in Wyoming's federal district court. The jury, in late 1994,
awarded an independent producer compensatory damages of approximately
$6,100,000 and punitive damages of $200,000 on his claims involving
take-or-pay, tax reimbursement, contract breach, and tortious
interference with a contract. The presiding judge has still not
issued a decision concerning the competing forms of judgment submitted
by the opposing parties. The Company's management believes that any
payments arising from the breach of contract claim will be included in
the gas balancing account and recovered in its rates for natural gas
sales service. This same producer filed a new lawsuit against the
Company and its affiliates in 1997. This lawsuit was also filed in
Wyoming's federal district court and presents some of the same claims
heard in the first case for the time period since the first lawsuit.
It also involves new claims of fraud and antitrust violations.
As a result of its former ownership of Entrada and Wasatch
Chemical Company, Questar Gas has been named as a "potentially
responsible party" for contaminants located on property owned by
Entrada in Salt Lake City, Utah. Questar and Entrada have also been
named as potentially responsible parties. (Prior to October 2, 1984,
Questar Gas was the parent of Entrada, which is now a direct,
wholly-owned subsidiary of Questar.) The property, known as the
Wasatch Chemical property, was the location of chemical operations
conducted by Entrada's Wasatch Chemical division, which ceased
operation in 1978. A portion of the property is included on the
national priorities list, commonly known as the "Superfund" list.
In September of 1992, a consent order governing clean-up
activities was formally entered by the federal district court judge
presiding over the underlying litigation involving the property.
This consent order was agreed to by Questar, Entrada, the Company, the
Utah Department of Health and the Environmental Protection Agency (the
"EPA").
During 1996, Entrada basically completed clean-up activities at
the site, but will continue to monitor the situation. Entrada has
accounted for all costs spent on the environmental claims and has also
accounted for all settlement proceeds, accruals and insurance claims.
It has received cash settlements, which together with accruals and
insurance receivables, should be sufficient for any future clean-up
costs. Questar Gas has consistently maintained that Entrada should be
responsible for any liability imposed on the Questar group as a result
of actions involving Wasatch Chemical. The Company has not paid any
and does not expect to pay any costs associated with the clean-up
activities for the property.
See "Regulation" for information concerning regulatory
proceedings in which Questar Gas is involved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, Regulated Services, the
Company's only stockholder, approved the name change.
Part II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER
MATTERS
As of January 1, 1997, the Company's outstanding shares of common
stock, $2.50 par value, are owned by Regulated Services. Information
concerning the dividends paid on such stock and the ability to pay
dividends is reported in the Statements of Common Shareholder's Equity
and the 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 DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Questar Gas conducts natural-gas distribution operations. Following is a
summary of financial results and operating information:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(Dollars In Thousands)
<S> <C> <C> <C>
OPERATING INCOME
Revenues
Residential and commercial sales $399,174 $328,785 $315,458
Industrial sales 24,459 18,357 22,479
Industrial transportation 6,491 5,898 6,127
Other 18,099 18,888 18,705
Total revenues 448,223 371,928 362,769
Natural gas purchases 248,933 182,400 190,606
Revenues less natural gas purchases 199,290 189,528 172,163
Operating expenses
Operating and maintenance 101,719 97,110 93,384
Depreciation and amortization 31,160 28,309 25,469
Other taxes 8,174 8,071 9,588
Total expenses 141,053 133,490 128,441
Operating income $58,237 $56,038 $43,722
OPERATING STATISTICS
Natural gas volumes (in Mdth)
Residential and commercial sales 85,747 80,844 73,950
Industrial deliveries
Sales 9,523 8,584 9,210
Transportation 51,313 49,499 59,569
Total industrial 60,836 58,083 68,779
Total deliveries 146,583 138,927 142,729
Natural gas revenue (per dth)
Residential and commercial $4.66 $4.07 $4.27
Industrial sales 2.57 2.14 2.44
Transportation for industrial customers 0.13 0.12 0.10
System natural gas cost (per dth) $2.62 $2.44 $2.16
Heating degree days (normal 5,801) 5,465 5,307 5,047
Warmer than normal 6% 9% 13%
Number of customers at December 31, 641,696 618,231 592,738
</TABLE>
<PAGE>
Revenues, net of gas costs, increased $9,762,000 in 1997 when compared
with 1996 and increased $17,365,000 in 1996 when compared with 1995.
The increasesresulted primarily from higher heating demand caused by colder
temperatures and customer additions somewhat offset by lower rates.
Temperatures were 3% colder in 1997 when compared with 1996 and 5% colder
in 1996 when compared with 1995. However, temperatures were warmer than
normal for the three years presented. This warmer-than-normal temperature
trend was mitigated in 1997 and 1996 as a result of a weather-normalization
adjustment, which was part of a 1995 rate settlement. Virtually all of
Questar Gas' residential and commercial volumes were covered under the
weather-normalization adjustment in 1997 compared with about 50% in 1996.
On February 4, 1997, Questar Gas filed an application with the Public Service
Commission of Utah (PSCU) to reduce block rates, eliminate a new-premises fee
for multi-family dwellings and reduce capacity-release revenues retained by
Questar Gas from 20% to 10%. The PSCU approved the filing effective February
18, 1997. Revenues were $2.1 million lower in 1997 as a result of this
reduction. In addition, a revenue surcharge to customers on the southern
system, in effect for the past ten years, expired in the last half of 1997.
This resulted in an approximate $.6 million decrease in 1997 revenues and an
estimated $2.4 million reduction on a yearly basis. The surcharge was added
to this area's customer bills to help pay for the system expansion in 1987.
Questar Gas added 23,465 customers in 1997 and 25,493 customers in 1996
representing an increase of 3.8% and 4.3%, respectively. Customer additions
in 1998 are expected to reach nearly 20,000.
Gas deliveries to industrial customers increased 5% in 1997 when compared
with 1996 after decreasing 16% in 1996. The increase in 1997 was due to the
effects of a healthy regional economy. The 1996 decrease was the result of
the availability of cheap electricity from hydropower sources, that reduced
the use of gas for electricity generation.
Questar Gas' natural gas purchases were higher in 1997 when compared with
1996 due to a higher natural gas cost component allowed in rates and an
increase in volumes sold. The gas-cost component in Utah rates was
increased in January, July and October of 1997 in an effort to recover
sharply increased natural gas purchase costs incurred during the 1996-1997
heating season. The PSCU approved, on an interim basis, gas cost pass
through filings in 1997 for a total $86.8 million annualized increase.
The Public Service Commission of Wyoming (PSCW) also approved annualized
rate increases of $3.6 million to allow recovery of purchased gas costs.
In March 1998, the PSCW approved Questar Gas' gas-merchant unbundling
proposal that was filed in Wyoming in 1997. Under this plan, a
transportation service option is extended to residential and commercial
customers as well as industrial customers. Customers choosing
transportation service are allowed to secure gas supplies directly from
producers and marketers and pay Questar Gas a fee for transportation
services. Questar Gas continues to offer a traditional bundled sales
service as well. The Company expects that the option of unbundled service
in Wyoming will not have a material effect on earnings. Questar Gas will
maintain its current structure in Utah. At December 31, 1997,
Questar Gas served 21,632 customers in the state of Wyoming representing,
3% of the total number of customers served.
