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. 1-8796
QUESTAR CORPORATION
(Exact name of registrant as specified in its charter)
State of Utah 87-0407509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 East 100 South, P.O. Box 45433, Salt Lake City, Utah 84145-0433
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (801) 324-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class which registered
Common Stock, Without Par Value, withNew York Stock Exchange
Common Stock Purchase Rights
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes x No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein and
will not be contained, to the best of registrants' knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
[x]
The aggregate market value of the registrant's common stock,
without par value, held by nonaffiliates on March 1, 1999, was
$1,450,204,572 (based on the closing price of such stock).
On March 1, 1999, 82,660,389 shares of the registrant's common
stock, without par value, were outstanding.
Documents Incorporated by Reference. Portions of the definitive Proxy
Statement for the 1999 Annual Meeting of Stockholders are incorporated
by reference into Part III. The sections of the Proxy Statement
labelled "Committee Report on Executive Compensation" and "Cumulative
Total Shareholder Return" are expressly not incorporated into this
document.
TABLE OF CONTENTS
Heading Page
PART I
Items 1.
and 2. BUSINESS AND PROPERTIES
General
Market Resources, Exploration and Production
Market Resources, Wholesale Marketing
Market Resources, Gathering and Processing
Market Resources, General
Regulated Services, Introduction
Regulated Services, Retail Distribution
Regulated Services, Transmission and Storage
Other Operations
Employees
Environmental Matters
Research and Development
Oil and Gas Operations
Item 3. LEGAL PROCEEDINGS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Item 6. SELECTED FINANCIAL DATA
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
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
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
Registrant Questar Corporation ("Questar" or "the Company") is an
integrated energy services holding company. It has two basic
divisions, Market Resources and Regulated Services. Market Resources
engages in energy development and production; gas gathering and
processing; and wholesale gas, electricity and hydrocarbon liquids
trading. Regulated Services conducts interstate gas transmission and
storage activities and retail gas distribution services. The Company
is also involved in information and communication systems and
technologies.
The Company was organized in 1984 and became a publicly held
entity when the shareholders of Questar Gas Company (then known as
Mountain Fuel Supply Company, "Questar Gas") approved a corporate
reorganization. Questar was created to provide organizational and
financial flexibility and to achieve a more clearly defined separation
of utility and nonutility activities. Questar is a "holding company,"
as that term is defined in the Public Utility Holding Company Act of
1935, because Questar Gas is a natural gas utility. The Company,
however, qualifies for and claims an exemption from provisions of such
act applicable to registered holding companies.
As is noted in the following organization chart, Questar's
Regulated Services unit includes a subholding entity,Questar Regulated
Services Company ("QRS"), Questar Gas, Questar Pipeline Company
("Questar Pipeline") and Questar Energy Services, Inc. ("QES").
Market Resources entities are owned through another subholding
company, Questar Market Resources, Inc. ("QMR"). They include Wexpro
Company ("Wexpro"), Celsius Energy Company ("Celsius"), and its
Canadian subsidiary, Celsius Energy Resources Ltd. ("Celsius Ltd."),
Questar Exploration and Production Company ("Questar E&P," formerly
Universal Resources Corporation), Questar Gas Management Company
("QGM"), Questar Energy Trading ("Questar Energy Trading"), and
Questar URC Company ("Questar URC"). The Company's information and
communication activities are conducted by Questar InfoComm, Inc.
("Questar InfoComm").
Questar Corporation
QuestarInfoComm, Inc.
(Information,Communication, and Electronic
Measurement Services)
Questar Market Resources, Inc.
(Subholding Company)
Wexpro Company
(Production)
Questar Exploration and Production Company
(Questar URC Company)
(Exploration and Production)*
Celsius Energy Company
(Celsius Energy Resources Ltd.)
(Exploration and Production)*
Questar Energy Trading Company
(Marketing)
Questar Gas Management Company
(Gathering and Processing)
Questar Regulated Services Company
(Subholding Company)
Questar Gas Company
(Retail Distribution)
Questar Pipeline Company
(Transportation and Storage)
Questar Energy Services Company
(Retail Services)
*Market Resources intends to merge Celsius Energy into Questar E&P.
As an integrated provider of energy services, the Company
believes that its structure enhances its operating flexibility as
traditional regulated activities (interstate transmission and storage
and retail distribution) become deregulated and more competitive and
as previously packaged services become unbundled. Questar's
integrated structure also enhances its financial strength by providing
a balance between the stability of regulated operations and revenues
associated with rate-base assets and the earnings growth potential of
exploration and production operations, and wholesale marketing,
gathering and processing.
Questar intends to continue emphasizing the ownership of
assets, reserves, pipelines, storage reservoirs, distribution
systems, as it offers new and traditional services in a changed
environment with different rules. The Company has important
partnerships and joint venture arrangements and will continue
to pursue new alliances to strengthen its position and to
minimize its risks.
Financial information concerning the Company's lines of business,
including information relating to the amount of total revenues
contributed by any class of similar products or services responsible
for 10 percent or more of consolidated revenues, is presented in Note
12 in the Notes to Consolidated Financial Statements.
The Company's activities are discussed below.
Market Resources, Exploration and Production
The Company has been in the exploration and production ("E&P")
business since its organization in 1935. Through the ensuing years,
the Company's E&P activities have generated substantial economic
benefits for the Company and its shareholders and customers and have
expanded in size and geographic location. The year 1998 was a
difficult year for Questar's E&P operations, as reserve acquisitions
and production increases could not compensate for the significant
decrease in commodity prices. The Company took a write-down at
year-end 1998 for both Canadian and domestic operations. The E&P
group, however, did achieve its objective to purchase additional
reserves with the HSRTW acquisition.
The Company has five affiliates, Wexpro, Celsius, Celsius Ltd.,
Questar E&P, and Questar URC, that are directly engaged in E&P
operations. The division of activities into five companies is a
result of historical developments. All of the companies are managed
by the same group of officers, although each also has a separate
general manager. Together, the companies form a unique E&P group that
conducts a blended program of low-cost development drilling, low-risk
reserve acquisition, and high-quality exploration.
The E&P group also has a geographical balance and diversity, with
Wexpro and Celsius located in the Rocky Mountain area, Celsius active
in the Southwest, and Questar E&P and Questar URC concentrated in the
Midcontinent area, including East Texas and the Upper Gulf Coast.
Celsius Ltd. owns the Canadian assets acquired in 1996.
Natural gas remains the primary focus of the Company's E&P
operations. As of year-end 1998, the Company had proved reserves
(excluding Questar Gas's cost-of-service reserves) of 489.0 billion
cubic feet ("Bcf") of gas and 16.4 million barrels ("MMBbls") of oil
liquids, compared to 379.0 Bcf of gas and 17.5 MMBbls of oil as of the
same date in 1997. (Any references to oil in this report include
natural gas liquids.) Natural gas reserves constituted 83 percent of
the Company's total nonutility reserves at year-end 1998, compared to
78 percent at year-end 1997. See "Oil and Gas Operations," a separate
section of this report, for additional information concerning the
Company's oil and gas activities on a consolidated basis.
The E&P companies participated in 205 (gross) wells in 1998,
compared to 235 wells in 1997. The 205 wells were divided between 14
exploratory wells and 191 development wells and included 114 gas
wells, 43 oil wells, 23 dry holes and 25 wells in progress (waiting on
completion or drilling) at year-end. The overall drilling success in
1998 was 87 percent.
The E&P group continued to generate Section 29 tax credits during
1998. These tax credits are available for production from wells that
meet specified criteria, including a requirement that drilling of the
wells be commenced prior to January 1, 1993. Properties are often
referred to as "tight sands," coal seams," or low permeability
formations from which it is generally more expensive to produce gas.
During 1998, Celsius and Questar E&P recorded $5.7 million in Section
29 credits. (Wexpro does not have an economic interest in the
cost-of-service gas produced from Questar Gas's properties.)
The production of oil and gas is subject to regulation by
appropriate federal and state agencies. In general, these regulatory
agencies are authorized to make and enforce regulations to prevent
waste of oil and gas, protect the correlative rights and opportunities
to produce oil and gas by owners of a common reservoir, and protect
the environment. Many leases held or operated by the E&P group are
federal leases subject to additional regulatory requirements. Both
federal and state agencies are imposing more restrictions on access to
leasehold acreage, thereby increasing the planning time to obtain
drilling permits and limiting the E&P group's flexibility to adapt
quickly to circumstances.
The following description of Questar's E&P group is bifurcated
between Wexpro and the combined Celsius/Questar E&P.
Wexpro Company. Wexpro was incorporated in 1976 as a subsidiary
of Questar Gas. Questar Gas's efforts to transfer producing
properties and leasehold acreage to Wexpro resulted in protracted
regulatory proceedings and legal adjudications that ended with a
court-approved settlement agreement that was effective August 1, 1981.
Wexpro, unlike Celsius and Questar E&P, does not conduct
exploratory operations and does not acquire leasehold acreage for
exploration activities. It conducts oil and gas development and
production activities on certain producing properties located in the
Rocky Mountain region under the terms of the settlement agreement.
(The terms of the settlement agreement are described in Note 9 in the
Notes to Consolidated Financial Statements.) Wexpro produces gas from
specified properties for Questar Gas and is reimbursed for its costs
plus a return on its investment. In connection with its successful
development gas drilling, Wexpro charges Questar Gas for its costs
plus a specified rate of return (currently 21.70 percent and adjusted
annually based on a specified formula) on its net investment in such
properties adjusted for working capital and deferred taxes. At
year-end 1998, Wexpro's investment (net of deferred income taxes) in
cost-of-service operations was $97.6 million. Under the terms of the
settlement agreement, Wexpro bears all dry hole costs. The settlement
agreement is monitored by the Utah Division of Public Utilities and
retained experts.
The gas volumes produced by Wexpro for Questar Gas are reflected
in the latter's rates at cost-of-service prices. Cost-of-service gas
(defined to include the gas attributable to royalty interest owners)
produced by Wexpro satisfied 45 percent of Questar Gas's system
requirements during 1998. Questar Gas relies upon Wexpro's drilling
program to develop the properties from which the cost-of-service gas
is produced. During 1998, the average wellhead cost of Questar Gas's
cost-of-service gas was $1.54 per decatherm ("Dth"), which is lower
than Questar Gas's average price for field-purchased gas.
Wexpro participates in drilling activities in response to the
demands of other working interest owners, to protect its rights, and
to meet the needs of Questar Gas. Wexpro, in 1998, produced 37.5
billion cubic feet equivalent ("Bcfe") of natural gas and liquids from
Questar Gas's cost-of-service properties and added reserves of 40.2
Bcfe through drilling activities and reserve estimate revisions.
(These numbers do not include the related royalty gas.)
Wexpro, under the terms of the Wexpro agreement, owns
oil-producing properties. Under the terms of the settlement
agreement, the revenues from the sale of crude oil produced from such
properties are used to recover operating expenses and provide Wexpro
with a return on its investment. In addition, Wexpro receives 46
percent of any residual income. (The remaining income is received by
Questar Gas and is used to reduce natural gas costs reflected in
customer rates.)
