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, 1998 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 100 South, P.O. Box 45360, Salt Lake City, Utah84145-0360
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:(801) 324-5555
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933:
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 29, 1999: $0.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 29, 1999: 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
(I)(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K
Report with the reduced disclosure format.
TABLE OF CONTENTS
Heading Page
PART I
Items 1.
and 2. BUSINESS AND PROPERTIES
General
Gas Distribution
Gas Supply
Competition, Growth and Unbundling
Regulation
Relationships with Affiliates
Employees
Environmental Matters
Research and Development
Item 3. LEGAL PROCEEDINGS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
PART II
Item 5. MARKET FOR REGISTRANT'S EQUITY
AND RELATED STOCKHOLDER MATTERS
Item 6. OMITTED
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATION
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
Items OMITTED
10-13
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
SIGNATURES
FORM 10-K
ANNUAL REPORT, 1998
PART I
ITEMS 1. and 2. BUSINESS AND PROPERTIES
General
Questar Gas Company (the "Company" or "Questar Gas") distributes
natural gas to more than 663,000 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 within its service area.
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, 1998, Questar Gas was serving 663,392
residential, commercial, and industrial customers, a 3.4 percent
increase from the 641,696 customers served as of the end of 1997.
(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. Over 96 percent of the Company's customers are in
Utah. Questar Gas 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 21,696 customers in 1998, which was the fifth
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. During 1998,
Questar Gas extended service to several small communities in rural
Utah, e.g., Panguitch, Joseph, Oak City. The population of the
Company's service area in Utah continues to grow faster than the
national average. Questar Gas expects to add 18,000-21,000 customers
each year until at least 2002.
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 total gas requirements in the coldest six months of the
year. (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 1.04 Dth.) 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 in 1998 which was the fifth 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 1998, 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 1998, Questar Gas sold 83.2 million decatherms ("MMDth")
of natural gas to residential and commercial customers, compared to
85.7 MMDth in 1997. General service sales to residential and
commercial customers were responsible for over 89 percent of the
Company's total revenues in 1998.
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
1998-99 heating season, the Company used a design-day demand of
977,251 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 1998, from 60.8 MMDth in 1997 to
65.1 MMDth in 1998, reflecting Utah's economic strength.
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.
Questar Gas 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 1998, 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 19,976 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 1998,
approximately 45 percent of the Company's firm sales requirement was
satisfied with cost-of-service gas produced from over 660 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 Company ("Questar
Pipeline"). See "Relationships with Affiliates." During 1998, 42.7
MMDth of gas were delivered from such properties, compared to 44.0
MMDth in 1997.
The Company estimates that it had reserves of 339.8 billion cubic
feet ("Bcf") of natural gas as of year-end 1998 compared to 336.9 Bcf
as of year-end 1997. (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 increased reserves were attributable to revisions and
extensions as a result of Wexpro's drilling activities, which more
than offset the production associated with such properties. The
average wellhead cost associated with gas volumes produced from the
Company's cost-of-service reserves was $1.54 per Dth in 1998, which is
below the average cost of purchased volumes.
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 1998, Questar Gas, as the party
with the economic interest in the gas produced from such wells,
claimed $2.2 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 13.3 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 42 gas supply contracts with a
variety of suppliers located in the Rocky Mountain states of Wyoming,
Colorado, and Utah. It also purchases gas on the spot market,
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. Questar Gas'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 1999 average wellhead cost of field-purchased gas would be
$1.92 per Dth. Although Questar Gas has contracts with take-or-pay
provisions, it currently has no material take-or-pay liabilities.
The Company is concerned about the reduction of heating content
in its gas supply and has extensively reviewed several alternatives to
deal with the problem. This reduction of heat content is caused by
the presence of carbon dioxide in gas volumes extracted from coal
seams and by the fact that processing plants strip off liquids from
gas supplies. Appliances in Questar Gas's service area have
historically been set to burn gas at a certain Btu level and may
require adjustment for proper combustion of lower Btu gas. The
Company, during 1998, changed its recommended setpoint for appliances.
This revised setpoint is used by customers and contractors to adjust
appliances when they are installed or serviced.
The Company has contracted with Questar Transportation Services
Company, a new subsidiary of Questar Pipeline, to construct and
operate a processing plant to strip carbon dioxide from gas volumes
extracted from coal seam gas. This plant will be finished during the
summer of 1999. (See "Regulation" for a discussion of regulatory
proceedings involving the plant.)
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. Virtually 100 percent of the new homes
constructed in its service area have natural gas lines and 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 the
1997-98 winter heating season, the Company's net income was affected
by the impact of charging higher rates for natural gas. When natural
gas rates increased as a result of higher gas costs and a special
surcharge, customers adjusted their usage patterns. On a
temperature-adjusted basis, per-customer usage declined for the first
time in several years, but stabilized later in 1998, as natural gas
rates were adjusted.
Questar Gas reduced its rates effective January 1, 1999, to
reflect changes in natural gas costs and to eliminate the special
surcharge. The typical residential customer in Utah would have an
annual bill of $552.79, using rates in effect as of January 1, 1999,
compared to an annual bill of $594.53 using rates in effect as of the
same date in the prior year.
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 have not
bypassed 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 or direct taps on Questar Pipeline'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.
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 on the Company's system 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 increasing the number of customers served per employee from 475 in
1997 to 537 in 1998. (The numbers include a proportionate share of
employees in the Company's parent.) Questar Gas intends to maintain
its competitive position within its own service area and to take
advantage of opportunities in new markets.
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.