Questar Gas' operating and maintenance (O & M) expenses increased 5% in 1997
due primarily to costs of serving an expanding customer base, higher labor
costs and modernization of key computer systems. O & M expenses increased 4%
in 1996. Questar Gas initiated cost-containment measures intended to slow
the increase of operating expenses. In 1997, Questar Gas and Questar
Pipeline combined functions common to gas-distribution and gas-transmission
operations in order to eliminate duplication. In 1995, Questar Gas closed
five service centers, reduced activities at five other service centers and
offered an early-retirement program. Depreciation expense was 10% higher
in 1997 when compared to 1996 and 11% higher in 1996 when compared to 1995
as a result of Questar Gas' capital expenditures. Settlements of disputed
tax assessments with state and local governmental agencies in 1996 resulted
in reduced property taxes.
Debt expense was 15% higher in 1997 when compared with 1996 primarily because
of increased borrowings. Questar Gas borrowed an additional $50 million of
medium-term debt between August and October of 1997 with a weighted average
coupon rate of 6.88%. Also, short-term debt balances were higher in 1997.
The effective income tax rate was 31.7% in 1997 and 1996 and 24.6% in 1995.
The effective income tax rate was below the combined federal and state
statutory rate of about 38% primarily due to income tax credits received from
production of gas from certain properties. These credits amounted to
$2,686,000 in 1997, $3,246,000 in 1996 and $4,376,000 in 1995.
Year 2000 Costs: Questar Gas 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 Gas' 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 of $21,504,000 decreased 57% in
1997 when compared to 1996 due primarily to the effects that higher gas costs
had on accounts receivable and purchased gas costs adjustments. Net cash
provided from operating activities of $50,496,000 in 1996 decreased 26% when
compared with 1995 due to higher costs of natural gas.
Investing Activities
Following is a summary of capital expenditures for 1997 and 1996, and a
forecast of 1998 expenditures.
<TABLE>
<CAPTION>
1998
Estimated 1997 1996
(In Thousands)
<S> <C> <C> <C>
New-customer service $30,800 $30,794 $29,152
Distribution system 9,400 10,507 10,594
Buildings 400 5,388 1,902
Computer software and hardware 16,100 9,083 7,321
General 8,700 9,603 2,688
$65,400 $65,375 $51,657
</TABLE>
Expansion of the distribution system in response to the rapid growth in the
number of customers was the focus of capital spending. The distribution
system was extended by 509 miles of main, feeder and service lines.
Financing Activities
Questar Gas borrowed $50 million of medium-term notes and increased
short-term debt by $23.8 million in 1997. The borrowed funds plus net cash
provided from operating activities were used to finance capital expenditures,
pay dividends and redeem the remaining balance of preferred stock.
Forecasted 1998 capital expenditures of $65.4 million are expected to be
financed with net cash provided from operations and borrowings from Questar.
Questar makes loans to Questar Gas under a short-term borrowing arrangement.
Short-term notes payable to Questar totaled $100,000,000 at December 31, 1997
with an interest rate of 6.02% and $76,200,000 at December 31, 1996 with an
interest rate of 5.63%.
Questar Gas' capital structure at December 31, 1997 was composed of 50%
long-term debt and 50% common 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 Gas. Management believes they are
reasonable representations of Questar Gas' 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
Questar Gas 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
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 in the List of
Financial Statements are filed as part of this report.
(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
3.1.* Restated Consolidated Articles of Incorporation dated August
15, 1980. (Exhibit No. 4(a) to Registration Statement No.
2-70087, filed December 1, 1980.)
3.2.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated May 13, 1982. (Exhibit No. 3(b) to
Form 10-K Annual Report for 1982.)
3.3.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated May 10, 1983. (Included in Exhibit
No. 4.1. to Registration Statement No. 2-84713, filed June
23, 1983.)
3.4.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated August 16, 1983. (Exhibit No. 3(a)
to Form 8 Report amending the Company's Form 10-Q Report for
Quarter Ended September 30, 1983.)
3.5.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated October 26, 1984. (Exhibit No. 3.5.
to Form 10-K Annual Report for 1984.)
3.6.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated May 13, 1985. (Exhibit No. 3.1. to
Form 10-Q Report for Quarter Ended June 30, 1985.)
3.7.* Articles of Amendment to Restated Consolidated Articles of
Incorporation dated February 10, 1988. (Exhibit No. 3.7. to
Form 10-K Annual Report for 1987.)
3.8.* Articles of Amendment to Restated Consolidated Articles of
Incorporation dated December 31, 1997. (Exhibit No. 3.7. to
Form 8-K Current Report for December 31, 1997.)
3.9.* Bylaws (as amended effective August 11, 1992). (Exhibit No.
3.8. to Form 10-K Annual Report for 1992.)
4.* Indenture dated as of May 1, 1992, between the Company and
Citibank, as trustee, for the Company's Debt Securities.
(Exhibit No. 4. to Form 10-Q Report for Quarter Ended June
30, 1992.)
10.1.* Stipulations and Agreement, dated October 14, 1981, executed
by Mountain Fuel Supply Company; Wexpro Company; the Utah
Department of Business Regulations, Division of Public
Utilities; the Utah Committee of Consumer Services; and the
staff of the Public Service Commission of Wyoming. (Exhibit
No. 10(a) to Form 10-K Annual Report for 1981.)
10.7.* 1\ Data Processing Services Agreement effective July 1, 1985,
between Questar Service Corporation and Mountain Fuel Supply
Company. (Exhibit 10.7. to Form 10-K Annual Report for
1988.)
10.8. 2\ Annual Management Incentive Plan adopted by Questar Gas
Company, Questar Pipeline Company, and Questar Regulated
Services Company.
10.9.* 1,2\ Mountain Fuel Supply Company Window Period Supplemental
Executive Retirement Plan effective January 24, 1991.
(Exhibit No. 10.9. to Form 10-K Annual Report for 1990.)
10.10.*1,2\ Mountain Fuel Supply Company Deferred Compensation Plan
for Directors as amended and restated effective February 13,
1997. (Exhibit No. 10.10. to Form 10-K Annual Report for
1995.)
10.11.*1\ Gas Gathering Agreement between Mountain Fuel Supply Company
and Questar Pipeline Company effective September 1, 1993.
(This agreement has been transferred to Questar Gas
Management Company.) (Exhibit No. 10.11. to Form 10-K
Annual Report for 1994.)
10.12. 1\ Amendment to Gas Gathering Agreement between Mountain Fuel
Supply Company and Questar Gas Management Company effective
September 1, 1997.
12. Ratio of Earnings to Fixed Charges.
23. Consent of Independent Auditors.
24. Power of Attorney.
27. Financial Data Schedule.
_______________________
*Exhibits so marked have been filed with the Securities and
Exchange Commission as part of the referenced filing and are
incorporated herein by reference.
1\This document has not been formally amended to refer to the
Company's current name.
2\Exhibit so marked is a management contract or compensation plan
or arrangement.