Wexpro has an ownership interest in the wells and appurtenant
facilities related to its oil reservoirs and in the facilities that
have been installed to develop and produce gas reservoirs described
above since August 1, 1981 (a date specified by the settlement
agreement referred to above). Wexpro maintains an office in Rock
Springs, Wyoming, in addition to its principal office in Salt Lake
City, Utah.
Celsius Energy Company/Questar E&P. Celsius and Questar E&P are
combined from an operating and financial perspective. Historically,
Celsius operated in the Rocky Mountain area and emphasized exploration
and development opportunities while Questar E&P, acquired as an
independent company in 1987, operated in the Midcontinent and
emphasized development and acquisition opportunities. Effective
September 1, 1998, 150 Bcfe of proved oil and gas reserves located in
the Midcontinent were added when HSRTW Inc. was acquired from HS
Resources Inc. for $155 million. The companies continue to maintain
division offices in Denver, Colorado, Oklahoma City, Oklahoma, and
Tulsa, Oklahoma. (As part of a reorganization, Celsius will be merged
into Questar E&P.)
Gas production increased from 47.4 Bcf in 1997 to 51.3 Bcf in
1998. The increase in production was attributable to the reserve
acquisitions. Celsius and Questar E&P received an average selling
price of $1.92 per thousand cubic feet ("Mcf") in 1998, compared to
$1.89 per Mcf in 1997. Gas production belonging to the two entities
is produced from four separate gas producing regions, the Midcontinent
area, the San Juan Basin area, the Rocky Mountain area, and the
western Canada area. Production from each of these areas is generally
priced below the Henry Hub pricing center in Louisiana, reflecting
demand and access to transportation.
Gas prices remained volatile during 1998. The Company hedges as
much as 50 to 55 percent of its production in order to minimize the
effect of price volatility on revenues. Hedging activities are
conducted by Questar Energy Trading.
The E&P companies increase their activities and minimize their
risks by finding partners that will drill wells on their acreage to
acquire an interest in any resulting production. An example of this
kind of arrangement is a joint exploration program with Texaco
Exploration and Production Company in the Ham's Fork region located in
southwestern Wyoming. Celsius was also involved with deep drilling
activities conducted by Union Pacific Resources Company in the Brady
unit in southwestern Wyoming.
During 1998, the E&P companies, on a combined basis, produced 2.9
MMBbls of oil, which is equivalent to its crude production in 1997.
The production was sold at an average price of $12.69 per barrel in
1998, compared to $18.29 per barrel in 1997.
The E&P group adopted several cost-cutting measures in early 1999
to respond to the low-price environment. These measures included
terminating 10 employees, freezing salaries for highly compensated
employees, reducing market salary adjustments for other employees, and
allowing exempt employees to reduce their hours and salaries by 10
percent. The Market Resources group is exploring additional
cost-cutting measures, e.g., the integration of some administrative
functions.
Market Resources, Wholesale Marketing
Questar Energy Trading conducts energy marketing activities. It
combines gas volumes purchased from third parties and equity
production (production that is produced by affiliates) to build a
flexible and reliable portfolio. Questar Energy Trading aggregates
supplies of natural gas for delivery to large customers, including
industrial users, municipalities, and other marketing entities.
During 1998, Questar Energy Trading marketed a total of 96.5 million
decatherms ("MMDth") of natural gas, 2.3 MMBbls of liquids, and
327,000 megawatt-hours of electricity and earned a gross profit margin
of $2,470,000. (The volumes and margins exclude affiliated
production.)
Questar Energy Trading uses derivatives as a risk management tool
to provide price protection for physical transactions involving owned
production and marketing purchases. Questar Energy Trading hedges
with a third party at least a portion of owned production and does so
with a variety of contracts for different periods of time. Questar
Energy Trading does not engage in speculative hedging transitions.
As a wholesale marketing entity, Questar Energy Trading
concentrates on markets in the Pacific Northwest, Rocky Mountains,
Midwest, and western Canada that are close to reserves owned by
affiliates or accessible by major pipelines.
To sustain its activities in an increasingly competitive
environment in which sellers and purchasers are becoming more
sophisticated, Questar Energy Trading needs to expand its
capabilities. Through a limited liability company, Questar Energy
Trading has a certificate issued by the Federal Energy Regulatory
Commission ("FERC") to construct and operate an open-access storage
reservoir in southwestern Wyoming adjacent to several interstate
pipelines. It is also exploring partnerships with electricity
providers and others to obtain additional expertise and access to
sophisticated information technology.
Market Resources, Gathering and Processing
QGM conducts gathering and processing activities in the Rocky
Mountain and Midcontinent areas. Its activities are not subject to
regulation by the FERC. QGM was originally established in 1993 to
construct and operate the Blacks Fork processing plant in southwestern
Wyoming. It expanded in 1996 when Questar Pipeline spun down its
gathering assets and activities. QGM was then moved from Questar
Pipeline to the Market Resources group in mid-1996 and acquired the
processing plants that formerly belonged to Questar E&P and Celsius.
QGM's gathering system, which consists of 1,400 miles of
gathering lines, compressor stations, field dehydration plants, and
measuring stations, was largely built to gather production from
Questar Gas's cost-of-service properties. During 1998, QGM gathered
29.9 MMDth of natural gas for Questar Gas, compared to 28.5 MMDth in
1997, for which it received $5 million in demand charges. Under the
terms of a contract that was assigned with the gathering assets from
Questar Pipeline, QGM is obligated to gather Questar Gas's
cost-of-service production for the life of the properties.
QGM's gathering system was originally built as a regulated asset;
QGM now must operate in a different competitive environment. Often,
new wells will have connections with more than one gathering system,
and producers insist that gathering systems be tied to more than one
pipeline.
In addition to gathering activities, QGM is also engaged in
processing activities. It owns a 50 percent interest in the Blacks
Fork processing plant, which has a total daily capacity of 84 million
cubic feet ("MMcf"). This plant, which is located in southwestern
Wyoming, strips liquids (e.g., ethane, butane) from natural gas
volumes. QGM and Wexpro jointly own a processing facility located in
the Canyon Creek area of southwestern Wyoming that has a total
operating capacity of 45 MMcf per day. QGM also owns interests in
other processing plants in the Rocky Mountain and MidContinent areas.
Market Resources, General
Investment in Questar's Market Resources segment is growing
faster than its Regulated Services segment. The Company expects to
spend more capital budget funds on this segment to expand reserves
through acquisitions and drilling and to enlarge its infrastructure of
gathering systems, processing plants, header facilities, and
nonregulated storage facilities. The volatility of commodity prices
makes it imperative for the Market Resources group to manage risks and
form strategic alliances. This segment will continue to expand the
scope of its activities and joint venture or alliance relationships.
Questar expects this segment to account for at least 58 percent of
corporate earnings by 2002.
Although the activities of the Market Resources companies are
diverse, they are complementary and support the Company's overall goal
to build value with energy resources and services. As the E&P
companies find or acquire new reserves, QGM has more opportunities to
expand gathering and processing activities, and Questar Energy Trading
has more physical production to support its marketing programs.
Regulated Services, Introduction
Questar's Regulated Services segment includes Questar Gas, a
retail distribution utility; Questar Pipeline, an interstate pipeline;
Questar Energy Services Inc. ("QES"), an entity engaged in retail
energy services that was transferred by QMR effective January 1, 1999;
and QRS, a subholding company that provides administrative services to
all these entities. All members of the Regulated Services group have
common officers and share service functions, e.g., marketing,
planning, business development, engineering, compensation, legal,
regulatory affairs, accounting, and budgeting. All Regulated Services
employees share base and incentive compensation programs and are
expected to work together to improve customer service and operating
efficiency. The integration of the entities has resulted in lower
operating and maintenance costs and better coordination of activities
and projects. During 1998, the Regulated Services group offered an
early retirement program to eligible employees. Most of the 178
employees accepting the program will not be replaced, resulting in
lower labor and overhead costs.
Regulated Services, Retail Distribution
Questar Gas distributes natural gas as a public utility in Utah,
southwestern Wyoming, and a small portion of southeastern Idaho. As
of December 31, 1998, it was serving 663,392 sales and transportation
customers, a 3.4 percent increase from the 641,696 customers as of
year-end 1997. (Customers are defined in terms of active meters.)
Approximately 96 percent of Questar Gas's customers live in Utah.
Questar Gas distributes gas to customers in the major populated areas
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. Questar Gas supplies natural gas in the
southwestern Wyoming communities of Rock Springs, Green River, and
Evanston, and the southeastern Idaho community of Preston. Questar
Gas has the necessary regulatory approvals granted 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 it added at least 20,000 customers. The
customer growth reflects Utah's economic prosperity and continued
in-migration. Utah's population is growing faster than the national
average, and Questar Gas expects to add 18,000-21,000 customers each
year.
Questar Gas'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 Dth per year) consumes over 75 percent of his
total gas requirements in the coldest six months of the year. Questar
Gas's revenue forecasts used to set rates are based on normal
temperatures. As measured in degree days, temperatures in Questar
Gas'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.
Questar Gas's sensitivity to weather and temperature conditions,
however, has been ameliorated by adopting a weather normalization
mechanism for its general service customers in Utah and Wyoming. The
mechanism, which has been in effect for 1997 and 1998, adjusts the
non-gas 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 MMDth to residential and
commercial customers, compared to 85.7 MMDth in 1997. General service
sales to residential and commercial customers were responsible for 89
percent of Questar Gas's total revenues in 1998.
Questar Gas has designed its distribution system and annual gas
supply plan to handle design-day demand requirements. It 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, Questar Gas used a design-day demand of 977,251 Dth
for firm sales customers. Questar Gas is also obligated to have
pipeline capacity, but not gas supply, for firm transportation
customers. Questar Gas's management believes that the distribution
system is adequate to meet the demands of its firm customers.
Questar Gas's total industrial deliveries, including both sales
and transportation, increased from 60.8 MMDth in 1997 to 65.1 MMDth in
1998, reflecting Utah's continued economic growth.
Questar Gas has been providing transportation service since 1986.
It has worked diligently to retain its transportation customers with
cost-based rates. Transportation service is attractive to customers
that can buy volumes of gas directly from producers and have such
volumes transported at aggregate prices lower than Questar Gas's sales
rates.
Questar Gas'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 City.
Questar Gas's competitive position has been strengthened as a
result of owning natural gas producing properties. During 1998, it
satisfied 45 percent of its system requirements with the
cost-of-service gas produced from such properties. These properties
are operated by Wexpro, and the gas produced from such properties is
transported by Questar Pipeline. Questar Gas's investment in these
properties is included in its utility rate base.
Questar Gas had reserves of 339.8 Bcf as of year-end 1998,
compared to 336.9 Bcf as of year-end 1997. (The reserve numbers do
not include volumes attributable to royalty interests.) The average
wellhead cost associated with Questar Gas's cost-of-service reserves
was below the cost of purchased. During 1998, Questar Gas recorded
$2.2 million in Section 29 tax credits associated with production from
wells on its cost-of-service properties that qualify for such credits.
Questar Gas believes that it is important to continue owning gas
reserves, producing them in a manner that will serve the best
interests of its customers, and satisfying a significant portion of
its supply requirements with gas produced from such properties.
Questar Gas uses storage capacity at Clay Basin to provide
flexibility for handling gas volumes produced from cost-of-service
properties. It stores gas at Clay Basin during the summer and
withdraws it during the heating season.