The Company offers its Wyoming customers a "supplier choice"
program, which was approved by the PSCW in 1998. Under this program,
general service customers have the option of selecting a different
supplier of gas while purchasing transportation and associated
services from Questar Gas. During the program's initial open season,
which was conducted in the spring of 1998, no other supplier offered
to provide service under the program. Questar Gas expects to continue
offering the program to its Wyoming customers and hopes that it will
provide valuable information about customer preferences.
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
1999. 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 decrease its rates effective January 1,
1999. The Company's new rates for Utah customers reflect a gas-cost
component of $2.78 per Dth, compared to $3.20 per Dth for the prior
period; new rates for Wyoming customers reflect a gas-cost component
of $2.63 per Dth compared to $2.88 per Dth. (The gas-cost component
includes transportation and storage costs.)
The PSCU, by an order dated December 31, 1998, settled claims
raised by the Division of Public Utilities ("Division"), a Utah state
agency, concerning the rates paid by Questar Gas for gathering
services rendered by Questar Gas Management Company ("QGM"), an
affiliate. The Division claimed that a reduction in gathering rates
that was effective September 1, 1997, should be extended retroactively
to March of 1996, when Questar Pipeline transferred the gathering
assets to QGM. After presiding at public hearings and receiving legal
briefs, the PSCU ruled against the Division's claims, which involved
approximately $7.8 million in potential refunds.
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.
Questar Gas has filed an application with the PSCU to recover the
costs associated with the new carbon dioxide processing plant that is
being built to deal with the low Btu problem in coal seam gas. The
Company proposed that the costs be handled as gas costs eligible for
pass-through treatment. Some parties in the proceedings are reviewing
the Company's conclusion that the plant is the best and cheapest
alternative to address the Btu problem and the Company's proposal for
pass-through treatment of costs. Hearings in conjunction with the
application will be held during April of 1999.
The PSCU recently determined that it had jurisdiction to
determine whether Questar Gas should be required to sell gas to a
municipality in southern Utah for resale to residents of the
community. The PSCU, however, has not determined whether "public
interest" supports the municipality's request for such service.
Hearings on the public interest issue will begin in late August 1999.
Questar Gas does not believe that it can be required to offer such
service. At the Company's request, the PSCU preserved the Company's
right to request a rehearing on the jurisdictional issue upon the
conclusion of the public-interest proceedings.
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 1981 settlement agreement involving
cost-of-service gas and defining certain contractual obligations
between the Company and Wexpro continued to be monitored by the
Division and its agents.
The PSCU has requested comments on a proposed rule submitted for
its consideration that imposes conditions on the ability of Questar
Gas and its affiliates to enter "unregulated markets" in competition
with other vendors. The Company intends to be an active participant
in any rule-making proceedings convened by the PSCU.
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. The following diagram shows the corporate
structure of the Company and its primary affiliates:
Questar Corporation
Questar InfoComm, Inc.
Questar Market Resources, Inc.
Wexpro Company
Questar Exploration and Production Company
Celsius Energy Company
Questar Energy Trading Company
Questar Gas Management Company
Questar Regulated Services Company
Questar Pipeline Company
Questar Gas Company
Questar Energy Services, Inc.
The Company's relationships with its primary affiliates are
described below.
Questar Regulated Services Company. The Company's direct parent,
Questar Regulated Services Company ("QRS"), is a subholding company
that was created to link Questar Gas and Questar Pipeline. The same
group of officers manages all entities within the group. QRS provides
various services, administrative, accounting, engineering, regulatory,
legal, for all entities within it.
The creation of the Regulated Services group allowed its members
to lower administrative costs and allowed the group to offer an early
retirement program effective July 31, 1998. The program, which was
accepted by 178 employees, resulted in reduced labor and overhead
costs for 1998.
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 Gas has
reserved about 800,000 Dth per day or 74 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 1998, Questar Pipeline transported 107.5 MMDth of gas for
Questar Gas, compared to 110.3 MMDth in 1997. 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 1998, paid
approximately $50.7 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, but the parties have recently decided to extend the
agreement for three years.
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 $14 million in
demand charges during 1998 in connection with storage services.
Questar Energy Services, Inc. Effective January 1, 1999, Questar
Energy Services, Inc. ("QES") was transferred from Questar's Market
Resources unit to the Regulated Services unit. When it was part of
the Market Resources unit, QES assumed the responsibility for an
appliance financing program that had originally been initiated by
Questar Gas. The Company also allows QES to advertise its products
with bills sent to customers as part of its general advertising
campaign and to invoice its customers on utility bills.
QES is currently revising its business plan, but expects to
continue a close relationship with Questar Gas.
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 1998, QGM gathered 29.9 MMDth of natural gas for Questar Gas,
compared to 28.5 MMDth in 1997. During 1998, the Company paid $5
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.
Wexpro Company. Wexpro, another company within Questar's Market
Resources segment, operates certain properties owned by Questar Gas.
Under the terms of a 1981 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 21.70 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 reflected in the Company's rates.
Other Affiliates. Other significant affiliates of Questar Gas
include Questar InfoComm and Questar Energy Trading Company ("Questar
Energy Trading"). 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 maintenance of existing systems and the
necessary testing and certification of such systems for Year 2000.
Questar Energy Trading conducts energy marketing activities. It
combines gas volumes purchased from third parties and equity producers
(production from affiliates) to build a flexible and reliable
portfolio. The Company purchases some natural gas volumes from
Questar Energy Trading, including gas volumes originally produced by
Celsius Energy Company ("Celsius").