(b) Questar Gas Company filed a Form 8-K reporting the name change
that was legally effected on December 31, 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 GAS COMPANY
SALT LAKE CITY, UTAH
FORM 10-K -- ITEM 14 (a) (1) AND (2)
QUESTAR GAS COMPANY
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following financial statements of Questar Gas 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 common shareholder's equity -- Years ended December
31, 1997, 1996 and 1995
Statements of cash flows -- Years ended December 31, 1997, 1996
and 1995
Notes to financial statements
Financial statement 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 Gas Company
We have audited the accompanying balance sheets of Questar Gas
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 Gas 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 GAS COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(In Thousands)
<S> <C> <C> <C>
REVENUES
From unaffiliated customers $445,684 $368,905 $358,758
From affiliated companies - Note 7 2,539 3,023 4,011
448,223 371,928 362,769
OPERATING EXPENSES
Natural gas purchases
From affiliated companies - Note 7 137,062 128,919 129,781
From unaffiliated parties 111,871 53,481 60,825
Total natural gas purchases 248,933 182,400 190,606
Operating and maintenance - Note 7 101,719 97,110 93,384
Depreciation and amortization 31,160 28,309 25,469
Other taxes 8,174 8,071 9,588
TOTAL OPERATING EXPENSES 389,986 315,890 319,047
OPERATING INCOME 58,237 56,038 43,722
INTEREST AND OTHER INCOME 3,388 3,033 4,232
DEBT EXPENSE (19,119) (16,637) (16,580)
INCOME BEFORE INCOME TAXES 42,506 42,434 31,374
INCOME TAXES - Note 4 13,492 13,446 7,706
NET INCOME $29,014 $28,988 $23,668
</TABLE>
See notes to financial statements.
<PAGE>
QUESTAR GAS COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
1997 1996
(In Thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and short-term investments $6,747 $1,875
Accounts receivable 46,054 38,141
Unbilled gas accounts receivable 37,302 23,528
Accounts receivable from affiliates 3,131 393
Federal income taxes receivable 1,109
Inventories, at lower of average
cost or market
Gas stored underground 15,829 11,647
Materials and supplies 4,518 3,648
Total inventories 20,347 15,295
Purchased-gas adjustments 37,251 24,210
Prepaid expenses and deposits 4,356 4,511
TOTAL CURRENT ASSETS 155,188 109,062
PROPERTY, PLANT AND EQUIPMENT
Production - Note 8 97,870 97,870
Distribution 641,226 608,571
General 98,974 99,372
Construction in progress 44,866 19,308
882,936 825,121
Less allowances for depreciation
and amortization 354,761 325,821
NET PROPERTY, PLANT AND EQUIPMENT 528,175 499,300
OTHER ASSETS
Income taxes recoverable from customers 6,371 7,293
Unamortized costs of reacquired debt 9,102 9,596
Other 6,015 5,818
TOTAL OTHER ASSETS 21,488 22,707
$704,851 $631,069
</TABLE>
<PAGE>
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
December 31,
1997 1996
(In Thousands)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable to Questar - Note 2 $100,000 $76,200
Accounts payable and accrued expenses
Accounts payable 32,504 37,075
Accounts payable to affiliates 14,599 17,779
Federal income taxes 3,112
Other taxes 5,304 4,161
Interest 4,548 3,676
Other 4,420 3,867
Total accounts payable and
accrued expenses 64,487 66,558
TOTAL CURRENT LIABILITIES 164,487 142,758
LONG-TERM DEBT - Notes 2 and 3 225,000 175,000
OTHER LIABILITIES
Unbilled gas revenues 5,180 10,360
Other 809 570
TOTAL OTHER LIABILITIES 5,989 10,930
DEFERRED INVESTMENT TAX CREDITS 6,392 6,774
DEFERRED INCOME TAXES - Note 4 80,717 74,537
COMMITMENTS AND CONTINGENCIES - Note 5
REDEEMABLE CUMULATIVE PREFERRED STOCK
$100 stated value, 4,000,000
shares authorized,
48,280 shares outstanding in 1996 4,828
COMMON SHAREHOLDER'S EQUITY
Common stock-par value $2.50 per share;
authorized 50,000 shares; issued
and outstanding 9,189,626 shares 22,974 22,974
Additional paid-in capital 41,875 41,875
Retained earnings 157,417 151,393
TOTAL COMMON SHAREHOLDER'S EQUITY 222,266 216,242
$704,851 $631,069
</TABLE>
See notes to financial statements.
<PAGE>
QUESTAR GAS COMPANY
STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings
(In Thousands)
<S> <C> <C> <C>
Balances at January 1, 1995 22,974 41,875 140,612
1995 net income 23,668
Payment of dividends
Preferred stock (483)
Common stock (20,000)
Redemption cost (1)
Balances at December 31, 1995 22,974 41,875 143,796
1996 net income 28,988
Payment of dividends
Preferred stock (391)
Common stock (21,000)
Balances at December 31, 1996 22,974 41,875 151,393
1997 net income 29,014
Payment of dividends
Preferred stock (192)
Common stock (22,750)
Premium paid on retired preferred stock (48)
Balances at December 31, 1997 $22,974 $41,875 $157,417
</TABLE>
See notes to financial statements.
<PAGE>
QUESTAR GAS COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(In Thousand)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $29,014 $28,988 $23,668
Depreciation and amortization 33,739 31,214 28,295
Deferred income taxes 6,180 13,146 6,366
Deferred investment tax credits (382) (383) (384)
68,551 72,965 57,945
Changes in operating assets
and liabilities
Accounts receivable (24,425) 1,609 10,549
Inventories (5,052) 5,620 4,026
Prepaid expenses and deposits 155 (668) (722)
Accounts payable and accrued expenses (5,183) 4,758 14,379
Federal income taxes 4,221 2,862 (5,620)
Purchased-gas adjustments (13,041) (33,392) (7,889)
Other (3,722) (3,258) (4,122)
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 21,504 50,496 68,546
INVESTING ACTIVITIES
Capital expenditures (65,375) (51,657) (51,413)
Proceeds from disposition of property,
plant and equipment 2,761 2,990 1,054
NET CASH USED IN INVESTING
ACTIVITIES (62,614) (48,667) (50,359)
FINANCING ACTIVITIES
Redemption of preferred stock (4,876) (129) (1,367)
Issuance of long-term debt 50,000
Change in notes payable to Questar 23,800 20,100 2,600
Payment of dividends (22,942) (21,391) (20,483)
NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES 45,982 (1,420) (19,250)
Change in cash and short-term investments 4,872 409 (1,063)
Beginning cash and short-term investments 1,875 1,466 2,529
ENDING CASH AND SHORT-TERM
INVESTMENTS $6,747 $1,875 $1,466
</TABLE>
See notes to financial statements.
<PAGE>
QUESTAR GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Accounting Policies
Questar Gas Company (the Company or Questar Gas), formerly Mountain Fuel
Supply, 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 Gas and Questar
Pipeline Company (Questar Pipeline).
Significant accounting policies are presented below.
Business and Regulation: Questar Gas' business consists of natural gas
distribution operations for residential, commercial and industrial customers.