Questar Gas has a balanced and diversified portfolio of gas
supply contracts with suppliers located in the Rocky Mountain states
of Wyoming, Colorado, and Utah. It purchases gas on the spot market
and under longer-term contracts, primarily during the winter heating
season. The contracts have market-price provisions and are either of
short-term 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
its latest semi-annual purchased-gas-cost filing, Questar Gas
estimated that its average wellhead cost of field-purchased gas would
be $1.92 per Dth for 1999.
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, has permitted Questar Gas to retain over 90 percent of
the residential space 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.
Questar Gas has virtually 100 percent of the space heating and water
heating offered in new homes within its service area.
Although Questar Gas is a public utility and has no direct
competition from other distributors of natural gas for residential and
commercial customers, it competes with other energy sources. Questar
Gas continues to monitor its competitive position, in terms of
commodity costs and efficiency of usage, with other energy sources.
Questar Gas is also interested in Utah's economic development in
order to enhance market growth and is encouraging the use of natural
gas in additional appliances. Most households in Questar Gas's
service area already use natural gas for space and water heating. Its
market share for other gas 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 has marketing campaigns to convince existing customers to
take advantage of natural gas's lower prices and greater efficiency by
converting other appliances to natural gas. It also has marketing
campaigns to encourage contractors to install the necessary lines for
gas fireplaces, ranges, and dryers in new homes.
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 appliances to natural gas. Consequently, Questar
Gas follows an annual gas supply plan that provides for a judicious
balance between cost-of-service gas and purchased gas and that allows
it to increase operating efficiency.
Questar Gas raised its rates for natural gas service in the fall
of 1997 to reflect higher gas costs and to implement a special
surcharge to collect a deficiency in its gas balance account. The
magnitude of this increase caused some customers to adjust their
usage. During the 1997-98 winter heating season, Questar Gas's net
income was negatively affected by the impact of charging higher rates
for natural gas. On a temperature-adjusted basis, per-customer usage
declined for the first time in several years, but stabilized later in
1998.
Questar Gas reduced its rates effective January 1, 1999, to
reflect changes in natural gas costs and 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.
The Kern River pipeline, which was built to transport gas from
southwestern Wyoming to Kern County, California, runs through portions
of Questar Gas's service area and provides an alternative delivery
source for transportation customers. As of the date of this report,
Questar Gas has lost no industrial load as a result of the Kern River
pipeline. The existence of this interstate pipeline system has made
it possible for Questar Gas to extend service into a new area in Utah
and to develop a second source of supply for its central and its
southern Utah system. Questar Gas has a tap on the Kern River line in
Salt Lake County for the delivery of additional peak-day supplies to
meet increasing demand.
Questar Gas and all other 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, Questar Gas owns and controls the lines through
which gas is delivered, is the only supplier of 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 extending residential
and commercial customers the same choices provided industrial
customers, i.e., allowing them to separate the commodity supply from
the transportation service. (Industrial customers have enjoyed the
benefit of supplier choice for over 10 years.)
Questar Gas has been reviewing the opportunities and risks
associated with unbundling and believes that it is well-positioned to
succeed in a competitive environment. Questar Gas is accurately
described as an efficient local distribution company. It increased
the number of customers served per employee from 475 in 1997 to 537 in
1998. Its operating efficiency is buttressed by owning the reserves
to meet 40-50 percent of its current demand and by having storage
capacity to balance the relationship between production of its
reserves and seasonal demands of residential customers.
Questar Gas and other retail distribution companies have been
subject to governmental regulation as a substitute for competition.
Other industries, airline, trucking, telecommunication, financial
service, and interstate pipeline, have been and are being deregulated,
and competitive market forces are forcing these industries to focus on
operating efficiency. The substitution of competition for regulation
has caused Questar Gas and other distribution companies to continue to
review their costs and reexamine their commitment to sales service.
Questar Gas offers its Wyoming customers a "supplier choice"
program that was approved by the PSCW in 1998. Under the terms of
this program, general service customers in Wyoming have the option of
selecting a different supplier of natural 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 anticipates that electric utility service will
be unbundled before retail gas distribution service. Given its
attractive rates and high customer service ratings, Questar Gas 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. (Questar Gas's customers in Idaho are served
under the provisions of its Utah tariff. Pursuant to a special
contract between the PUCI and the PSCU, rates for Questar Gas's Idaho
customers are regulated by the PSCU.) Questar Gas's natural gas sales
and transportation services are made 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 labor costs, consolidating activities, and
utilizing new technology. Questar Gas 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 Questar Gas to use a
balancing account procedure for changes in the cost of natural gas,
including supplier non-gas costs, and to reflect changes on at least a
semi-annual basis. Questar Gas received regulatory approval from the
PSCU and PSCW to decrease its rates effective January 1, 1999. 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; rates for Wyoming
customers reflect a gas-cost component of $2.63 per Dth compared to
$2.88 per Dth. (The gas-cost numbers include storage and
transportation costs.)
The PSCU, by order 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
provided by QGM. 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. The PSCU ruled against the Division's
claims, which involved approximately $7.6 million plus interest in
potential refunds.
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.
Questar Gas has consolidated many of its activities in its operations
center, warehouse and garage located in Salt Lake City, Utah. It also
owns operations centers, field offices, and service center facilities
throughout other parts of its service area. The mains and service
lines are constructed pursuant to franchise agreements or
rights-of-way. Questar Gas has fee title to the properties on which
its operation and service centers are constructed.
Regulated Services, Transmission and Storage
Questar Pipeline is an interstate pipeline company that is
engaged in the transportation and storage of natural gas in the Rocky
Mountain states of Utah, Wyoming and Colorado. As a "natural gas
company" under the Natural Gas Act of 1938, Questar Pipeline is
subject to regulation by the FERC as to rates and charges for storage
and transportation of gas in interstate commerce, construction of new
facilities, extensions or abandonments of service and facilities,
accounts and records, and depreciation and amortization policies.
Questar Pipeline holds certificates of public convenience and
necessity granted by the FERC for the transportation and underground
storage of natural gas in interstate commerce and for the facilities
required to perform such operations.
Questar Pipeline, as an open-access pipeline, transports gas for
affiliated and unaffiliated customers. It also owns and operates the
Clay Basin storage facility, which is a large underground storage
project in northeastern Utah, and other underground storage operations
in Utah and Wyoming. Questar Pipeline has a 54 percent ownership
interest in Overthrust Pipeline Company ("Overthrust") and, through a
subsidiary, a 50 percent ownership interest in TransColorado Gas
Transmission Company ("TransColorado").
During 1998, Questar Pipeline significantly expanded its
potential transportation capacity. As equal partners, wholly-owned
subsidiaries of Questar Pipeline and KN Energy built the TransColorado
pipeline project, which is a 292-mile pipeline that runs from
northwestern Colorado to northern New Mexico. Questar Pipeline also
acquired a 700-mile crude oil pipeline that extends from northern New
Mexico to southern California, renamed it "Southern Trails," and
commenced the necessary regulatory and environmental proceedings to
convert the line to transport natural gas.
As an open-access pipeline, Questar Pipeline transports gas for
affiliated and unaffiliated customers. It also owns and operates the
Clay Basin storage facility, which is a large underground storage
project in northeastern Utah, and other underground storage operations
in Utah and Wyoming.
Questar Pipeline's transmission system is strategically located
in the Rocky Mountain area near large reserves of natural gas. It is
referred to as a "hub and spoke" system, rather than a "long-line"
pipeline, because of its physical configuration, multiple connections
to other major pipeline systems and access to major producing areas.
Questar Pipeline's transmission system connects with the transmission
systems of Colorado Interstate Gas Company ("CIG"), the middle segment
(commonly referred to as the "WIC segment") of the Trailblazer
pipeline system, The Williams Companies, Inc. ("Williams") including
Kern River Gas Transmission Company ("Kern River"), and TransColorado.
These connections provide access to markets outside Questar Gas's
service area and allow Questar Pipeline to transport gas for
nonaffiliated customers.
Questar Pipeline's transmission system includes 1,726 miles of
transmission lines that interconnect with other pipelines and link
producers of natural gas with Questar Gas's distribution operations in
Utah and Wyoming. (The transmission mileage figure includes lines at
storage fields and tap lines used to serve Questar Gas.) This system
includes two major segments, often referred to as the northern and
southern systems; the northern system segment extends from
northwestern Colorado through southwestern Wyoming into northern Utah,
and the southern system segment extends from western Colorado to
Payson in central Utah. The two portions are linked together and have
significant connections with other pipeline systems, making it a fully
integrated system.
Questar Pipeline's largest transportation customer is Questar
Gas. During 1998, Questar Pipeline transported 107.5 MMDth for
Questar Gas, compared to 110.3 MMDth in 1997. These transportation
volumes include cost-of-service gas produced by Wexpro on properties
owned by Questar Gas, as well as some volumes purchased by Questar Gas
directly from field producers.
Questar Gas has a reserved firm transportation capacity of about
800,000 Dth per day, or 74 percent of Questar Pipeline's reserved
capacity. Questar Gas paid reservation charges of $50.7 million to
Questar Pipeline in 1998; these charges include reservation charges
attributable to firm and "no-notice" transportation. Questar Gas only
needs its total reserved capacity during peak-demand situations. When
it is not fully utilizing such capacity, Questar Gas releases it to
others, primarily industrial transportation customers and marketing
entities, and receives revenue credits from Questar Pipeline.
Questar Pipeline's transportation agreement with Questar Gas
expires on June 30, 1999. The parties have agreed to extend the
contract for three years, reflecting Questar Gas's growing design-day
requirements and Questar Pipeline's competitive transportation rates.
Questar Pipeline recovers approximately 95 percent of its
transmission cost of service through demand charges from firm
transportation customers. In other words, these customers pay
primarily for access to transportation capacity, rather than on the
basis of volumes actually transported. Consequently, Questar
Pipeline's throughput volumes do not have a significant effect on its
short-term operating results. Questar Pipeline's transportation
revenues are not significantly impacted by fluctuating demand based on
the vagaries of weather or natural gas prices. Questar Pipeline's
revenues may be adversely affected if the FERC changes its basic
regulatory scheme of "straight fixed-variable" rates.
Questar Pipeline's total system throughput decreased from 264.3
MMDth in 1997 to 255.1 MMDth in 1998. This decrease was primarily
attributable to lower transportation volumes for affiliated customers,
which declined from 148.1 MMDth in 1997 to 134.4 MMDth in 1998.
Despite this decrease in volumes, Questar Pipeline's transportation
revenues increased by 3 percent between two years, from $68.8 million
in 1997 to $70.8 million in 1998.
Questar Pipeline's transmission system is an open-access system
and has been since September of 1988. The FERC's Order No. 636 and
Questar Pipeline's tariff provisions based on Order No. 636 require it
to transport gas on a nondiscriminatory basis when it has available
transportation capacity. Questar Pipeline does have limited
opportunities for interruptible transportation service.
Questar Pipeline will continue to develop and build new lines and
related facilities that will allow it to meet customer needs or
improve transportation services. During 1998, Questar Pipeline
completed a project begun in 1997 to build a 20-inch diameter line
extending from Clay Basin to Coleman Compressor Station in
southwestern Wyoming, which added 88 thousand decatherms ("MDth") of
firm capacity, in 1998. The project significantly expanded Questar
Pipeline's capacity to move gas north from its storage facility at
Clay Basin and its southern system. Questar Pipeline also installed
new compression facilities on its southern system near Price, Utah.