In addition to QGM and Wexpro, the Market Resources segment of
Questar includes Questar Exploration and Production Company (formerly
Universal Resources Corporation) and Celsius. Both of these companies
are owned by Questar Market Resources, Inc., but do not have
significant business relationships with Questar Gas.
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
benefit 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, 1998, the Company had 946 employees, compared
to 1,037 at year-end 1997. The decrease reflects the early retirement
program offered to employees with Regulated Services during 1998.
Regulated Services, the Company's parent, has 434 employees who
perform specified services, e.g., administrative, legal, accounting,
budget, regulatory affairs, for Questar Gas, Questar Pipeline and QES.
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.
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 outcomes of these proceedings, the Company's management
believes that the outcomes will not have a material adverse effect on
the Company's financial position.
As a result of acquiring Questar Pipeline's gas purchase
contracts, the Company is responsible for any judgment rendered
against Questar Pipeline in a lawsuit that was tried before a Wyoming
federal district court jury in late 1994. The jury awarded several
million dollars to the producer from which Questar Pipeline purchased
gas, but the trial judge, in June of 1998, entered a judgment that
overturned most provisions of the jury verdict. The producer filed an
appeal from the trial court's decision with the United States Court of
Appeals for the Tenth Circuit, where briefs have been filed.
The plaintiff producer filed another case against the Company and
its affiliates in 1997. It includes claims of fraud and antitrust
violation in addition to the same claims heard in the first case for a
subsequent period of time. The case, which was also filed in
Wyoming's federal district court, has been stayed pending the outcome
of the appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its
stockholders during the last quarter of 1998.
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
Natural Gas Distribution - Questar Gas conducts natural gas distribution
operations. Following is a summary of financial results and operating
information:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(Dollars In Thousands)
<S> <C> <C> <C>
OPERATING INCOME
Revenues
Residential and commercial sales $425,452 $399,174 $328,785
Industrial sales 29,555 24,459 18,357
Industrial transportation 6,480 6,491 5,898
Other 15,336 18,099 18,888
Total revenues 476,823 448,223 371,928
Natural gas purchases 281,004 248,933 182,400
Revenues less natural gas purchases 195,819 199,290 189,528
Operating expenses
Operating and maintenance 96,923 101,719 97,110
Depreciation and amortization 33,261 31,160 28,309
Other taxes 8,185 8,174 8,071
Total expenses 138,369 141,053 133,490
Operating income $57,450 $58,237 $56,038
OPERATING STATISTICS
Natural gas volumes (in Mdth)
Residential and commercial sales 83,231 85,747 80,844
Industrial deliveries
Sales 9,681 9,523 8,584
Transportation 55,461 51,313 49,499
Total industrial 65,142 60,836 58,083
Total deliveries 148,373 146,583 138,927
Natural gas revenue (per dth)
Residential and commercial $5.11 $4.66 $4.07
Industrial sales 3.05 2.57 2.14
Transportation for industrial customers 0.12 0.13 0.12
System natural gas cost (per dth) $2.57 $2.62 $2.44
Heating degree days (normal 5,801) 5,462 5,465 5,307
Warmer than normal 6% 6% 9%
Number of customers at December 31,
Residential and commercial 662,084 640,496 617,241
Industrial 1,308 1,200 990
663,392 641,696 618,231
</TABLE>
<PAGE>
Revenues, less natural gas purchases, decreased $3,471,000 in 1998 when compared
with 1997 as a result of lower usage per customer in 1998 and switching between
rate classifications. These downward pressures were partially offset by
increased sales due to the addition of new customers. Revenues, net of gas
costs, increased $9,762,000 in 1997 when compared with 1996 primarily from
higher heating demand caused by colder temperatures and customer additions.
Usage of gas per retail customer fell during the first half of 1998 after
increasing in the first half of 1997. This reduced usage appears to have been a
reaction to rising gas costs included in rates during the latter part of 1997
and first part of 1998. Usage per customer had stabilized by the end of 1998,
coinciding with lower gas costs. A rate surcharge, associated with constructing
a distribution pipeline into southern Utah and in effect for the past 10 years,
began phasing out in September of 1997. Also, some general-service customers,
who met higher load-factor standards in 1998, shifted to firm commercial rates
that have a lower margin.
Questar Gas added 21,696 customers in 1998 and 23,465 customers in 1997,
representing increases of 3.4% and 3.8%, respectively. Customer additions in
1999 are expected to reach 20,000 to 21,000.
Temperatures were warmer than normal for the three years presented. The revenue
impact of this warmer-than-normal temperature trend was mitigated 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 1998 and 1997 compared with about
50% in 1996.
Gas deliveries to industrial customers increased 7% in 1998 and 5% in 1997
compared with the prior year. The increases were due to the effects of a strong
regional economy, which produces expansion of operations and addition of
industrial customers. Margins from gas delivered to industrial customers, either
for gas sold or transported, are substantially lower than from gas delivered to
residential and commercial customers.
Questar Gas' natural gas purchases increased in 1998 and 1997, resulting in a
rising natural gas-cost component allowed in rates. The gas-cost component in
Utah rates was also increased in 1998 and 1997 in an effort to recover sharply
increased natural gas-purchase costs incurred during the 1996-1997 heating
season. By the end of 1998, those costs had been substantially recovered. The
balance in the purchased gas cost account had decreased from $37.3 million at
December 31, 1997 to $2.1 million at December 31, 1998. In response to requests
by Questar Gas, regulatory agencies approved on an interim basis decreases in
gas costs charged to customers. The winter residential and small commercial
customer gas-cost component for Utah decreased from $3.20 per dth to $2.78
beginning in January 1999 and from $2.88 to $2.63 per dth in Wyoming.