The Company is regulated by the Public Service Commission of Utah (PSCU) and
the Public Service Commission of Wyoming (PSCW). While Questar Gas also
serves a small area of southeastern Idaho, the Public Utilities Commission
of Idaho has deferred to the PSCU for rate oversight of this area. These
regulatory agencies establish rates for the sale and transportation 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 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 Gas accrues
gas-distribution revenues for gas delivered to residential and commercial
customers but not billed at the end of the accounting period. The Company
periodically collects revenues subject to possible refund pending final
orders from regulatory agencies. In these situations, Questar Gas
establishes reserves for revenues collected subject to refund.
Purchased-Gas Adjustments: Questar Gas accounts for purchased-gas costs in
accordance with procedures authorized by the PSCU and PSCW whereby
purchased-gas costs that are different from those provided for in the
present rates are accumulated and recovered or credited through future rate
changes.
Cash and Short-Term Investments: Short-term investments consist principally
of repurchase agreements with maturities of three months or less.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost. The provision for depreciation and amortization is based upon rates
which will systematically charge the costs of assets over their estimated
useful lives. The costs of natural gas distribution property, plant and
equipment, excluding gas wells, are amortized using the straight-line method
ranging from 3% to 33% per year and averaging 4.2% in 1997. The costs of gas
wells were amortized using the units-of-production method at $.16 per Mcf of
natural gas production in 1997.
Allowance for Funds Used During Construction: The Company capitalizes the
cost of capital during the construction period of plant and equipment using
a method required by regulatory authorities. This amounted to $261,000 in
1997, $277,000 in 1996 and $391,000 in 1995.
Reacquisition of Debt: Gains and losses on the reacquisition of debt are
deferred and amortized as debt expense over the life of the replacement debt
in order to match regulatory treatment.
Income Taxes: Questar Gas records cumulative increases in deferred taxes
as income taxes recoverable from customers. The Company has adopted
procedures with its regulatory commissions to include under-provided
deferred taxes in customer rates on a systematic basis. Questar Gas uses
the deferral method to account for investment-tax credits as required by
regulatory commissions. The Company's operations are consolidated with
those of Questar and its subsidiaries for income tax purposes. The income
tax arrangement between Questar Gas 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 Gas 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 - Debt
Questar makes loans to Questar Gas under a short-term borrowing arrangement.
Short-term notes payable to Questar totaled $100,000,000 at December 31, 1997
with an interest rate of 6.02% and $76,200,000 at December 31, 1996 with an
interest rate of 5.63%.
Questar Gas' long-term debt consists of medium-term notes with interest rates
ranging from 6.85% to 8.43%, due 2007 to 2024. Questar Gas filed a
registration statement with the Securities and Exchange Commission for the
issuance of up to $75 million in medium-term notes, which became effective
July 23, 1997. The Company issued $50 million of medium-term notes having a
weighted average coupon rate of 6.88% and a weighted average maturity of
16.5 years in 1997.
There are no maturities of long-term debt for the five years following
December 31, 1997 and no long-term debt provisions restricting the payment
of dividends. Cash paid for interest was $17,933,000 in 1997, $16,346,000
in 1996 and $16,458,000 in 1995.
Note 3 - Financial Instruments and Credit Management Activities
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
Book Estimated Book Estimated
Value Fair Value Value Fair Value
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term investments $6,747 $6,747 $1,875 $1,875
Financial liabilities
Short-term loans 100,000 100,000 76,200 76,200
Long-term debt 225,000 255,615 175,000 190,793
Redeemable cumulative preferred stock 4,828 4,876
</TABLE>
The Company used the following methods and assumptions in estimating fair
values: (1) Cash and short-term investments, and short-term loans - book
value approximates fair value; (2) Long-term debt - the fair value of the
medium-term notes is based on the discounted present value of cash flows
using the Company's current borrowing rates; Fair value is calculated at
a point in time and does not represent what the Company would pay to retire
the debt securities.
Credit Risk: Questar Gas' primary market area is the Rocky Mountain region
of the United States. Exposure to credit risk may be impacted by the
concentration of customers in this region due to changes in economic or
other conditions. Customers include individuals and numerous industries
that may be affected differently by changing conditions. Management believes
that its credit-review procedures, loss reserves and customer deposits have
adequately provided for usual and customary credit-related losses.
Note 4 - Income Taxes
The components of income taxes were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(In Thousands)
<S> <C> <C> <C>
Federal
Current $5,334 ($678) ($294)
Deferred 6,636 12,906 7,099
State
Current 1,107 254 302
Deferred 797 1,347 983
Deferred investment tax credits (382) (383) (384)
$13,492 $13,446 $7,706
</TABLE>
The difference between income tax expense and the tax computed by applying
the statutory federal income tax rate of 35% to income before income taxes
is explained as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(In Thousands)
<S> <C> <C> <C>
Income before income taxes $42,506 $42,434 $31,374
Federal income taxes at statutory rate $14,877 $14,852 $10,981
State income taxes, net of federal
income tax benefit 1,155 1,512 1,179
Tight-sands gas production credits (2,686) (3,246) (4,376)
Investment-tax credits (382) (383) (384)
Reduction in deferred income tax rate (571)
Deferred taxes related to regulated
assets for which deferred taxes were
not provided in prior years 921 921 921
Other (393) (210) (44)
Income tax expense $13,492 $13,446 $7,706
Effective income tax rate 31.7% 31.7% 24.6%
</TABLE>
Significant components of the Company's deferred tax liabilities and assets
were as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
(In Thousands)
<S> <C> <C>
Deferred tax liabilities
Property, plant and equipment $74,694 $73,979
Purchased-gas adjustments 14,155 9,200
Other 7,135 8,680
Total deferred tax liabilities 95,984 91,859
Deferred tax assets
Alternative minimum tax and production
credit carryovers 7,866 7,546
Unbilled revenues 1,968 3,937
Other 5,433 5,839
Total deferred tax assets 15,267 17,322
Net deferred tax liabilities $80,717 $74,537
</TABLE>
Cash paid for income taxes was $1,516,000 in 1997 and $7,333,000 in 1995.
Questar Gas applied an overpayment of 1995 income taxes to more than offset
payment of 1996 taxes.
Note 5 - Rate Matters, Litigation and Commitments
On January 8, 1997, the Utah Division of Public Utilities (Division) filed a
motion with the PSCU seeking an investigation into the reasonableness of
Questar Gas' rates and requesting an interim rate decrease of $3.5 million.
On January 29, 1997, the Division withdrew its petition, and the PSCU
accepted that action after Questar Gas agreed to reduce rates and charges
by $2.85 million annually. On February 4, 1997, Questar Gas filed an
application with the PSCU to reduce block rates, eliminate the new-premises
fee for multi-family dwellings, and reduce the capacity-release revenue
retained by Questar Gas from 20% to 10%. The PSCU approved the filing
effective February 18, 1997.
The PSCU approved a purchased gas-cost recovery application on an interim
basis, effective January 1, 1996. In connection with the application and
pass-through cases filed since then, the Division has raised issues about
the reasonableness of gas-gathering costs for field-purchased gas gathered
by Market Resources affiliate, Questar Gas Management. Hearings were held
January 6, 1998 at which the Division requested that the PSCU disallow gas
gathering costs of approximately $7.6 million plus a $.2 million interest
charge. Briefs have been filed with the PSCU. The Company's management
believes that its gathering costs are reasonable and in compliance with
contract terms and applicable laws. The Company cannot predict the
resolution of this dispute or any financial impact of such resolution on
its balance sheet, income statement, or cash flows at the current time.