The new facilities, referred to as the Oak Spring compression
facilities, added approximately 52 MDth of firm capacity.
In addition to the transmission system described above, Questar
Pipeline has a 54 percent interest and is the operating partner in
Overthrust, a general partnership that owns and operates the
Overthrust segment of Trailblazer. Trailblazer, in turn, is a major
800-mile line that transports gas from producing areas in the Rocky
Mountains to the Midwest. The 88-mile Overthrust segment is the
western-most of Trailblazer's three segments. Although the Overthrust
segment is currently underutilized, Questar Pipeline and its remaining
partners are reviewing opportunities, including backhauling, to
increase its value.
The Kern River pipeline, which is currently owned by Williams,
was built to transport gas from Wyoming to the enhanced oil recovery
projects in Kern County, California. It runs through Utah's Wasatch
Front, making it possible for some large industrial customers to
bypass both Questar Gas and Questar Pipeline by buying transportation
service on Kern River. The Kern River line has diverted some
transportation volumes from both Questar Pipeline and Overthrust. The
Kern River line, on the other hand, has also provided Questar Pipeline
with opportunities to make additional connections with outside
markets.
Questar Pipeline's Clay Basin storage facility in northeastern
Utah is the largest underground storage reservoir in the Rocky
Mountains. During 1998, storage capacity was expanded by 5 Bcf of
working gas and 2.5 Bcf of cushion gas, bringing total capacity to
117.5 Bcf. Clay Basin has been operational since 1977 and has been
successfully expanded several times.
Questar Pipeline owns and operates a major compressor complex
near Rock Springs, Wyoming, that compresses volumes of gas from the
transmission system for delivery to the WIC segment of the Trailblazer
system and to CIG. The complex has become a major delivery point on
Questar Pipeline's system, with five of its major natural gas lines
connected to the system at the complex. In addition, both of CIG's
Wyoming pipelines and the WIC segment are connected to the complex.
April 1, 1999 is the scheduled start-up date for the
TransColorado pipeline project. This $295 million project, which was
originally announced in 1990, has a design capacity of 300 MMcf, but
will operate on a reduced basis until market demand improves and
additional facilities are installed. The line originates at a point
on Questar Pipeline's system 25 miles east of Rangely in northwestern
Colorado and extends 292 miles to the Blanco hub in northwestern New
Mexico. It was constructed to transport natural gas from the Rocky
Mountain area that was traditionally priced lower than other gas
supplies, e.g., San Juan, to California and Midwestern markets through
interconnections with major pipeline systems. At the current time,
natural gas prices and the resulting lack of basis differentials
between Rocky Mountain production and San Juan production will require
the TransColorado partners to discount transportation rates.
Questar Pipeline acquired a 700-mile, 16-inch diameter oil
pipeline from ARCO Pipeline Company during 1998. This line extends
from the Four Corners area where the states of Arizona, New Mexico,
Colorado, and Utah meet to Long Beach, California. After acquiring
the line, the Questar Pipeline renamed it Southern Trails, conducted
an open season to gauge customer interest, and filed the necessary
application to obtain FERC certification. Converting the line to
natural gas will require extensive environmental review. Questar
Pipeline is handling the project on an expedited basis and expects the
line to be in service by mid-2000. Questar Pipeline believes that
completion of the Southern Trails conversion will improve the ability
to market capacity on TransColorado.
Storage service is important to parties that need a "shock
absorber" to balance purchases with fluctuating customer demand,
improve service reliability, and avoid imbalance penalties. The
storage capacity at Clay Basin is fully subscribed by customers under
long-term agreements. Questar Gas currently has 13.3 Bcf of working
gas capacity at Clay Basin. Other large customers, in addition to
Questar Gas, include Williams; Washington Natural Gas Company, a
utility in the state of Washington; and BC Gas Utility Ltd., a
distribution utility in British Columbia, Canada.
Questar Pipeline also offers interruptible storage service at
Clay Basin and allows firm storage service customers the right to
transfer their injection and withdrawal rights to other parties.
Questar Pipeline does not currently plan to file a general rate
case in 1999 and has no open rate case issues before the FERC. It,
however, will continue to review its revenues and costs as it adds new
facilities that are not included in its rate base and makes
expenditures to comply with regulatory mandates.
In July of 1998, the FERC issued a Notice of Proposed Rulemaking
("NOPR") in Docket No. RM98-10-000, seeking comments on a wide range
of issues relating to competition in short-term transportation
markets. The NOPR includes proposed rules requiring pipelines to
report and auction all unused daily capacity and to provide shippers
with greater operational flexibility. In a companion Notice of
Inquiry issued at the same time, the FERC proposed permitting
incentive-based rate alternatives to cost-based rates for long-term
service. Both regulatory initiatives indicate that the FERC is
continuing to push for even-greater competitive conditions within the
transportation industry and to view transportation capacity as a
commodity, even as it proposes additional regulations for
jurisdictional pipelines. Questar Pipeline is closely monitoring the
FERC's rulemaking proceedings, but maintains that it is premature to
speculate concerning the final rules and to measure their impact on
its operations.
Questar Pipeline recently amended its FERC application for the
Southern Trails project to request "optional" certification because it
did not demonstrate, to the immediate satisfaction of the FERC staff,
sufficient evidence of market support for the project, i.e., signed
contracts with shippers, and did not want to delay commencement of the
necessary regulatory and environmental review. When proposing and
building new pipeline projects under the optional-certificate, Questar
Pipeline is generally at full-risk for changes in market conditions.
Competition for Questar Pipeline's transportation and storage
services has intensified in recent years. Regulatory changes have
significantly increased customer flexibility and increased the risks
associated with new projects. Questar Pipeline has two key assets
that contribute to its continued success. It has a strategically
located and integrated transmission system with interconnections to
major pipeline systems and with access to major producing areas and
markets. Questar Pipeline's Clay Basin storage facility has been
expanded in response to customer interest. Questar Pipeline intends
to take advantage of these assets by increasing its "intra-hub
capacity" or its ability to quickly and reliably move gas between
+receipt and delivery points and by expanding its storage capacity and
services.
Questar Pipeline has a strong commitment to increase its
footprint in other parts of the western United States as witnessed by
its participation in the TransColorado pipeline project and by its
acquisition of direct transportation capacity that reaches California
markets. Questar Pipeline's ability to compete with other pipelines
is affected by natural gas prices in the supply basins connected to
its pipeline system compared to prices in other basins connected to
competing pipelines. Questar Pipeline's ability to contract with
industrial customers in California for capacity on the Southern Trails
line is affected by regulatory provisions that protect local
distribution companies in California. Questar Pipeline's future
success in new markets may be affected by its ability to compete with
other entities that are often larger and possess greater resources.
Other Operations
In addition to the two primary segments of Market Resources and
Regulated Services, Questar has "other operations." This group
includes Questar InfoComm, which is a full-service provider of
integrated information and communication services to affiliates and
external businesses; miscellaneous real estate activities; and the
ownership of stock issued by Nextel Communications Inc. ("Nextel").
Questar InfoComm provides information, communication, and
electronic measurement services. It operates a regional microwave
system that covers much of Utah and southwestern Wyoming. This
digital system was originally built to satisfy the needs of Questar's
operations, but also carries data for alternative telephone providers
and other external customers. Questar InfoComm installs and maintains
telephone-switching equipment and voice-mail systems. It built and
leases a fiber optic telephone network in parts of Salt Lake City for
an alternative telephone provider, NextLink Communications, and owns
shares of stock issued by NextLink.
Questar InfoComm also owns and operates the Business Continuity
Center, which is a 22,800 square-foot facility in Salt Lake City
designed to protect critical communication and data processing
equipment in the event of a natural disaster. Although built to allow
Questar companies to continue vital operations, the facility
accommodates other tenants that have the same need to safeguard
information and equipment.
During 1998, Questar InfoComm acquired Baseline Industries, Inc.
("Baseline"), a Colorado-based developer and manufacturer of
gas-analysis systems. The purchase supports Questar InfoComm's
strategy to expand its gas-analysis expertise and applied technology
services. Questar InfoComm recently acquired an equity interest in
ParkerVision, a Florida-based firm that develops wireless technology
and audiovisual products. Questar InfoComm is working with
ParkerVision to develop new communications systems for the energy
industry using new wireless radio technology.
Through an affiliate, Questar also owns 14.5 acres of commercial
real estate in Salt Lake County that was the site of the Wasatch
Chemical clean-up activities. See Legal Proceedings. Although the
Company intends to continue owning the property to minimize any future
problems associated with environmental compliance, it believes that
the property can earn attractive returns when leased.
As of the date of this report, Questar retains approximately 1.5
million shares of stock issued by Nextel, an international wireless
communication company. The Company acquired this stock in 1994 when
it sold Questar Telecom, a specialized mobile radio subsidiary, to
Nextel. Questar has sold approximately 2.4 million of its original
3.9 million shares and intends to continue selling such stock when
market conditions are favorable.
During 1998, Questar sold its office building in downtown Salt
Lake City that had recently been remodeled, enlarged, and upgraded
from a seismic protection perspective. The Company has leased the
building through 2012 and has 800 employees in the building. Questar
continues to own property adjacent to the building that is currently
used for parking and will continue to review proposals to develop it.
Employees
As of December 31, 1998, Questar and its affiliates had 2,338
employees compared to 2,437 at year-end 1997. Of this total, 1,509
worked for the Regulated Services segment, 425 worked for Market
Resources entities, and 404 worked for corporate, Questar InfoComm,
and Baseline. None of these employees is represented under collective
bargaining agreements. Questar has comprehensive benefit plans for
its employees. Employee relations are generally deemed to be
satisfactory.
Environmental Matters
Questar and its affiliates are subject to the National
Environmental Policy Act and other federal and state legislation
regulating the environmental aspects of their businesses. During
1998, Questar continued to be involved in actions involving local and
federal environmental enforcement agencies and allegations of
"hazardous waste" problems. QMR's liability for contamination is
described in "Legal Proceedings". The Company does not believe that
environmental protection provisions will have any significant effect
on its competitive position; it does believe, however, that such
provisions have added and will continue to add to capital expenditures
and operating costs.
Questar is actively promoting the environmental advantages of
natural gas in comparison to other fuels. It has actively
participated in various clean air committees and has promoted the use
of natural gas in automobiles. Questar's management believes that
increasing concerns about environmental pollution will result in an
increased demand for natural gas.
Research and Development
Questar Gas has the primary responsibility for the Company's
research and development activities. It evaluates gas conversion
equipment, gas piping, and engines using natural gas and also
evaluates technological developments with electrical appliances. The
total amount spent by Questar on research and development activities
either directly or through contributions is not significant.
Oil and Gas Operations
Oil and gas operations are significant to the business functions
and financial condition of Questar. (All information set forth below
relates to the Company on a consolidated basis.) Certain information
concerning the Company's oil and gas operations is presented in Note
10 in the Notes to Consolidated Financial Statements. The Company
does not have any long-term supply contracts with foreign governments
or reserves of equity investees.