Questar Gas' operating and maintenance expenses decreased by 5% in 1998 compared
with 1997 as a result of lower labor costs and capitalizing costs associated
with installing new computer systems. Labor costs were $2 million lower in 1998
due to a reduction in the number of employees following an early retirement
program offered to employees of Regulated Services. Operating and maintenance
expenses increased 5% in 1997 due primarily to the costs of serving an expanding
customer base, higher labor costs and modernization of key computer systems. In
1997, Questar Gas and Questar Pipeline combined functions common to
gas-distribution and gas-transmission operations in order to eliminate
duplications.
Depreciation expense was higher in 1998 compared with 1997 primarily as a result
of increased investment in property, plant and equipment. Interest expense was
higher in 1998 due primarily to an issuance of $50 million of medium-term notes
with an average interest rate of 6.88 % in the third and fourth quarters of
1997.
The effective income tax rate was 33.5% in 1998, 31.7% in 1997 and 1996. 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 $2,217,000 in 1998,
$2,686,000 in 1997 and $3,246,000 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash provided from operating activities increased in 1998 compared to 1997
due primarily to the collection of purchased-gas costs and accounts receivable
from natural gas distribution customers and the timing of payments of accounts
payable associated with construction.
Investing Activities
Following is a summary of capital expenditures for 1998 and 1997, and a forecast
of 1999 expenditures.
<TABLE>
<CAPTION>
1999
Estimated 1998 1997
(In Thousands)
<S> <C> <C> <C>
New-customer service $35,100 $35,106 $30,794
Distribution system 11,200 15,338 10,507
Buildings 600 396 5,388
Computer software and hardware 3,700 14,859 9,083
General 9,400 10,629 9,603
$60,000 $76,328 $65,375
</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 720 miles of main, feeder and service lines.
Financing Activities
Questar Gas used net cash provided from operating activities to fund 1998
capital expenditures and dividend payments. Questar Gas borrowed $50 million of
medium-term notes and increased short-term debt by $23.8 million in 1997.
Forecasted 1999 capital expenditures of $60 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 $96.7 million at December 31, 1998
with an interest rate of 5.71% and $100 million at December 31, 1997 with an
interest rate of 6.02%.
Questar Gas' capital structure at December 31, 1998 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.
Year 2000
Introduction
Questar Gas is addressing the issue of computer programs and
embedded computer chips being unable to distinguish between the year
1900 and the year 2000 ("Y2K").
In a coordinated effort with its parent Questar Corporation's Y2K
project team, the basic approach is to provide company-wide management
and coordination combined with distributed compliance responsibility
at the various business units. The Y2K team is responsible for
fostering awareness; establishing company-wide strategy; coordinating
Questar Gas action items and information; and providing periodic
internal status reports. The effort is designed to be consistent with
the Questar Corporation's Y2K project and the prudent efforts of
publicly traded companies of similar size, business, and complexity.
Questar InfoComm, Inc. (an affiliate which provides information
technology services) is responsible for Y2K compatibility of all
communications systems; networks (LANs and WANs); corporate-wide
applications and operating systems; mainframe resident commercial
off-the-shelf products; and for developing, implementing and
coordinating testing procedures.
General
The Y2K team operates under a written plan (the "Plan")
addressing infrastructure, applications software (infrastructure and
applications software are sometimes collectively referred to as "IT
systems"), outside suppliers and customers, and process control and
instrumentation containing embedded chips (non-IT systems). The
Company's in-house programmers and systems analysts (including those
of Questar InfoComm, Inc.) are primarily responsible for the
conversion and testing of certain non-compliant application software
code. In addition, the services of outside consultants and programmers
were engaged to assist with project management and completion of
coding for certain software programs. The general phases common to all
business units are:
(1) Inventory
(2) Prioritization
(3) Project start-up
(4) Assessment
(5) Remediation
(6) Testing; and
(7) Project closeout.
Implementation of the Plan is generally proceeding on schedule.
Status
Inventory and Assessment. The inventory and assignment of priority for
each business unit were essentially completed in September 1998.
Throughout the ongoing Y2K project, these inventory listings continue
to be monitored. Material items were defined as those the Company
believed to involve a risk to the safety of individuals; or which may
cause damage to property or the environment; or which may affect the
Company's ability to provide gas production, transportation, or
delivery.
Projects Planning. Based on the inventory and determined priorities,
more than 45 individual items have been combined into 4 projects.
Project managers have been assigned, standard project documentation
has been established, training sessions are being held with the
various project managers, and standard management reporting forms have
been devised and are being utilized. All of the foregoing activities
comprise what has been defined as "project start-up."
Applications Software. The applications software section of the Plan
addresses both the conversion of applications software that is not Y2K
compliant and the replacement of such software. The testing phase of
this section is scheduled for completion by the third quarter of 1999.
The testing phase is conducted as the software is remediated or
replaced. Currently there are 4 projects identified in this section:
0 in start-up, 2 in assessment, 0 in remediation, 1 in testing, and 1
completed and deemed to be Y2K ready. Contingency planning for this
section began in the third quarter of 1998 and will be completed by
mid-1999.