The PSCW approved Questar Gas' gas-merchant unbundling proposal that was
filed in Wyoming in 1997. Under this plan, a transportation service option
is extended to residential and commercial customers as well as industrial
customers. Customers choosing transportation service are allowed to secure
gas supplies directly from producers and marketers and pay Questar Gas a
fee for transportation services. Questar Gas continues to offer a
traditional bundled sales service as well. Questar Gas expects that the
option of unbundled service in Wyoming will not have a material effect on
earnings. The Company will maintain its current structure in Utah.
At December 31, 1997, Questar Gas served 21,632 customers in the state of
Wyoming representing 3% of the total number of customers served.
Questar Gas, as a result of acquiring Questar Pipeline's gas-purchase
contracts, is responsible for any judgment rendered against Questar Pipeline
in a lawsuit that was tried before a jury in 1994. The jury awarded an
independent producer compensatory damages of approximately $6.1 million and
punitive damages of $200,000 on his claims. The producer's counterclaims
originally exceeded $57 million, but were reduced to less than $10 million,
when the presiding judge dismissed with prejudice some of the claims prior
to the jury trial. The Company's management believes that any payments
resulting from this judgment will be included in Questar Gas' gas balancing
account and recovered in its rates for natural gas service.
This same producer has recently filed additional claims against the Company
and its affiliates in the same court and with the same presiding judge.
The new lawsuit, which is currently assigned to the same judge presiding
over the earlier litigation, updates the claims in the original lawsuit for
the period since the trial and adds new claims of fraud and antitrust
violations. The Company has informed the producer that it will make any
payments for the period subsequent to the date covered by the original
trial once the presiding judge enters judgment and rules on pending
post-trial motions. The Company's management believes that the producer's
new allegations of fraud and antitrust violation are without merit.
Questar Gas is involved in an environmental clean-up action on a site that
involves numerous other parties. Management believes that the Company's
responsibility for remediation will be minor and that any potential liability
will not be significant to its results of operations, financial position or
liquidity.
There are various legal proceedings against the Company. While it is not
currently possible to predict or determine the outcome of these proceedings,
it is the opinion of management that the outcome will not have a material
adverse effect on the Company's results of operations, financial position or
liquidity.
Each year, Questar Gas purchases significant quantities of natural gas under
numerous gas-purchase contracts with varying terms and conditions. Purchases
under these agreements totalled $122,106,000 in 1997, $67,249,000 in 1996 and
$44,892,000 in 1995. Historically, gas-purchase contracts extended over
many years. However, it is now common practice to set contract terms for
anywhere from one day up to one year. With this trend toward shorter-term
contracts, as of February 1, 1998, substantially all long-term contracts
have expired. The remaining long-term contracts are not material.
Note 6 - Employee Benefits
Pension Plan: Substantially all of Questar Gas' 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
10 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. Questar Gas
transferred employees and related benefit costs to Regulated Services as
part of its reorganization of administrative services in 1997. Pension cost
was $1,847,000 in 1997, $2,820,000 in 1996 and $3,352,000 in 1995.
Questar Gas' 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 Gas 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 on or 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 $1,993,000 in 1997,
$2,424,000 in 1996 and $3,183,000 in 1995. Both the PSCU and the PSCW
allowed Questar Gas to recover future costs if the amounts are funded in
an external trust. The Company's portion of plan assets and benefit
obligations related to postretirement medical and life insurance benefits
is not determinable because the plan assets are not segregated or restricted
to meet the Company's obligations.
Postemployment Benefits: The Company recognizes the net present value of
the liability for postemployment benefits, such as long-term disability
benefits and health-care and life-insurance costs, when employees become
eligible for such benefits. Postemployment benefits are paid to former
employees after employment has been terminated but before retirement
benefits are paid. The Company accrues both current and future costs.
The PSCU and the PSCW have allowed Questar Gas to recover postemployment
costs accumulated through December 31, 1994 in future rates. At
December 31, 1997, the Company had a $727,000 regulatory asset that
it is amortizing over the next seven years.
Employee Investment Plan: Questar Gas 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 $1,552,000 in 1997, $1,893,000 in 1996,
and $1,622,000 in 1995.
Note 7 - 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 Gas
$26,061,000 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 Gas purchased transportation and storage services from Questar
Pipeline amounting to $64,924,000 in 1997, $61,078,000 in 1996 and
$54,083,000 in 1995. The costs of these services were included in natural
gas purchases. Also included in natural gas purchases are amounts paid
to Questar Gas Management for gathering of Company-owned gas and purchased
gas. These costs amounted to $12,472,000 in 1997, $14,515,000 in 1996 and
$15,867,000 in 1995.
Questar Gas has reserved transportation capacity on Questar Pipeline's
system of approximately 800,000 decatherms per day and paid an annual
demand charge of approximately $49.6 million for this reservation.
Questar Gas releases excess capacity to its industrial transportation or
other customers and receives a credit from Questar Pipeline for the
released-capacity revenues and a portion of Questar Pipeline's
interruptible-transportation revenues.
Wexpro, an affiliated company, operates certain properties owned by
Questar Gas under the terms of the Wexpro Settlement Agreement.
The Company receives a portion of Wexpro's income from oil operations
after recovery of Wexpro's operating expenses and a return on investment.
This amount, which is included in revenues, was $2,347,000 in 1997,
$2,768,000 in 1996 and $3,400,000 in 1995. Questar Gas paid Wexpro for
the operation of gas properties owned by Questar Gas. These costs are
included in natural gas purchases and amounted to $49,887,000 in 1997,
$53,119,000 in 1996 and $59,831,000 in 1995.
In addition in 1997, Questar Gas purchased $568,000 worth of gas from
Questar Gas Management and $133,000 from Wexpro.
Questar Gas purchased gas from Questar Energy Trading and Questar Gas
Management in 1997 and paid $9,078,000 and $559,000, respectively.
Questar Gas has a 15-year lease for some 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 $1,155,000.
Questar InfoComm Inc. is an affiliated company that provides data
processing and communication services to Questar Gas. The Company paid
Questar InfoComm $19,875,000 in 1997, $16,343,000 in 1996 and $15,781,000
in 1995.
Questar charges Questar Gas for certain administrative functions amounting
to $5,518,000 in 1997, $5,746,000 in 1996 and $5,283,000 in 1995.
These costs are included in operating and maintenance expenses and are
allocated based on each affiliated company's proportional share of revenues
less gas costs; property, plant and equipment; and labor costs.
Management believes that the allocation method is reasonable.
Questar Gas incurred debt expense to Questar of $3,575,000 in 1997,
$1,906,000 in 1996 and $1,273,000 in 1995 and received interest income
from affiliated companies of $126,000 in 1997 and $10,000 in 1995.
Note 8 - Oil and Gas Producing Activities (Unaudited)
The following information discusses the Company's oil and gas producing
activities. All of the properties are cost-of-service properties with the
return on investment established by state regulatory agencies. Questar Gas
has not incurred any costs for oil and gas producing activities for the
three years ended December 31, 1997. Wexpro develops and produces gas
reserves owned by the Company. See Note 7 for the amounts paid by Questar
Gas to Wexpro.