Reserve Reports. The following is a reconciliation of reserve
quantities reported in Note 10 in the Notes to Consolidated Financial
Statements and reserve quantities reported to other regulatory
agencies:
The Company, on a consolidated basis, is reporting 829 Bcf of
natural gas reserves at year-end 1998. This total represents the net
revenue interest of all owned reserves and includes quantities
attributable to cost-of-service properties.
Questar Gas files information using a FERC Form 2 format with the
PSCU and PSCW and lists gas reserves of 396.8 Bcf (working interest)
at December 31, 1998, which include reserves attributable to royalty
interests. The 339.8 Bcf (net revenue interest) reported as
cost-of-service gas reserves in Note 10 exclude reserves attributable
to royalty interests.
Questar Pipeline files a Form 2 (Annual Report) with the FERC.
The Form 2 discloses Questar Pipeline's cushion gas of 61.6 Bcf at
December 31, 1998. This gas is not included in the total reserve
number.
Oil and Gas Production.1
1998 1997 1996
Natural gas (MMcf) 88,447 84,896 77,259
Oil (Mbbl) 2,953 2,962 2,558
1Production quantities from all properties, including
cost-of-service properties.
Average Sales Price.2
1998 1997 1996
Natural gas per Mcf $ 1.92 $1.89 $1.53
Oil per bbl 12.69 18.29 18.80
2Average sales price is calculated on production excluding
cost-of-service volumes.
Average Production (Lifting) Cost. The average production cost
Mcfe excludes costs and volumes associated with production of
cost-of-service reserves. One barrel of oil equals the energy content
of 6 Mcf of gas.
1998 1997 1996
Production cost per Mcfe $.67 $.68 $.62
Producing Wells at December 31, 1998.
Gas Oil
Gross wells 3,934 3,033
Net wells 1,289 648
The numbers for gross wells include 139 wells with multiple
completions.
Leasehold Acreage at December 31, 1998. Questar can retain its
interest in undeveloped acreage by either drilling activity that
establishes commercial production or by the payment of delay rentals.
A portion of the unproved acreage may be allowed to lapse prior to the
primary terms of the lease. Leasehold acreage is located in the
United States and Canada. Approximately 81 percent of the domestic
unproved acreage consists of federal and state leases that generally
have ten-year terms. The remaining 19 percent is attributable to fee
leases that generally have three- to five-year terms. About 30
percent of the unproved acreage is scheduled to expire within the next
five years if no drilling or development activity is undertaken.
Substantially all the Canadian unproved acreage is related to Crown or
government leases, which provide for five-year terms.
The following chart lists the Company's consolidated productive
and unproved acreage:
Productive Unproved
Gross Net Gross Net
United States 2,649,319 859,272 1,753,340 734,745
Canada 75,861 21,989 112,943 47,759
Total 2,725,180 881,261 1,866,283 782,504
Net Productive and Dry Wells Drilled.
Exploratory WellsDevelopment Wells
1998 1997 1996 1998 1997 1996
Productive 2 3 3 61 36 19
Dry 3 - 5 7 2
Total 5 3 3 66 43 21
Present Activities. At year-end 1998, Questar affiliates had a
working interest in 15 wells waiting on completion and 10 wells being
drilled.
Delivery Commitments. Questar Gas is obligated to deliver natural
gas to approximately 663,400 customers in Utah, Wyoming and Idaho, but
future quantities associated with such service are neither fixed nor
determinable.
Celsius and Questar E&P sell a majority of their oil and gas
production through Questar Energy Trading on the spot-market or under
short-term contracts that provide for price readjustments.
ITEM 3. LEGAL PROCEEDINGS
There are various legal proceedings pending against the Company
and its affiliates. Significant cases are discussed below.
Questar E&P is a named defendant in a class action lawsuit
involving royalty payments in Oklahoma state court. In Bridenstine
vs. Kaiser-Francis Oil Company, the plaintiffs allege fraud and
contract claims and assert damages against all defendants for a
15-year period in excess of $35,000,000 plus punitive damages. The
plaintiff's primary claim alleges that a transportation fee charged
against royalty payments was improper or excessive. The claims
involve wells connected to an intrastate gathering system that QGM
presently owns and operates. Kaiser-Francis and Questar E&P are the
major working interest owners and operators of a majority of the wells
connected to this pipeline system.
The Oklahoma Supreme Court has denied defendants' appeal from the
trial court's decision to certify the Bridenstine case as a class
action. At this point, Questar E&P cannot predict the outcome of the
lawsuit but believes it will not have a material effect on the
Company.
Questar Pipeline and some its affiliates have been named as
defendants in a lawsuit filed under the federal false claims act by an
individual who is engaged in natural gas production. The case is one
of 77 substantially similar cases filed contemporaneously by this
producer against pipelines and their respective affiliates, in which
the producer alleges mismeasurement of the heat content of natural gas
volumes and understatement of the value of gas on which royalty
payments are due the federal government. The complaint also claims
treble damages and seeks imposition of civil penalties. The
producer's complaint does not include a request for any specific
monetary damages. Management believes that the producer's allegations
and claims against Questar Pipeline do not have merit. The outcome of
the case cannot be predicted at this time.
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. On June 2, 1998, the trial court judge
entered a judgment that set aside all aspects of the jury's award in
favor of the producer except for $500,000 relating to specified
take-or-pay issues. The producer has filed an appeal with the United
States Court of Appeals for the Tenth Circuit.
Prior to the trial court judge's action, the producer filed
another action in Wyoming's federal district court alleging antitrust
violations in addition to similar claims raised in the first case for
the period since the jury verdict. This second case has been stayed
pending appellate review of the first case.
QMR continues to monitor the Wasatch Chemical property in Salt
Lake City, which is still included on the national priorities list,
commonly known as the "Superfund" list. The Wasatch Chemical property
was the location of chemical mixing operations and is the subject of a
1992 consent order. QMR conducted the necessary soil remediation and
groundwater remediation activities and expects that the site will be
removed from the Superfund list.
See "Regulated Services, Retail Distribution" and "Regulated
Services, Transmission and Storage" for a review of significant
regulatory proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of stockholders
during the last quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information concerning the market for the common equity of the
Company and the dividends paid on such stock is located in Note 11 in
the Notes to Consolidated Financial Statements. As of March 22, 1999,
Questar had 12,934 shareholders of record and estimates that it had an
additional 20,000-23,000 beneficial holders.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Revenues $906,256 $936,337 $817,981 $649,287 $670,318
Operating expenses
Natural gas and other product purchases 365,168 399,941 314,271 199,419 212,528
Other expenses 408,307 366,241 332,087 307,842 303,132
Total operating expenses 773,475 766,182 646,358 507,261 515,660
Operating income $132,781 $170,155 $171,623 $142,026 $154,658
Write-down of investment in
Nextel Communications $(61,743)
Income from continuing operations $76,899 $104,795 $98,145 $83,786 49,417
Gain from sale of Questar Telecom
to Nextel Communications 38,126
Loss from discontinued operations
Net income $76,899 $104,795 $98,145 $83,786 $87,543
Basic earnings per common share
From continuing operations $0.93 $1.27 $1.20 $1.03 $0.61
Gain from sale of Questar Telecom 0.47
Loss from discontinued operations
Net income $0.93 $1.27 $1.20 $1.03 $1.08
Diluted earnings per common share
From continuing operations $0.93 $1.27 $1.19 $1.02 $0.60
Gain from sale of Questar Telecom 0.47
Loss from discontinued operations
Net income $0.93 $1.27 $1.19 $1.02 $1.07
Dividends per share $0.65 $0.62 $0.60 $0.58 $0.57
Book value per common share 10.62 10.30 9.41 8.76 8.09
Total assets 2,161,281 1,945,017 1,816,225 1,584,553 1,585,575
Net cash provided from
operating activities 284,685 202,678 182,921 204,171 163,375
Capital expenditures 461,347 212,797 291,835 118,188 276,882
Capitalization
Long-term debt, less current portion 615,770 541,986 555,509 421,695 494,684
Redeemable cumulative preferred stock 4,828 4,957 6,324
Common stock 877,958 845,778 772,085 712,675 653,589
Total capitalization $1,493,728 $1,387,764 $1,332,422 $1,139,327 $1,154,597
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SUMMARY
Questar Corporation reported 1998 net income of $76,899,000,
or $.93 per share, which includes the effect of a write-down of
oil and gas properties by $20,315,000 after-tax, or $.25 per
share. Questar reported 1997 net income of $104,795,000, or
$1.27 per share (including a $3,540,000, or $.04 per share,
after-tax write-down), and $98,145,000, or $1.19 per diluted
share, in 1996.
Questar's Market Resources group, which engages in various
nonregulated activities, had net income of $13,737,000 in 1998
compared with $42,099,000 in 1997 and $42,447,000 in 1996. A
31% decline in the price of oil and natural gas liquids in 1998
caused a $34 million pretax write-down of oil and gas
properties under full-cost accounting rules. A weakness in
Canadian energy prices and revision of pricing in a gathering
contract resulted in a $6 million pretax write-down in 1997.
Questar's Regulated Services group, consisting of gas
distribution, interstate gas-transportation and storage and
retail energy services achieved net income of $54,827,000
compared with $54,639,000 in 1997 and $51,309,000 in 1996.
Corporate and other operations reported net income of
$8,335,000 in 1998 compared with $8,057,000 in 1997 and
$4,389,000 in 1996. Other operations benefited from the sales
of shares of a communications-technology company and the
conversion of an interest in a local company into shares of
another communications-technology company resulting in
after-tax gains of $6.3 million in 1998, $5.5 million in 1997
and $3.7 million in 1996.
Net cash provided from operating activities increased to
$284,685,000 in 1998 from $202,678,000 in 1997 and $182,921,000
in 1996 due to increased cash flow from working capital
changes. Capital expenditures amounted to $461,347,000 in 1998
and were financed primarily through net cash flow provided from
operations, short- and long-term debt, and asset sales. Common
equity represented 59% and long-term debt 41% of consolidated
capitalization at December 31, 1998.
RESULTS OF OPERATIONS
MARKET RESOURCES - Market Resources conducts Questar's
exploration and production, energy marketing, and gas gathering
and processing. Retail energy services were transferred with
Regulated Services for all periods presented. 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
Natural gas sales $98,767 $89,489 $61,970
Oil and natural gas liquids sales 36,722 53,722 47,045
Cost-of-service gas operations 61,448 52,950 53,119
Energy marketing 234,565 297,413 286,042
Gas gathering and processing 23,796 28,175 31,851
Other 4,816 4,068 4,053
Total revenues 460,114 525,817 484,080
Operating expenses
Energy purchases 232,135 293,174 272,610
Operating and maintenance 75,032 72,712 66,301
Depreciation and amortization 71,377 67,078 58,679
Write-down of oil and gas propertie 34,000 6,000
Other taxes 24,988 25,569 19,034
Oil-income sharing 1,053 2,347 2,768
Total expenses 438,585 466,880 419,392
Operating income $21,529 $58,937 $64,688
OPERATING STATISTICS
Production volumes
Natural gas (in MMcf) 51,309 47,442 40,519
Oil and natural gas
liquids (in Mbbl) 2,894 2,938 2,502
Production revenue
Natural gas (per Mcf) $1.92 $1.89 $1.53
Oil and natural gas
liquids (per bbl) $12.69 $18.29 $18.80
Wexpro settlement investment base, net
of deferred income taxes (in 000 $97,594 $72,867 $74,806
Energy-marketing volumes
(in thousands of equivalent dth) 113,513 142,601 152,280
Natural gas-gathering volumes (in Mdth)
For unaffiliated customers 72,908 57,586 48,525
For Questar Gas 29,893 28,506 30,199
For other affiliated customers 17,720 17,679 8,794
Total gathering 120,521 103,771 87,518
Gathering revenue (per dth) $0.16 $0.21 $0.24
</TABLE>
Revenues for Market Resources decreased 12% in 1998 compared
with 1997, due primarily to lower markeitng revenues and lower
selling prices for oil and natural gas liquids (NGL). Natural
gas production improved 8% primarily as a result of producing
properties acquired in September 1998. Also, Market Resources
increased its investment in cost-of-service gas operations.