Non-IT Equipment. Inventory and assessment phases are in progress for
non-IT systems. This section of the Plan is considered to be one
project and addresses hardware, software and associated embedded
computer chips used in the operation of all facilities operated by the
Company. This section presents unique problems in that it is often
difficult to determine whether embedded chips have a date function
that present a Y2K problem. It is also difficult to take certain
critical systems, such as compressors and pipeline valves, off-line
for testing. Because of this, the Company has engaged the services of
a consultant, Stone & Webster, to help with this effort. The Company
believes the replacement, repair and testing of non-IT systems
equipment is on schedule to be completed by third quarter 1999. As of
December 31, 1998, the embedded chip project is active and in the
assessment phase. Contingency planning for this section began in the
third quarter of 1998 and will be completed by year end 1999.
Testing. The testing phases of the Plan are underway. The Company has
developed a testing procedure and guidelines to help system users and
project managers develop their specific test plans and to ensure
consistency in testing. The Company has assembled a test facility
which duplicates, in essential details, the production environment.
The test facility is in operation. Critical systems already tested
and determined to be Y2K ready include the SCADA gas control system
and the company's internal telephone system (including switches) which
connects to the local access provider. Other critical systems
currently in the test facility include customer information systems
(CIS) and gas measurement. Responsible project managers and system
users continue to develop their test plans and schedule testing in the
facility.
Critical Third Parties. The outside vendors and customers section of
the Plan includes the process of identifying and prioritizing critical
suppliers and customers and communicating with them about their plans
and progress in addressing their Y2K problems. The various business
units have formed Project teams which have begun the detailed
evaluation of the most critical third parties and to elicit required
information. The process of evaluating these external agents
commenced in the third quarter of 1998 and first contacts with vendors
have been made. This process is scheduled for completion by mid-1999,
with follow-up reviews scheduled through the remainder of 1999. This
procedure will include the development of contingency plans, scheduled
for the second quarter of 1999, with completion by late 1999. The
Company estimates that this section was on schedule at December 31,
1998.
Costs
The total cost associated with efforts to become Y2K compliant is
not expected to be material to the Company's financial position. The
current expense estimate of the Y2K project is $2.3 million. The
expense estimate is expected to change as the project progresses.
Funds for the project are included in existing operating budgets.
Risks
Failure to correct a material Y2K problem could result in an
interruption, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition.
Due to the general uncertainty inherent in the Y2K problem - resulting
in part from the uncertainty of the Y2K readiness of outside suppliers
and customers and the embedded chip problems - the Company is unable
to determine at this time whether the consequences of Y2K failures
will have a material impact on the Company's results of operations,
liquidity or financial condition. The Y2K project has reduced and is
expected to continue to significantly reduce the Company's level of
uncertainty about the Y2K problem and, in particular, about the Y2K
compliance and readiness of its material outside vendors and
customers. The Company believes that the possibility of significant
interruptions of normal operations is not significant.
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's expected
performance at this time. Actual results may vary from management's
stated expectations and projections.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are included in Part IV, Item
14, herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
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.*1 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.*2Stipulations 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.)
10.2.*3Annual Management Incentive Plan adopted by Questar Gas
Company, Questar Pipeline Company, and Questar Regulated
Services Company as amended and restated effective May 19,
1998. (Exhibit No. 10.1. to Form 10-Q Report for Quarter
Ended June 30, 1998.)
10.3.*2,3Mountain 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.)
10.4.*2,3Questar Gas Company Deferred Compensation Plan for
Directors as amended and restated effective May 19, 1998.
(Exhibit No. 10.2. to Form 10-Q Report for Quarter Ended June
30, 1998.)
10.5.*2Gas 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.)
10.6.*2Amendment to Gas Gathering Agreement between Mountain Fuel
Supply Company and Questar Gas Management Company effective
September 1, 1997.
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.
1First Security Bank, N.A. serves as the successor trustee.
2This document has not been formally amended to refer to the
Company's current name.
3Exhibit so marked is a management contract or compensation plan
or arrangement.
(b) Questar Gas Company did not file a Current Report on Form 8-K
during the last quarter of 1998.
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, 1998
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, 1998, 1997 and
1996
Balance sheets -- December 31, 1998 and 1997
Statements of common shareholder's equity -- Years ended December
31, 1998, 1997 and 1995
Statements of cash flows -- Years ended December 31, 1998, 1997
and 1996
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Salt Lake City, Utah
February 8, 1999
QUESTAR GAS COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
REVENUES
From unaffiliated customers 475,754 445,684 368,905
From affiliated companies 1,069 2,539 3,023
476,823 448,223 371,928
OPERATING EXPENSES
Natural gas purchases
From affiliated companies 142,699 137,062 128,919
From unaffiliated parties 138,305 111,871 53,481
Total natural gas purchases 281,004 248,933 182,400
Operating and maintenance 96,923 101,719 97,110
Depreciation and amortization 33,261 31,160 28,309
Other taxes 8,185 8,174 8,071
TOTAL OPERATING EXPENSES 419,373 389,986 315,890
OPERATING INCOME 57,450 58,237 56,038
INTEREST AND OTHER INCOME 3,566 3,388 3,033
DEBT EXPENSE (19,792) (19,119) (16,637)
INCOME BEFORE INCOME TAXES 41,224 42,506 42,434
INCOME TAXES 13,816 13,492 13,446
NET INCOME 27,408 29,014 28,988
</TABLE>
See notes to financial statements.