Estimated Quantities of Proved Oil and Gas Reserves: The following
estimates were made by Questar's reservoir engineers. Reserve estimates
are based on a complex and highly interpretive process which is subject to
continuous revision as additional production and development drilling
information becomes available. The quantities are based on existing economic
and operating conditions using current prices and operating costs. All oil
and gas reserves reported are located in the United States. Questar Gas
does not have any long-term supply contracts with foreign governments or
reserves of equity investees. No estimates are available for proved
undeveloped reserves that may exist.
<TABLE>
<CAPTION>
Natural Gas Oil
(In Million (In Thousands
Cubic Feet) of Barrels)
<S> <C> <C>
Proved Developed Reserves
Balance at January 1, 1995 416,312 707
Revisions of estimates (831) 10
Extensions and discoveries 10,591 2
Production (36,632) (57)
Balance at December 31, 1995 389,440 662
Revisions of estimates 4,365 (44)
Extensions and discoveries 2,812 2
Production (36,740) (56)
Balance at December 31, 1996 359,877 564
Revisions of estimates 7,008 41
Extensions and discoveries 7,439 28
Production (37,454) (24)
Balance at December 31, 1997 336,870 609
</TABLE>
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 GAS COMPANY
(Registrant)
By /s/ D. N. Rose
D. N. Rose
President and 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 and Chief Executive
D. N. Rose Officer; 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
*W. Whitley Hawkins Director
*Robert E. Kadlec Director
*Dixie L. Leavitt Director
*Gary G. Michael Director
*G. L. Nordloh Director
*D. N. Rose Director
*Harris H. Simmons Director
March 27, 1998 *By /s/ D. N. Rose
Date D. N. Rose, Attorney in Fact
EXHIBIT INDEX
Exhibit
Number Exhibit
3.1.* Restated Consolidated Articles of Incorporation dated
August 15, 1980. (Exhibit No. 4(a) to Registration
Statement No. 2-70087, filed December 1, 1980.)
3.2.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated May 13, 1982. (Exhibit No. 3(b) to
Form 10-K Annual Report for 1982.)
3.3.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated May 10, 1983. (Included in Exhibit
No. 4.1. to Registration Statement No. 2-84713, filed June
23, 1983.)
3.4.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated August 16, 1983. (Exhibit No. 3(a)
to Form 8 Report amending the Company's Form 10-Q Report
for Quarter Ended September 30, 1983.)
3.5.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated October 26, 1984. (Exhibit No. 3.5.
to Form 10-K Annual Report for 1984.)
3.6.* Certificate of Amendment to Restated Consolidated Articles
of Incorporation dated May 13, 1985. (Exhibit No. 3.1. to
Form 10-Q Report for Quarter Ended June 30, 1985.)
3.7.* Articles of Amendment to Restated Consolidated Articles of
Incorporation dated February 10, 1988. (Exhibit No. 3.7.
to Form 10-K Annual Report for 1987.)
3.8.* Articles of Amendment to Restated Consolidated Articles of
Incorporation dated December 31, 1997. (Exhibit No. 3.7.
to Form 8-K Current Report for December 31, 1997.)
3.9.* Bylaws (as amended effective August 11, 1992). (Exhibit
No. 3.8. to Form 10-K Annual Report for 1992.)
4.* Indenture dated as of May 1, 1992, between the Company and
Citibank, as trustee, for the Company's Debt Securities.
(Exhibit No. 4. to Form 10-Q Report for Quarter Ended June
30, 1992.)
10.1.* Stipulations and Agreement, dated October 14, 1981,
executed by Mountain Fuel Supply Company; Wexpro Company;
the Utah Department of Business Regulations, Division of
Public Utilities; the Utah Committee of Consumer Services;
and the staff of the Public Service Commission of Wyoming.
(Exhibit No. 10(a) to Form 10-K Annual Report for 1981.)
10.7.* 1\ Data Processing Services Agreement effective July 1, 1985,
between Questar Service Corporation and Mountain Fuel
Supply Company. (Exhibit 10.7. to Form 10-K Annual Report
for 1988.)
10.8. 2\ Annual Management Incentive Plan adopted by Questar Gas
Company, Questar Pipeline Company, and Questar Regulated
Services Company.
10.9.* 1,2\ Mountain Fuel Supply Company Window Period Supplemental
Executive Retirement Plan effective January 24, 1991.
(Exhibit No. 10.9. to Form 10-K Annual Report for 1990.)
10.10.* 1,2\ Mountain Fuel Supply Company Deferred Compensation Plan for
Directors as amended and restated effective February 13,
1997. (Exhibit No. 10.10. to Form 10-K Annual Report for
1995.)
10.11.* 1\ Gas Gathering Agreement between Mountain Fuel Supply
Company and Questar Pipeline Company effective September 1,
1993. (This agreement has been transferred to Questar Gas
Management Company.) (Exhibit No. 10.11. to Form 10-K
Annual Report for 1994.)
10.12. 1\ Amendment to Gas Gathering Agreement between Mountain Fuel
Supply Company and Questar Gas Management Company effective
September 1, 1997.
12. Ratio of Earnings to Fixed Charges.
23. Consent of Independent Auditors.
24. Power of Attorney.
27. Financial Data Schedule.
_______________________
*Exhibits so marked have been filed with the Securities and
Exchange Commission as part of the referenced filing and are
incorporated herein by reference.
1\This document has not been formally amended to refer to the
Company's current name.
2\Exhibit so marked is a management contract or compensation plan
or arrangement.
(b) Questar Gas Company filed a Form 8-K reporting the name change
that was legally effected on December 31, 1997.
EXHIBIT NO. 10.8
QUESTAR REGULATED SERVICES COMPANY,
QUESTAR GAS COMPANY, AND
QUESTAR PIPELINE COMPANY
ANNUAL MANAGEMENT INCENTIVE PLAN
Paragraph 1. Name. The name of this Plan is the Annual
Management Incentive Plan (the Plan) for Questar Regulated Services
Company, Questar Gas Company, and Questar Pipeline Company
(collectively referred to as Regulated Services).
Paragraph 2. Purpose. The purpose of the Plan is to
provide an incentive to officers and key employees of Regulated
Services for the accomplishment of major organizational and individual
objectives designed to further the efficiency, profitability, and
growth of Regulated Services.
Paragraph 3. Administration. The Management Performance
Committee (Committee) of the Board of Directors of Questar Corporation
(Questar) shall have full power and authority to interpret and
administer the Plan. Such Committee shall consist of no less than
three disinterested members of the Board of Directors.
Recommendations made by the Committee shall be reviewed by the Boards
of Directors of participating employers.
Paragraph 4. Participation. Within 60 days after the
beginning of each year, the Committee shall nominate Participants from
the officers and key employees for such year. The Committee shall
also establish a target bonus for the year for each Participant
expressed as a percentage of base salary or specified portion of base
salary. Participants shall be notified of their selection and their
target bonus as soon as practicable.
Paragraph 5. Determination of Performance Objectives.