A 31% drop in the average selling price of oil and NGL caused
lower revenues from oil and NGL production and a write-down of
oil and gas properties in the fourth quarter of 1998. The
write-down, under full-cost accounting rules, amounted to $34
million before income taxes and included $19 million for U.S.
properties and $15 million for Canadian properties. The
write-down reduced income by $20.3 million after taxes. Market
Resources wrote down oil and gas properties by $3 million
before taxes or $1.7 million after taxes in the fourth quarter
of 1997. The 1997 write-down resulted from lower Canadian oil
and gas prices.
The average price for oil and NGL declined from $18.29 in 1997
to $12.69 in 1998 largely due to surplus supplies. Production
of oil and NGL was 1% lower in 1998 after registering a 17%
increase in 1997 attributable to reserve acquisitions in 1996.
Natural gas selling prices increased 2% in 1998 following a 24%
increase in 1997. Gas production rose 3.9 billion cubic feet
(Bcf) or 8% in 1998 due to the acquisition of reserves.
On September 1, 1998, Market Resources completed the purchase
of an estimated 150 billion cubic feet equivalent of proved oil
and gas reserves, primarily in Oklahoma, as well as in Texas,
Arkansas and Louisiana. Approximately 80 percent of the
reserves are natural gas. The purchase price was $155 million.
Production from these new properties was about .9 Bcf of gas
and 25,000 barrels (bbls) of oil and NGL per month. In a
separate purchase also effective September 1998, Market
Resources acquired 4.8 Bcfe of proved reserves (90% gas) for
$3.1 million in western Canada.
Market Resources achieved a five-year average finding cost of
$.93 per thousand cubic feet equivalent (Mcfe), including
cost-of-service reserves, in 1998 compared with $.78 per Mcfe
in 1997. Noncost-of-service reserve additions amounted to 173
Bcfe in 1998, representing a production-replacement ratio of
250%. Reserve additions in 1997 of 45 Bcfe resulted in a 62%
production-replacement ratio.
Revenues from Wexpro's cost-of-service gas operations increased
16% in 1998 as a result of investments made in cost-of-service
properties. Wexpro's investment base, net of deferred income
taxes, grew 34% to $97,594,000 as of December 31, 1998.
Wexpro's after-tax return on investment in those properties
averaged 20.6% in 1998. For more details, see a summary of the
Wexpro settlement agreement in Note 9 to the consolidated
financial statements.
Market Resources periodically enters into swaps, futures
contracts or option agreements to hedge its exposure to price
fluctuations in connection with marketing production of natural
gas and oil. Market Resources currently has hedged
approximately 57% of its existing 1999 gas production at a
price of about $1.99 per Mcf, net back to the well. Roughly
46% of its existing 1999 oil production is currently hedged at
$14.66 per bbl, net back to the well.
A 21% decline in marketing revenues was parallel to a 20% drop
in the quantities of energy-marketing volumes. Natural gas
volumes, which comprise 85% of the total, fell 23% in 1998. The
margin received on energy-marketing transactions decreased by
43% in 1998 after falling by 68% in 1997. The 1998 decrease
was caused by increased competition and reduced value of
firm-transportation contracts. The 1997 decrease was the result
of paying higher prices for production from affiliated
companies. Market Resources also markets oil and electricity,
which represented 18% of energy-marketing revenues in 1998 and
16% in 1997. Market Resources periodically enters into swaps,
futures contracts or option agreements to secure a known margin
for the purchase and resale of gas, oil and electricity in
marketing activities.
Revenues from gas gathering and processing fell 16% in 1998
when compared with 1997 due to a negotiated decrease in rates
charged to Questar Gas. Revenues from gas gathering and
processing declined by 12% in 1997. The 1997 decrease was the
result of selling two processing plants and revising a
gathering contract with Questar Gas.
A reduction in projected gathering-contract revenues caused a
$3 million pretax, or $1.9 million after-tax, writedown of
gathering assets in the fourth quarter of 1997. The write-down
was triggered after the Questar Gas contract revision when it
was determined that undiscounted future cash flows measured
less than the investment in plant assets.
Operating and maintenance (O & M) expenses increased 3% in 1998
and 10% in 1997 when compared with the prior year, primarily
due to the addition of oil and gas properties. Also, in 1998
there was an increase in cost-of-service activities. In 1997,
two processing plants were sold and an early-retirement program
was offered, which partially offset increases discussed.
REGULATED SERVICES - Regulated Services conducts Questar's
natural gas distribution, transmission and storage and
nonregulated retail energy services.
Natural Gas Distribution - Questar Gas conducts the Company's
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>
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 stablized 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 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' O & M 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. O & M 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.
Natural Gas Transmission - Questar Pipeline conducts the
Company's natural gas transmission and storage 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
Transportation $70,824 $68,837 $67,656
Storage 36,463 34,410 34,280
Other 1,270 2,190 2,242
Total revenues 108,557 105,437 104,178
Operating expenses
Operating and maintenance 38,832 37,334 39,959
Depreciation and amortization 13,927 14,797 14,206
Other taxes 2,600 2,816 2,519
Total expenses 55,359 54,947 56,684
Operating income $53,198 $50,490 $47,494
OPERATING STATISTICS
Natural gas transportation volumes (in Mdth)
For unaffiliated customers 120,747 116,215 131,895
For Questar Gas 107,501 110,311 100,161
For other affiliated customers 26,878 37,797 44,327
Total transportation 255,126 264,323 276,383
Transportation revenue (per dth) $0.28 $0.26 $0.24
Clay Basin storage, working gas-
capacity (in Bcf) 51.3 46.3 46.3
</TABLE>
Revenues were $3,120,000 higher in 1998 when compared with 1997
as a result of increasing firm-transportation reservation fees
and expanding firm-storage capacity. Revenues increased
$1,259,000 or 1% in 1997 when compared with 1996 as a result of
adding firm-transportation contracts. The new contracts cover
several short-haul portions of the pipeline.
Transportation revenues were $1,987,000 higher in 1998 when
compared with 1997 as a result of higher average
firm-transportation fees. However, transportation volumes
declined by 3% from 1997. Marketing programs continue to seek
replacement of customers that leave the system. As of December
31, 1998, approximately 76% of Questar Pipeline's
transportation system was reserved by firm-transportation
customers under contracts with varying terms and lengths. The
remaining 24% of transportation system capacity, which has
multiple delivery points, is available for interruptible
transportation.
Questar Gas has reserved transportation capacity from Questar
Pipeline of approximately 800,000 dth per day, representing 74%
of the total reserved daily-transportation capacity at December
31, 1998. This contract, which accounts for 79% of the demand
charges collected by Questar Pipeline, expires June 30, 1999.
Management intends to extend the contract and does not believe
that the new contract will have a material impact on the
results of operations, financial position or cash flows of
Questar Pipeline.
Questar Pipeline expanded working gas capacity at its Clay
Basin underground storage facility in 1998 by 5 Bcf to 51.3
Bcf. Questar Pipeline was able to sign-up customers for the
new capacity under long-term commitments. The expansion, which
began service in May 1998, added $2,026,000 to 1998 revenues.
Customers pay a fixed fee to reserve firm-storage capacity.
Storage revenues were flat in 1997 when compared with 1996.
Storage capacity at the end of 1998 was 100% subscribed and
about 76% of the contractual volumes had remaining terms of at
least 10 years. Questar Gas has reserved 24% of firm-storage
capacity for at least 10 years.
Questar Pipeline's O & M expenses increased 4% in 1998 compared
with 1997 due primarily to expansion of data processing and
telecommunications networks and more spending on general
maintenance and repair projects. However, labor costs were
$750,000 lower in 1998 due to a reduction in the number of
employees. An early-retirement program was offered to employees
of Regulated Services effective July 31, 1998. O & M expenses
decreased 7% in 1997 because of cost-containment measures and
reduced labor and related costs. In 1997, Questar Gas and
Questar Pipeline combined functions common to gas-distribution
and gas-transmission operations in order to eliminate
duplications.
Questar Pipeline has a 50% ownership interest in a partnership
that constructed the 270-mile Phase II of the TransColorado
Pipeline in western Colorado and northwestern New Mexico.
Construction of Phase II began in July 1998 and was
substantially completed at December 31, 1998. The in-service
date for Phase II is expected to be April 1999. With
completion of Phase II, Questar Pipeline will acquire El Paso
Energy Corporation's 50% interest in Phase I of the pipeline
project completed in 1996, making Questar Pipeline a 50% owner
of the entire project with KN Energy.
The 292-mile pipeline cost roughly $295 million, including the
costs of Phase I. During its startup period, the pipeline's
capacity is expected to be about 138 MMcf per day. Pipeline
capacity will be increased to its designed capacity of 300 MMcf
per day by adding compression as load requirements develop. The
two owners have agreed to contract for some capacity at a
discounted rate during the first three years of operation.
However, the cost of operating the pipeline during this period
is expected to exceed the revenue for transporting gas. The
pipeline has a tariff rate of $.40 per dth, but likely will be
required to offer discounts to shippers during the first
several years of service because of competitive market
conditions. A major factor is the differential in gas prices
between the San Juan basin and the Rocky Mountains. The
differential is generally seasonal with higher prices occurring
during the summer to meet demand for electricity generation.
TransColorado Gas Transmission Co., a partnership in which
Questar Pipeline owns a 50% interest through a subsidiary,
entered into a $200 million, three-year revolving credit
facility on October 14, 1998. Questar Pipeline and KN Energy
have each guaranteed the repayment of their proportionate share
of the loan. Proceeds from this debt were used to finance the
construction of the TransColorado Pipeline. The partnership had
borrowed $160 million under this arrangement as of December 31,
1998.
A subsidiary of Questar Pipeline, Questar Line 90 Company,
purchased an oil pipeline extending from the Paradox producing
basin of northwestern New Mexico to Long Beach, California, in
1998 for $38 million. The Company intends to convert this
line, named the Southern Trails Pipeline, to transport natural
gas to customers in the Los Angeles basin. At this time,
conversion and compression facilities are expected to add
approximately $117 million to the total cost of the project and
to be in-service by mid-2000. The pipeline capacity is expected
to be 120 MMcf per day after modifications. Questar Pipeline
plans to connect the Southern Trails Pipeline to the
TransColorado and other pipelines.
CORPORATE AND OTHER OPERATIONS - This segment's activities
include data processing, communications and corporate services.