<PAGE>
QUESTAR GAS COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
1998 1997
(In Thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and short-term investments 3,326 6,747
Accounts receivable 43,280 46,054
Unbilled gas accounts receivable 36,444 37,302
Accounts receivable from affiliates 788 3,131
Inventories, at lower of average cost
or market
Gas stored underground 18,248 15,829
Materials and supplies 4,048 4,518
Total inventories 22,296 20,347
Purchased-gas adjustments 2,067 37,251
Prepaid expenses and deposits 2,838 4,356
TOTAL CURRENT ASSETS 111,039 155,188
PROPERTY, PLANT AND EQUIPMENT
Distribution 685,710 641,226
Production 97,870 97,870
General 115,117 98,974
Construction in progress 49,583 44,866
948,280 882,936
Less allowances for depreciation
and amortization 382,657 354,761
NET PROPERTY, PLANT AND EQUIPMENT 565,623 528,175
OTHER ASSETS
Income taxes recoverable from customers 5,050 6,371
Unamortized costs of reacquired debt 8,609 9,102
Other 10,194 6,015
TOTAL OTHER ASSETS 23,853 21,488
700,515 704,851
</TABLE>
<PAGE>
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
December 31,
1998 1997
(In Thousands)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable to Questar 96,700 100,000
Accounts payable and accrued expenses
Accounts and other payables 41,756 36,924
Accounts payable to affiliates 17,240 14,599
Federal income taxes 2,113 3,112
Other taxes 5,612 5,304
Interest 4,567 4,548
Total accounts payable and
accrued expenses 71,288 64,487
TOTAL CURRENT LIABILITIES 167,988 164,487
LONG-TERM DEBT 225,000 225,000
OTHER LIABILITIES
Unbilled gas revenues 5,180
Other 330 809
TOTAL OTHER LIABILITIES 330 5,989
DEFERRED INVESTMENT TAX CREDITS 6,011 6,392
DEFERRED INCOME TAXES 74,012 80,717
COMMITMENTS AND CONTINGENCIES - Note 5
COMMON SHAREHOLDER'S EQUITY
Common stock - par value $2.50 per
share; authorized
50,000,000 shares; issued and
outstanding 9,189,626 shares 22,974 22,974
Additional paid-in capital 41,875 41,875
Retained earnings 162,325 157,417
TOTAL COMMON SHAREHOLDER'S EQUITY 227,174 222,266
700,515 704,851
</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, 1996 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
1998 net income 27,408
Payment of dividends (22,500)
Balances at December 31, 1998 22,974 41,875 162,325
</TABLE>
See notes to financial statements.
<PAGE>
QUESTAR GAS COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In Thousand)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $27,408 $29,014 $28,988
Depreciation and amortization 35,772 33,739 31,214
Deferred income taxes (6,705) 6,180 13,146
Deferred investment tax credits (381) (382) (383)
56,094 68,551 72,965
Changes in operating assets and
liabilities
Accounts receivable 5,975 (24,425) 1,609
Inventories (1,949) (5,052) 5,620
Prepaid expenses and deposits 1,518 155 (668)
Accounts payable and accrued expenses 7,800 (5,183) 4,758
Federal income taxes (999) 4,221 2,862
Purchased-gas adjustments 35,184 (13,041) (33,392)
Other (8,024) (3,722) (3,258)
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 95,599 21,504 50,496
INVESTING ACTIVITIES
Capital expenditures (76,328) (65,375) (51,657)
Proceeds from disposition of property,
plant and equipment 3,108 2,761 2,990
NET CASH USED IN INVESTING
ACTIVITIES (73,220) (62,614) (48,667)
FINANCING ACTIVITIES
Redemption of preferred stock (4,876) (129)
Issuance of long-term debt 50,000
Change in notes payable to Questar (3,300) 23,800 20,100
Payment of dividends (22,500) (22,942) (21,391)
NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES (25,800) 45,982 (1,420)
Change in cash and short-term investments (3,421) 4,872 409
Beginning cash and short-term investments 6,747 1,875 1,466
ENDING CASH AND SHORT-TERM
INVESTMENTS 3,326 6,747 1,875
</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, engineering, legal and regulatory functions
for its three subsidiaries, Questar Gas, Questar Pipeline Company (Questar
Pipeline) and Questar Energy Service. Significant accounting policies are
presented below.
Business and Regulation: Questar Gas distributes natural gas to 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.
Purchased-Gas Adjustments: Questar Gas accounts for purchased-gas costs in
accordance with procedures authorized by the PSCU and PSCW under which
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 4.3% in 1998. The costs of gas wells were
amortized using the units-of-production method at $.17 per Mcf of natural gas
production in 1998.
Allowance for Funds Used During Construction: The Company capitalized the cost
of capital during the construction period of plant and equipment using a method
required by regulatory authorities amounting to $797,000 in 1998, $261,000 in
1997 and $277,000 in 1996.
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 1997 and 1996
financial statements to conform with the 1998 presentation.
Note 2 - Debt
Questar makes loans to Questar Gas under a short-term borrowing arrangement.
Short-term notes payable to Questar totaled $96.7 million at December 31, 1998
with an interest rate of 5.71% and $100 million at December 31, 1997 with an
interest rate of 6.02%.
Questar Gas' long-term debt consists of medium-term notes with interest rates
ranging from 6.85% to 8.43%, due 2007 to 2024. There are no maturities of
long-term debt for the five years following December 31, 1998 and no long-term
debt provisions restricting the payment of dividends.
Cash paid for interest was $19,963,000 in 1998, $17,933,000 in 1997 and
$16,346,000 in 1996.