Within 60 days after the beginning of each year, the Committee shall
establish target, minimum, and maximum performance objectives for
Regulated Services and for its affiliates and shall determine the
manner in which the target bonus is allocated among the performance
objectives. The Committee shall also recommend a dollar maximum for
payments to Participants for any Plan year. The Board of Directors
shall take action concerning the recommended dollar maximum within 60
days after the beginning of the Plan year. Participants shall be
notified of the performance objectives as soon as practicable once
such objectives have been established.
Paragraph 6. Determination and Distribution of Awards. As
soon as practicable, but in no event more than 90 days after the close
of each year during which the Plan is in effect, the Committee shall
compute incentive awards for eligible participants in such amounts as
the members deem fair and equitable, giving consideration to the
degree to which the Participant's performance has contributed to the
performance of Regulated Services and its affiliated companies and
using the target bonuses and performance objectives previously
specified. Aggregate awards calculated under the Plan shall not
exceed the maximum limits approved by the Board of Directors for the year
involved. To be eligible to receive a payment, the Participant must be
actively employed by Regulated Services or an affiliate as of the date
of distribution except as provided in Paragraph 8.
Amounts shall be paid (less appropriate withholding taxes
and FICA deductions) according to the following schedule:
Award Distribution Schedule
Percent of
Award Date
Initial Award 75% As soon as possible after initial
award is (First Year determined
of Participation)
25 One year after initial award is
determined
100%
Subsequent Awards 50% As soon as possible after award is
determined
25 One year after award is determined
25 Two years after award is determined
100%
Paragraph 7. Restricted Stock in Lieu of Cash.
Participants who have a target bonus of $10,000 or higher shall be
paid all deferred portions of such bonus with restricted shares of
Questar's common stock under Questar's Long-Term Stock Incentive Plan.
Such stock shall be granted to the participant when the initial award
is determined, but shall vest free of restrictions according to the
schedule specified above in Paragraph 6.
Paragraph 8. Termination of Employment.
(a) In the event a Participant ceases to be an employee
during a year by reason of death, disability or approved retirement,
an award, if any, determined in accordance with Paragraph 6 for the
year of such event, shall be reduced to reflect partial participation
by multiplying the award by a fraction equal to the months of
participation during the applicable year through the date of
termination rounded up to whole months divided by 12.
For the purpose of this Plan, approved retirement shall mean
any termination of service on or after age 60, or, with approval of
the Board of Directors, early retirement under Questar's qualified
retirement plan. For the purpose of this Plan, disability shall mean
any termination of service that results in payments under Questar's
long-term disability plan.
The entire amount of any award that is determined after the
death of a Participant shall be paid in accordance with the terms of
Paragraph 11.
In the event of termination of employment due to disability
or approved retirement, a Participant shall be paid the undistributed
portion of any prior awards in his final paycheck or in accordance
with the terms of elections to voluntarily defer receipt of awards
earned prior to February 12, 1991, or deferred under the terms of
Questar's Deferred Compensation Plan. In the event of termination due
to disability or approved retirement, any shares of common stock
previously credited to a Participant shall be distributed free of
restrictions during the last month of employment. The current market
value (defined as the closing price for the stock on the New York
Stock Exchange on the date in question) of such shares shall be
included in the Participant's final paycheck. Such Participant shall
be paid the full amount of any award (adjusted for partial
participation) declared subsequent to the date of such termination
within 30 days of the date of declaration. Any partial payments shall
be made in cash.
(b) In the event a Participant ceases to be an employee
during a year by reason of a change in control, he shall be entitled
to receive all amounts deferred by him prior to February 12, 1991, and
all undistributed portions for prior Plan years. He shall also be
entitled to an award for the year of such event as if he had been an
employee throughout such year. The entire amount of any award for
such year shall be paid in a lump sum within 60 days after the end of
the year in question. Such amounts shall be paid in cash.
For the purpose of this Plan, a "change in control" shall be
deemed to have occurred if (i) any "Acquiring Person" (as that term is
used in the Rights Agreement dated February 13, 1996, between Questar
and Chemical Mellon Shareholder Services, L.L.C. ("Rights Agreement"))
is or becomes the beneficial owner (as such term is used in Rule 13d-3
under the Securities Exchange Act of 1934) of securities of Questar
representing 15 percent or more of the combined voting power of
Questar, or (ii) the stockholders of Questar approve (A) a plan of
merger or consolidation of Questar (unless, immediately following
consummation of such merger or consolidation, the persons who held
Questar's voting securities immediately prior to consummation thereof
will hold at least a majority of the total voting power of the
surviving or new company), or (B) a sale or disposition of all or
substantially all assets of Questar, or (C) a plan of liquidation or
dissolution of Questar. A change of control shall also include any
act or event that, with the passage of time, would result in a
Distribution Date, within the meaning of the Rights Agreement.
Paragraph 9. Interest on Previously Deferred Amounts.
Amounts voluntarily deferred prior to February 12, 1991, shall be
credited with interest from the date the payment was first available
in cash to the date of actual payment. Such interest shall be
calculated at a monthly rate using the typical rates paid by major
banks on new issues of negotiable Certificates of Deposit in the
amounts of $1,000,000 or more for one year as quoted in The Wall
Street Journal on the first day of the relevant calendar month or the
next preceding business day if the first day of the month is a
non-business day.
Paragraph 10. Coordination with Deferred Compensation Plan.
Some Participants are entitled to defer the receipt of their cash
bonuses under the terms of Questar's Deferred Compensation Plan, which
became effective November 1, 1993. Any cash bonuses deferred pursuant
to the Deferred Compensation Plan shall be accounted for and
distributed according to the terms of such plan and the choices made
by the Participant.
Paragraph 11. Death and Beneficiary Designation. In the
event of the death of a Participant, any undistributed portions of
prior awards shall become payable. Amounts previously deferred by the
Participant, together with credited interest to the date of death,
shall also become payable. Each Participant shall designate a
beneficiary to receive any amounts that become payable after death
under this Paragraph or Paragraph 8. In the event that no valid
beneficiary designation exists at death, all amounts due shall be paid
as a lump sum to the estate of the Participant. Any shares of
restricted stock previously credited to the Participant shall be
distributed to the Participant's beneficiary or, in the absence of a
valid beneficiary designation, to the Participant's estate, at the
same time any cash is paid.
Paragraph 12. Amendment of Plan. The Boards of Directors
for the participating employers, at any time, may amend, modify,
suspend, or terminate the Plan, but such action shall not affect the
awards and the payment of such awards for any prior years. The Boards
of Directors for the participating employers cannot terminate the Plan
in any year in which a change of control has occurred without the
written consent of the Participants. The Plan shall be deemed
suspended for any year for which the Board of Directors has not fixed
a maximum dollar amount available for award.
Paragraph 13. Nonassignability. No right or interest of
any Participant under this Plan shall be assignable or transferable in
whole or in part, either directly or by operation of law or otherwise,
including, but not by way of limitation, execution, levy, garnishment,
attachment, pledge, bankruptcy, or in any other manner, and no right
or interest of any Participant under the Plan shall be liable for, or
subject to, any obligation or liability of such Participant. Any
assignment, transfer, or other act in violation of this provision
shall be void.