Net income reported by other operations amounted to $8,335,000
in 1998, $8,057,000 in 1997, and $4,389,000 in 1996. Questar
sold 220,000 shares of Nextel Communications in 1998, 805,000
shares in 1997 and 620,000 shares in 1996. These sales
resulted in after-tax gains of $2.8 million in 1998, $5.5
million in 1997 and $3.7 million in 1996. In 1998, Questar
InfoComm converted an interest in a Utah affiliate of Nextlink
into 189,312 shares of Nextlink and realized a $3,536,000
after-tax gain. Another significant aspect of other operations
is providing data processing and communications services to
other Questar-affiliated companies.
CONSOLIDATED OPERATING RESULTS
Revenues: Consolidated revenues were lower by $30,081,000 or
3% in 1998 compared with 1997. Reduced energy-marketing sales
and lower oil and NGL prices were partially offset by increased
revenues from natural gas distribution and transmission
operations and higher natural gas production and prices from
Market Resources. Consolidated revenues rose 14% in 1997
because of increased gas-and -oil production and higher
gas-selling prices plus increased natural gas-distribution
revenues.
Natural gas and other product purchases: Natural gas and other
product purchases were 9% lower in 1998 compared with 1997 as a
result of a decrease in purchases for energy-marketing sales.
In 1997, natural gas and other product purchases increased
$85,670,000 or 27% primarily due to higher gas-purchase costs
for natural gas distribution and energy-marketing customers.
Operating and maintenance expenses: Operating and maintenance
expenses increased 4% in 1998 compared with 1997. The primary
causes of the higher expenses were related to development of
new computer and communications systems, operations of
additional gas properties and the growth in the number of
customers served.
Eligible employees in Regulated Services were offered an
early-retirement package that was effective July 31, 1998.
Enhanced benefits were paid to 178 employees who took advantage
of the offer. Regulated Services' work force was reduced by
more than 10%, which will decrease future operating expenses.
For the last five months of 1998, the net reduction of
operating expenses in excess of the cost of the program was
approximately $2.8 million. Regulated Services is amortizing
the costs associated with the early-retirement program over a
five-year period in accordance with anticipated regulatory
treatment.
Depreciation expenses: Depreciation and amortization expenses
increased 6% in 1998 and 12% in 1997 as a result of increased
capital investment in all business segments and higher gas and
oil production. The full-cost amortization rate was $.85 per
Mcfe in 1998, $.84 per Mcfe in 1997 and $.79 per Mcfe in 1996.
In addition to depreciation expense, the Company wrote down the
book value of oil and gas properties by $34 million in 1998 and
$6 million in 1997.
Other taxes: Other taxes, primarily production and property
related, decreased in 1998 because of lower oil revenues.
Other taxes increased in 1997 because of higher gas prices and
gas and oil production.
Interest and other income: Interest and other income was
$1,465,000 lower in 1998 compared with 1997 and $7,627,000
higher in 1997 compared with 1996 as described in the following
details:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Sales and conversion of interests in securities $10,474 $9,376 $6,265
Return earned on working-gas inventory 1,892 1,317 1,827
Write-off of Western Market Center (2,970)
Interest and other 5,836 8,974 6,918
Interest and other income $18,202 $19,667 $12,040
</TABLE>
Earnings from unconsolidated affiliates: Earnings from
unconsolidated affiliates were $1,424,000 or 33% lower in 1998
when compared with 1997 due to lower amounts of capitalized
interest costs and operating losses incurred by a processing
plant. Financing costs that accumulated during the planning
phase of the TransColorado Pipeline were capitalized in 1997.
Depressed prices for NGLs and higher operating costs have
caused an operating loss in a processing plant that is
partially owned by Market Resources. A rate increase in effect
for all of 1998 at the Overthrust Pipeline partially offset the
lower earnings reported by other unconsolidated affiliates.
Interest expense: Interest expense increased $4,205,000 or 10%
in 1998 when compared with 1997 due to an increase in short-
and long-term borrowings to finance a portion of the Company's
capital expenditures.
Income taxes: The effective combined federal, state and
foreign income tax rate was 27.4% in 1998, 30.3% in 1997, and
31.6% in 1996. Income tax rates were below the combined
statutory rate of about 38% primarily due to tax credits for
tight-sands gas production. Production tax credits of
$7,953,000 in 1998, $9,319,000 in 1997 and $9,491,000 in 1996
reduced income tax expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities increased to
$284,685,000 in 1998 from $202,678,000 reported in 1997.
Capital expenditures amounted to $461,347,000 in 1998, up from
$212,797,000 reported in 1997. Common equity and long-term debt
represented 59% and 41%, of consolidated capitalization at
December 31, 1998, respectively, compared with 61% and 39% a
year earlier.
Operating Activities:
Year Ended December 31,
1998 1997 1996
(In Thousands)
Net cash provided from operating
activities $284,685 $202,678 $182,921
Net cash provided from operating activities increased 40% to
$284,685,000 in 1998 as a result of the collection of
purchased-gas costs from natural gas distribution customers and
accounts receivable, and an increase in accounts payable in
connection with pipeline construction. Net cash provided from
operating activities in 1997 increased 11% when compared with
the amount reported for 1996 due primarily to higher net income
and depreciation charges and a smaller increase in accounts
receivable. The write-downs of oil and gas properties in both
1998 and 1997 were noncash expenses.
Investing Activities:
Capital expenditures amounted to $461,347,000 in 1998.
Following is a summary of capital expenditures for 1998 and
1997, and a forecast for 1999:
<TABLE>
<CAPTION>
Year Ended December 31,
1999
Estimated 1998 1997
(In Thousands)
<S> <C> <C> <C>
Market Resources
Exploratory drilling $12,900 $5,898 $6,677
Development drilling 49,000 60,402 33,301
Other exploration 8,000 6,789 8,733
Reserve acquisitions 238,500 158,000 2,155
Production 15,600 8,434 8,754
Gathering and processing 27,400 11,046 29,405
General 2,200 3,977 3,285
353,600 254,546 92,310
Regulated Services
Natural gas distribution
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
Natural gas transmission
Transmission system 26,100 21,395 19,622
Storage 1,700 6,284 1,399
Partnerships 10,200 26,000 6,214
Southern Trails Pipeline 30,000 39,471
CO2 plant 12,800 16,259
General 8,200 4,909 5,361
89,000 114,318 32,596
Other 3,900 493 77
Total Regulated Services 152,900 191,139 98,048
Corporate and other operations
General office building 1,724 9,676
Technology 5,300
Data processing and communications 4,900 2,550 6,429
Uncommitted 25,000
Other 9,100 6,088 6,334
39,000 15,662 22,439
$545,500 $461,347 $212,797
</TABLE>
Market Resources
Capital expenditures included the purchase of producing
properties, exploration and development of gas and oil reserves
and construction of NGL processing plants. The group
participated in drilling 205 wells (71 wells on a net revenue
basis) in 1998 that resulted in 114 gas wells, 43 oil wells, 23
dry holes and 25 wells in progress at year end. The 1998
success rate was 87%. Projected 1999 capital spending includes
$192 million designated for a large gas-and-oil reserve
acquisition should the opportunity exist.
Regulated Services - Natural gas distribution
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.
Regulated Services - Natural gas transmission
In 1998, transmission included the purchase a 700-mile
pipeline, substantial completion of construction of Phase II of
the TransColorado Pipeline, initial construction of a CO2
plant, replacement and expansion projects on sections of
existing transmission lines and expandsion of the Clay Basin
storage reservoir.
Corporate and Other Operations
The largest part of capital spending for other operations
included completion of a remodeling of corporate offices,
upgrading data processing and communication systems and
investment in technology companies. In 1998, Questar sold its
corporate headquarters and entered a long-term sale-leaseback
arrangement.
Financing Activities:
Funding for 1998 capital spending was obtained primarily from
internal sources, short- and long-term debt and sales of
assets. Net cash flow provided from operating activities, plus
the cash raised from selling excess assets, less dividends,
amounted to $282,193,000. Short-term debt provided $89,900,000
and long-term debt provided a net increase of $75,545,000.
Capital expenditures for 1999 will be funded primarily through
internally generated cash, short- and long-term borrowings and
the continuing disposition of securities available for sale.
Questar has short-term line-of-credit arrangements with several
banks under which it may borrow up to $285,200,000. These
lines have interest rates generally below the prime interest
rate. The balance of commercial paper and short-term bank debt
outstanding at December 31, 1998, amounted to $221,100,000 with
a weighted average interest rate of 5.38%. The balance of
commercial paper outstanding at December 31, 1997, amounted to
$131,200,000, with a weighted average interest rate of 6.14%.
Commercial-paper borrowings are backed by the short-term
line-of-credit arrangements, and rated P1 and A1 by Moody's and
Standard and Poor's, respectively.
The Company typically has negative net working capital at
December 31 because of short-term borrowings. These borrowings
are seasonal and generally peak at the end of the year because
of cold-weather gas purchases. However, Questar had
substantially more current liabilities than current assets at
December 31, 1998, because of the short-term debt connected
with the Market Resources' acquisitions. The Company expects
to convert a portion of that short-term debt to long-term debt
with the proceeds of a $300 million senior credit facility
being obtained by Market Resources.
Questar had a consolidated capital structure consisting of 41%
long-term debt and 59% common shareholders' equity at December
31, 1998. Moody's and Standard and Poor's have rated the
long-term debt of Questar Gas and Questar Pipeline A1 and A+,
respectively. Market Resources' debt rating is BBB+ by
Standard and Poor's and Baa3 by Moody's.
Market Risk
Questar's primary market risk exposures arise from commodity
price changes for natural gas, oil and other hydrocarbons and
changes in long-term interest rates. The Company has an
investment in a foreign operation that may subject it to
exchange rate risk. However, the exposure is not significant
due to the amount of the foreign investment. Market Resources
also has reserved certain volumes of pipeline capacity for
which it is obligated to pay $3 million annually for the next
eight years, whether or not it is able to market the capacity
to others.
Energy Price Risk Management: Energy price risk is a function
of changes in commondity prices as supply and demand fluctuate.
Market Resource bears a majority of the risk associated with
changes in commodity prices. A primary objective of
energy-price hedging is to protect product sales from adverse
changes in energy prices. The Company does not enter into
hedging contracts for speculative purposes.
Market Resources held hedge contracts covering the price
exposure for about 45.3 million dth of gas and 464,000 bbls of
oil at December 31, 1998 and 45 million dth of natural gas and
167,000 bbls of oil at December 31, 1997. The hedging
contracts are for gas and oil marketing activities and
Questar-owned production. The contracts at December 31, 1998,
had terms extending through March 2000 with about 96% of those
contracts expiring by the end of 1999.
The fair value of gas and oil price-hedging contracts at
December 31, 1998 was $6 million. The fair value calculation
used energy prices posted on the NYMEX, Inside FERC or other
indices at the end of 1998. A 10% decline in gas and oil prices
would cause the fair value of the contracts to increase by $3.9
million. Conversely, a 10% increase in prices results in a
$4.1 million lower fair value calculation. This sensitivity
calculation does not consider the effect of gains or losses
recognized on the underlying physical side of these
transactions, which we expect would largely offset the change
in value.