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, 1998 December 31, 1997
Book Estimated Book Estimated
Value Fair Value Value Fair Value
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term investments 3,326 3,326 6,747 6,747
Financial liabilities
Short-term loans 96,700 96,700 100,000 100,000
Long-term debt 225,000 257,766 225,000 255,615
</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,
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Federal
Current 16,773 5,334 (678)
Deferred (5,057) 6,636 12,906
State
Current 2,876 1,107 254
Deferred (395) 797 1,347
Deferred investment tax credits (381) (382) (383)
13,816 13,492 13,446
</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,
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Income before income taxes 41,224 42,506 42,434
Federal income taxes at statutory rate 14,428 14,877 14,852
State income taxes, net of federal
income tax benefit 1,613 1,155 1,512
Tight-sands gas production credits (2,217) (2,686) (3,246)
Investment-tax credits (381) (382) (383)
Deferred taxes related to regulated
assets for which deferred taxes were
not provided in prior years 922 921 921
Other (549) (393) (210)
Income tax expense 13,816 13,492 13,446
Effective income tax rate 33.5% 31.7% 31.7%
</TABLE>
Significant components of the Company's deferred tax liabilities and assets were
as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In Thousands)
<S> <C> <C>
Deferred tax liabilities
Property, plant and equipment 77,519 74,694
Purchased-gas adjustments 785 14,155
Other 6,706 7,135
Total deferred tax liabilities 85,010 95,984
Deferred tax assets
Alternative minimum tax and production
credit carryovers 6,056 7,866
Unbilled revenues 1,968
Other 4,942 5,433
Total deferred tax assets 10,998 15,267
Net deferred tax liabilities 74,012 80,717
</TABLE>
Cash paid for income taxes was $18,985,000 in 1998 and $1,516,000 in 1997.
Questar Gas applied an overpayment of 1995 income taxes to more than offset
payment of 1996 taxes.
Note 5 - Rate Matters, Litigation and Commitments
Questar Gas last filed general rate cases in 1995. Questar Gas was granted a
return on rate base between 10.22% and 10.34% in Utah and 10.54% in Wyoming in
1995 rate cases. A rate of return on equity was not specified. Currently, the
Company does not plan to file a general rate case in 1999.
Questar Gas has filed an application with PSCU to recover the costs associated
with the a new carbon dioxide processing plant that is being built to deal with
the low Btu problem in coal seam gas. The Company is proposing that costs be
handled as gas costs eligible for pass-through treatment. Some parties in the
case are reviewing the Company's conclusion that the plant is the best and
cheapest alternative to address the Btu problem and the Company's proposal for
pass-through treatment of costs. Hearings in conjunction with the application
will be held during April of 1999.
In an order issued December 31, 1998, the PSCU rejected the request of the Utah
Division of Public Utilities to deny Questar Gas recovery of approximately $7.6
million in costs paid by Questar Gas to Questar Gas Management for field
gathering of Questar Gas' system supplies.
As a result of acquiring Questar Pipeline's gas purchase contracts in 1994,
Questar Gas is responsible for any judgment rendered against Questar Pipeline in
a lawsuit that was tried before a Wyoming federal district court jury in 1994.
The jury awarded several million dollars to the producer from whom Questar
Pipeline purchased gas. However, in a ruling issued June 2, 1998, the trial
judge set aside all aspects of the jury's verdict, except for $500,000 related
to certain take-or-pay contract issues. The producer is pursuing an appeal at
the U. S. Court of Appeals for the 10th Circuit.
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 files for adjustment of purchased-gas costs with the PSCU and the
PSCW on a semiannual basis. Because of lower forecasted gas prices and the fact
that prior gas cost increases have been largely recovered, Questar Gas received
approval to reduce annual gas costs in rates by $1.1 million in Utah and
$356,000 in Wyoming effective July 1, 1998. Also, in January 1999, Questar Gas
received approval, pending a final order, to further reduce annual gas costs by
$39.3 million in Utah and $801,000 in Wyoming.
In March 1998, the PSCW approved Questar Gas' gas-merchant unbundling proposal
that was offered in 1997. Under this plan, a transportation-service option is
extended to residential and commercial customers as well as industrial customers
each year. 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
service as well. In 1998, no competitors qualified under the program. Questar
Gas 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. As of December 31, 1998, Questar Gas served 21,858 customers in Wyoming,
representing 3% of its total customers.
Questar Gas was involved in an environmental clean-up action on a site that
included numerous other parties. Recently, the parties have agreed to dismiss
Questar Gas from the case.
There are various legal proceedings against the Company. While it is not
currently possible to predict or determine the outcomes of these proceedings, it
is the opinion of management that the outcomes 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 $100,058,000 in 1998, $122,106,000 in 1997 and
$67,249,000 in 1996. Historically, gas-purchase contracts extended over many
years. Current practice, however, sets contract terms for anywhere from one day
up to one year. As of February 1, 1998, substantially all long-term contracts
had expired.
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 72 pay-period interval 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' 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, 1998, Questar's fair value of plan assets exceeded the
accumulated benefit obligation.
Eligible employees in Regulated Services were offered an early-retirement
program that was effective July 31, 1998. Enhanced benefits were paid to 178
employees taking advantage of the offer. Costs associated with the
early-retirement program are being amortized over a five-year period in
accordance with anticipated regulatory treatment.
Pension expense was $1,865,000 in 1998, $1,847,000 in 1997 and $2,820,000 in
1996.
Postretirement Benefits Other Than Pensions: Generally postretirement
health-care benefits and life insurance are provided only to employees hired
before January 1, 1997. Questar Gas pays a portion of postretirement
health-care costs benefits as determined by an employee's years of service and
limited to 170% of the 1992 contribution. 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 $1,844,000 in 1998, $1,993,000 in 1997 and $2,424,000 in 1996.