Paragraph 14. Effective Date of the Plan. The Plan shall
be effective with respect to the fiscal year beginning January 1,
1997, and shall remain in effect until it is suspended or terminated
as provided by Paragraph 12. This Plan replaces the individual plans
previously adopted by Questar Gas and Questar Pipeline that became
effective January 1, 1984. Plan participants who previously received
awards under predecessor plans or any other Annual Management
Incentive Plan adopted by an affiliate shall be treated as ongoing
participants for purposes of the distribution schedule in Paragraph 6.
EXHIBIT NO. 10.12
Amendment to the
Gas Gathering Agreement
Between
Questar Gas Company
and
Questar Gas Management Company
This Amendment is entered into this 6th day of February, 1998,
between Questar Gas Company and Questar Gas Management Company.
The Parties represent as follows:
A. Mountain Fuel Supply Company (MFS) and Questar Pipeline
Company entered into a Gas Gathering Agreement on October 11, 1993
(Agreement).
B. Questar Gas Management Company (QGM) assumed all of Questar
Pipeline Company's interest, rights, duties and obligations under the
Agreement in an Assignment dated March 1, 1996 (Assignment).
C. Mountain Fuel Supply Company became Questar Gas Company (QGC)
on January 1, 1998.
The Parties agree as follows:
Article III (a)(3) to the Agreement is deleted and the first
amended Article III (a)(3) below is inserted in its place.
Article III - Gathering Charges, Reimbursements and Credits
(3) Effective after August 31, 1997, until the termination
of this Agreement, rates will be redetermined each year, to be
effective from September 1 through the following August 31, and will
be based on:
(i) An allocated portion of the annual cost of service
for the prior calendar year that is attributable
to QGM's gathering function through which any gas
dedicated under Section I(d) flows during that
year, in accordance with the methodology shown in
Appendix B. The allocation for each cost center
under this subparagraph shall be the ratio of the
November through March volumes dedicated and
flowing under Section I(d) to total November
through March volumes for each cost center.
(ii) An assignment of 60% of the resultant annual
gathering cost of service to demand charges and
40% to commodity charges.
(iii) Billing determinants. Demand charge: Each
month's demand charge is one-twelfth of the total
demand allocation. Commodity charge: the actual
quantity gathered under this Agreement during the
prior calendar year.
(iv) Gathering rates will be determined based on
Questar Gas' share of the costs for each of QGM's
gathering cost centers.
2. Paragraphs 3.(d) (e) (f) and (g) of Appendix B to the
Agreement are deleted and first amended paragraphs 3.(d) (e) (f) (g)
and (h) of Appendix B to the Agreement below are inserted in their
place.
(d) Federal and State Income Taxes. Questar Gas' combined
federal and state income tax rate shall be applied to the equity
portion of the return on rate base.
(e) Rate Base. The average rate base shall be determined
by taking an average of the beginning and ending months for which data
are being used pursuant to paragraph 1 above (adjusted as necessary
pursuant to that paragraph) and shall include that portion of the
following that are directly related or allocable to the gathering
services performed under this Agreement:
(i) Gas plant,
(ii) Accumulated depreciation and amortization,
(iii) Working capital,
(iv) Deferred income taxes, and
(v) QGM's general and intangible plant
(f) Rate of Return. The rate of return on rate base shall
be the pre-tax rate of return derived from the overall rate of return
allowed by the Utah Public Service Commission for Mountain Fuel
effective at the end of the period.
(g) All accounting and allowed costs will be consistent
with ratemaking policies that have been set by the Utah Public Service
Commission, including allowed rate of return and methodologies for
calculating rate base, test year and types of costs that are not
allowed.
(h) The costs of gathering activities determined under this
Appendix will be reduced by other operating revenues that are directly
related to those costs.
3. Except as expressly amended, the Agreement remains in full
force and effect.
This Amendment is entered into by the authorized representatives
of the Parties whose signatures appear below.
Questar Gas Company: Questar Gas Management Company:
By: /s/D. N. Rose By: /s/G. L. Nordloh
D. N. Rose G. L. Nordloh
Name (please type) Name (please type)
President & CEO President & CEO
Title Title
EXHIBIT NO. 12
Questar Gas Company
Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
12 Months Ended
December 31,
1996 1997
(Dollars in Thousands)
<S> <C> <C>
Earnings
Income before income taxes $42,434 $42,506
Plus debt expense 16,637 19,119
Plus allowance for borrowed
funds used during construction 277 261
Plus interest portion of rental expense 187 193
$59,535 $62,079
Fixed Charges
Debt expense $16,637 $19,119
Plus allowance for borrowed
funds used during construction 277 261
Plus interest portion of rental expense 187 193
$17,101 $19,573
Ratio of Earnings to Fixed Charges 3.48 3.17
</TABLE>
EXHIBIT NO. 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 333-27909) of Questar Gas Company and in
the related Prospectus of our report dated February 9, 1998, with
respect to the consolidated financial statements of Questar Gas
Company included in this annual report (Form 10-K) for the year
ended December 31, 1997.
/s/ Ernst & Young LLP
Salt Lake City, Utah
March 24, 1998
EXHIBIT NO. 24
POWER OF ATTORNEY
We, the undersigned directors of Mountain Fuel Supply Company,
hereby severally constitute D. N. Rose and S. E. Parks, and each of
them acting alone, our true and lawful attorneys, with full power to
them and each of them to sign for us, and in our names in the
capacities indicated below, the Annual Report on Form 10-K for 1997
and any and all amendments to be filed with the Securities and
Exchange Commission by Mountain Fuel Supply Company, hereby ratifying
and confirming our signatures as they may be signed by the attorneys
appointed herein to the Annual Report on Form 10-K for 1997 and any
and all amendments to such Report.
Witness our hands on the respective dates set forth below.
Signature Title Date
/s/ R. D. Cash Chairman of the Board 2-10-98
R. D. Cash
/s/ D. N. Rose President & Chief 2-10-98
D. N. Rose Executive Officer
Director
/s/ W. Whitley Hawins Director 2-10-98
W. Whitley Hawkins
/s/ Robert E. Kadlec Director 2-10-98
Robert E. Kadlec
/s/ Dixie L. Leavitt Director 2-10-98
Dixie L. Leavitt
/s/ Gary G. Michael Director 2-10-98
Gary G. Michael
/s/ Gary L. Nordloh Director 2-10-98
Gary L. Nordloh
/s/ Harris H. Simmons Director 2-10-98
Harris H. Simmons
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summarized financial information from the Questar Gas
Company Statement of Income and Balance Sheet for the year ended December 31,
1997, and is qualified in its entirety by reference to the audited financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,747
<SECURITIES> 0
<RECEIVABLES> 86,487
<ALLOWANCES> 0
<INVENTORY> 20,347
<CURRENT-ASSETS> 155,188
<PP&E> 882,936
<DEPRECIATION> 354,761
<TOTAL-ASSETS> 704,851
<CURRENT-LIABILITIES> 164,487
<BONDS> 225,000
0
0
<COMMON> 22,974
<OTHER-SE> 199,292
<TOTAL-LIABILITY-AND-EQUITY> 704,851
<SALES> 0
<TOTAL-REVENUES> 448,223
<CGS> 0
<TOTAL-COSTS> 350,652
<OTHER-EXPENSES> 39,334
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,119
<INCOME-PRETAX> 42,506
<INCOME-TAX> 13,492
<INCOME-CONTINUING> 29,014
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,014
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