Both the PSCU and the PSCW allow 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 that were accumulated through December 31, 1994 in
future rates. At December 31, 1998, the Company had a $623,000 regulatory asset
that it is amortizing over the next six 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%,
increasing to 80% in 1999, 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 $1,616,000 in 1998,
$1,552,000 in 1997 and $1,893,000 in 1996.
Note 7 - Related Party Transactions
Regulated Services began providing administrative, technical and accounting
support in 1997 and charged Questar Gas $24,935,000 in 1998 and $26,061,000 in
1997. The majority of these costs are allocated and included in operating and
maintenance expenses. The allocation methods are based on several methods
dictated by the nature of the charges. Management believes that the allocation
methods are reasonable.
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 $50.7 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. Questar Gas purchased
transportation and storage services from Questar Pipeline amounting to
$67,528,000 in 1998, $64,924,000 in 1997 and $61,078,000 in 1996, which included
demand charges. The costs of these services were included in natural gas
purchases.
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 and reduces amounts billed to gas distribution customers, was
$1,050,000 in 1998, $2,347,000 in 1997 and $2,768,000 in 1996. 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 $58,482,000 in 1998,
$49,887,000 in 1997 and $53,119,000 in 1996.
Also included in natural gas purchases are amounts paid to Questar Gas
Management, an affiliate, for gathering of Company-owned gas and purchased gas.
These costs amounted to $9,047,000 in 1998, $12,472,000 in 1997 and $14,515,000
in 1996. Questar Gas purchased various other field-related services from
Questar Gas Management amounting to $418,000 in 1998 and $1,167,000 in 1997.
Questar Gas purchased noncost-of-service gas from Wexpro amounting to $99,000 in
1998 and $133,000 in 1997. Also, Questar Gas purchased gas from Questar Energy
Trading amounting to $7,125,000 in 1998 and $9,078,000 in 1997.
Questar Gas has a 13-year lease with Interstate Land, an affiliate, for some
space in an office building located in Salt Lake City, Utah. The annual lease
payment for the next five years 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
$16,480,000 in 1998, $19,875,000 in 1997 and $16,343,000 in 1996.
Questar charges Questar Gas for certain administrative functions amounting to
$4,714,000 in 1998, $5,518,000 in 1997 and $5,746,000 in 1996. 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 $2,403,000 in 1998, $3,575,000
in 1997 and $1,906,000 in 1996. The Company received interest income from
affiliated companies of $126,000 in 1997.
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, 1998. 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, 1996 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
Revisions of estimates 15,061 (12)
Extensions and discoveries 24,987 45
Production (37,138) (59)
Balance at December 31, 1998 339,780 583
</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 Financial
S. E. Parks 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.*1 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.*2 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.)
10.2.*3 Annual Management Incentive Plan adopted by Questar Gas
Company, Questar Pipeline Company, and Questar Regulated
Services Company as amended and restated effective May 19,
1998. (Exhibit No. 10.1. to Form 10-Q Report for Quarter
Ended June 30, 1998.)
10.3.*2,3 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.)
10.4.*2,3 Questar Gas Company Deferred Compensation Plan for
Directors as amended and restated effective May 19, 1998.
(Exhibit No. 10.2. to Form 10-Q Report for Quarter Ended
June 30, 1998.)
10.5.*2 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.)
10.6.*2 Amendment to Gas Gathering Agreement between Mountain Fuel
Supply Company and Questar Gas Management Company
effective September 1, 1997.
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.
1First Security Bank, N.A. serves as the successor trustee.
2This document has not been formally amended to refer to the
Company's current name.
3Exhibit so marked is a management contract or compensation plan
or arrangement.
(b) Questar Gas Company did not file a Current Report on Form 8-K
during the last quarter of 1998.
POWER OF ATTORNEY
We, the undersigned directors of Questar Gas 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 1998
and any and all amendments to be filed with the Securities and
Exchange Commission by Questar Gas 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 1998 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 2-9-99
R. D. Cash
/s/ D. N. Rose President & Chief 2-9-99
D. N. Rose Executive Officer
Director
/s/ W. Whitley Hawkins Director 2-9-99
W. Whitley Hawkins
/s/ Robert E. Kadlec Director 2-9-99
Robert E. Kadlec
/s/ Dixie L. Leavitt Director 2-9-99
Dixie L. Leavitt
/s/ Gary G. Michael Director 2-9-99
Gary G. Michael
/s/ Harris H. Simmons Director 2-9-99
Harris H. Simmons
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summarized financial information extracted from the
Questar Gas Company Statements of Income and Balance Sheet for the period ended
December 31, 1998, and is qualified in its entirety by reference to such
audited financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3326
<SECURITIES> 0
<RECEIVABLES> 80512
<ALLOWANCES> 0
<INVENTORY> 22296
<CURRENT-ASSETS> 111039
<PP&E> 948280
<DEPRECIATION> 382657
<TOTAL-ASSETS> 700515
<CURRENT-LIABILITIES> 167988
<BONDS> 225000
0
0
<COMMON> 22974
<OTHER-SE> 204200
<TOTAL-LIABILITY-AND-EQUITY> 700515
<SALES> 0
<TOTAL-REVENUES> 476823
<CGS> 0
<TOTAL-COSTS> 377927
<OTHER-EXPENSES> 41446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19792
<INCOME-PRETAX> 41224
<INCOME-TAX> 13816
<INCOME-CONTINUING> 27408
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27408
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