Interest-Rate Risk Management: The Company owed $622.2 million
of long-term debt at December 31, 1998, of which $434.6 million
was secured at a fixed rate. The fair value of fixed-rate debt
is subject to change as interest rates fluctuate. The fair
value of Questar's long-term debt amounted to $670.1 million at
December 31, 1998. The fair value calculation was based upon
quoted market prices, and the discounted present value of cash
flows using the Company's current borrowing rates. If interest
rates declined by 10%, fair value would increase to $693.6
millions and interest costs paid on variable-rate long-term
debt would decrease about $1.1 million. This sensitivity
calculation does not represent the cost to Company to retire
the debt securities. The book value of variable-rate debt
approximates fair value.
Foreign Currency Risk Management: The Company does not hedge
the foreign currency exposure of its foreign operation's net
assets and long-term debt. The net assets of foreign operation
were negative at December 31, 1998. Long-term debt held by the
foreign operation, amounting to $51.6 million (U.S.), is
expected to be repaid from future operations of the foreign
company.
YEAR 2000
Introduction
Questar established a team to address the issue of computer
programs and embedded computer chips being unable to distinguish
between the year 1900 and the year 2000 (Y2K).
The basic approach is to provide corporate-wide management and
coordination combined with distributed compliance responsibility at
the various business units. The corporate Y2K team is responsible for
fostering awareness, establishing corporate-level, corporate-wide
strategy; coordinating Questar action items and information; and
providing periodic internal status reports. The composition of the
team includes representation from each major Questar business unit.
The effort is designed to be consistent with the prudent efforts of
publicly traded companies of similar size, business, and complexity.
Questar InfoComm, Inc. (an affiliate which provides information
technology services to other Questar affiliates) 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
Questar's Y2K team has developed 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 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 on September 30,
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 700 individual items have been combined into 60
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."
Infrastructure. The infrastructure section of the Plan addresses
hardware and systems software other than applications software. This
effort is on schedule. The testing phase for this section has
commenced and is ongoing as hardware or system software is remediated,
upgraded or replaced. Currently there are 20 projects identified in
this section: 18 in start-up, 1 in assessment, 0 in remediation, 1 in
testing, and 0 completed. Contingency planning for this section
commenced in the third quarter of 1998. All infrastructure activities
are expected to be completed by mid-1999.
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 third quarter
1999. The testing phase is conducted as the software is remediated or
replaced. Currently there are 39 projects identified in this section
: 24 in start-up, 9 in assessment, 0 in remediation, 2 in testing, and
4 completed and deemed to be Y2K ready. Contingency planning for this
section began in the third quarter of 1998 and is scheduled to 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 year end 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 Year 2000 Project is $ 5.1 million,
with $2.3 million attributable to Questar Gas Company, $ 1.0 million
attributable to Questar Pipeline Company and $0.4 million attributable
to the Questar Market Resources group. The remainder is attributable
to Questar InfoComm, Inc. and a small portion to Questar Corporation.
This estimate does not include Questar's potential share of Y2K costs
that may be incurred by partnerships and joint ventures in which the
Company participates but is not the operator. 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 Corporation and its
subsidiaries. Management believes they are reasonable representations
of Questar'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 financial statements required by this Item are submitted in a
separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The Company 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 information requested in this item concerning Questar's
directors is presented in the Company's definitive Proxy Statement
under the section entitled "Election of Directors" and is incorporated
herein by reference. A copy of the definitive Proxy Statement will be
filed with the Securities and Exchange Commission on or about April 5,
1999.
The following individuals are serving as executive officers of
the Company:
Primary Positions Held with
Name the Company and Affiliates
R. D. Cash 56 Chairman of the Board of Directors (May 1985);
President and Chief Executive Officer, Director
(May 1984); Chairman of the Boards of
Directors, all affiliates except Questar Energy
Trading.
D. N. Rose 54 President and Chief Executive Officer, Questar
Gas (October 1984); President and Chief
Executive Officer, Questar Pipeline (March
1997); President and Chief Executive Officer,
QRS (December 1996); President and Chief
Executive Officer, QES (January 1999);
Executive Vice President, Questar (February
1996); Senior Vice President, Questar (May
1985 to February 1996); Director (May 1984);
Director, Questar Gas (May 1984), Questar
Pipeline (May 1996), QRS (December 1996), and
QES (January 1999).
Gary L. Nordloh 51 President and Chief Executive Officer, Wexpro,
Celsius, Questar E&P, QGM, Questar Energy
Trading, Questar E&P, and Celsius Ltd. (at
various times beginning in March 1991);
Executive Vice President, Questar (February
1996); Senior Vice President, Questar (March
1991 to February 1996); Director, (October
1996); Director, QMR (May 1991), all Market
Resources subsidiaries (various times beginning
in June 1989); Chairman, Questar Energy
Trading (August 1998).
Clyde M. Heiner 60 Senior Vice President, Questar (May 1984);
President and Chief Executive Officer, Questar
InfoComm (February 1993); Director, QMR (May
1984) and Questar InfoComm (February 1993).
S. E. Parks 47 Vice President, Treasurer and Chief Financial
Officer, Questar and all affiliates except
Questar Energy Trading (February 1996);
Treasurer, Questar and affiliates except
Questar Energy Trading (at various dates
beginning in May 1984); Director, Celsius and
Questar E&P (May 1996).
Gary G. Sackett 58 Vice President and General Counsel (February
1997 to April 1999); Associate General Counsel
(May 1980 to February 1997) and Assistant Vice
President (May 1986 to February 1997.)
Connie C. Holbrook 52 Vice President and Corporate Secretary (October
1984); General Counsel (April 1999); Corporate
Secretary, Questar Gas and other affiliates
except Questar Energy Trading (at various dates
beginning in March 1982); Director, Celsius
(May 1985) and Questar E&P (June 1987).
There is no "family relationship" between any of the listed
officers or between any of them and the Company's directors. The
executive officers serve at the pleasure of the Board of Directors.
There is no arrangement or understanding under which the officers were
selected. Information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, is presented in the
Company's definitive Proxy Statement under the section entitled
"Section 16(a) Compliance" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information requested in this item is presented in Questar's
definitive Proxy Statement for the Company's 1999 annual meeting,
under the sections entitled "Executive Compensation" and "Election of
Directors" and is incorporated herein by reference. The sections of
the Proxy Statement labelled "Committee Report on Executive
Compensation" and "Cumulative Total Shareholder Return" are expressly
not incorporated into this document.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information requested in this item for certain beneficial
owners is presented in Questar's definitive Proxy Statement for the
Company's 1999 annual meeting under the section entitled "Security
Ownership, Principal Holders" and is incorporated herein by reference.
Similar information concerning the securities ownership of directors
and executive officers is presented in the definitive Proxy Statement
for the Company's 1999 annual meeting under the section entitled
"Security Ownership, Directors and Executive Officers" and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information requested in this item for related transactions
involving the Company's directors and executive officers is presented
in the definitive Proxy Statement for the Questar's 1999 annual
meeting under the section entitled "Election of Directors."
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.
(a)(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
2.* Plan and Agreement of Merger dated as of December 16,
1986, by and among the Company, Questar Systems
Corporation, and Questar E&P Corporation. (Exhibit No.
(2) to Current Report on Form 8-K dated December 16,
1986.)
3.1.* Restated Articles of Incorporation as amended effective
May 19, 1998. (Exhibit No. 3.1. to Form 10-Q Report for
Quarter ended June 30, 1998.)
3.2.* Bylaws (as amended effective August 11, 1998). (Exhibit
No. 3.2. to Form 10-Q Report for Quarter ended June 30,
1998.)
4.3.*1 Rights Agreement dated as of February 13, 1996, between
the Company and Chemical Mellon Shareholder Services
L.L.C. pertaining to the Company's Shareholder Rights
Plan. (Exhibit No. 4. to Current Report on Form 8-K dated
February 13, 1996.)
10.1.* Stipulation and Agreement, dated October 14, 1981,
executed by Mountain Fuel; Wexpro; 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 Mountain Fuel Supply Company's Form 10-K Annual Report
for 1981.)
10.2.*2 Questar Corporation Annual Management Incentive Plan, as
amended and restated effective May 19, 1998. (Exhibit No.
10.1. to Form 10-Q Report Quarter ended June 30, 1998.)
10.3.*2 Questar Corporation Executive Incentive Retirement Plan,
as amended and restated effective May 19, 1998. (Exhibit
No. 10.2. to Form 10-Q Report for Quarter Ended June 30,
1998.)
10.4.*2 Questar Corporation Long-Term Stock Incentive Plan, as
amended and restated effective February 10, 1998.
(Exhibit No. 10.4. to Form 10-K Annual Report for 1997.)
10.5.*2 Questar Corporation Executive Severance Compensation Plan,
as amended and restated effective May 19, 1998. (Exhibit
No. 10.3. to Form 10-Q Report for Quarter Ended June 30,
1998.)
10.6.*2 Questar Corporation Deferred Compensation Plan for
Directors, as amended and restated effective May 19, 1998.
(Exhibit No. 10.5. to Form 10-Q Report for Quarter Ended
June 30, 1998.)
10.7.*2 Questar Corporation Supplemental Executive Retirement
Plan, as amended and restated effective June 1, 1998.
(Exhibit No. 10.6. to Form 10-Q Report for Quarter Ended
June 30, 1998.)
10.8.*2 Questar Corporation Stock Option Plan for Directors, as
amended and restated effective October 29, 1998. (Exhibit
No. 10.10. to Form 10-Q Report for Quarter Ended September
30, 1998.)
10.9.*2 Form of Individual Indemnification Agreement dated
February 9, 1993 between Questar Corporation and
Directors. (Exhibit No. 10.11. to Form 10-K Annual Report
for 1992.)
10.10.*2 Questar Corporation Deferred Share Plan, as amended and
restated effective May 19, 1998. (Exhibit No. 10.7. to
Form 10-Q Report for Quarter Ended June 30, 1998.)
10.11.*2 Questar Corporation Deferred Compensation Plan, as amended
and restated effective May 19, 1998. (Exhibit No. 10.10.
to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.12.* Agreement and Plan of Reorganization dated April 29, 1994,
by and between Nextel Communications, Inc.; Questar
Corporation; Advance MobilComm, Inc.; Robert C. Mearns and
Francis G. Fuson. (Exhibit No. 10.14. to Form 10-Q Report
for Quarter ended June 30, 1994.)
10.13.*2 Questar Corporation Directors' Stock Plan as approved May
21, 1996. (Exhibit No. 10.15. to Form 10-Q Report for
Quarter ended June 30, 1996.)
10.14.*2 Questar Corporation Deferred Share Make-Up Plan. (Exhibit
No. 10.8. to Form 10-Q Report for Quarter Ended June 30,
1998.)
10.15.*2 Questar Corporation Special Situation Retirement Plan.
(Exhibit No. 10.10. to Form 10-Q Report for Quarter Ended
June 30, 1998.)
21. Subsidiary Information.
23. Consent of Independent Auditors.
24. Power of Attorney.
27. Financial Data Schedule.
99.1. Undertakings for Registration Statements on Form S-3 (No.
33-48168) and on Form S-8 (Nos. 33-4436, 33-15149,
33-40800, 33-40801, 33-48169, 333-04913, and 333-04951).
________________________
*Exhibits so marked have been filed with the Securities and
Exchange Commission as part of the indicated filing and are
incorporated herein by reference.
1The name of the Rights Agent has been changed to ChaseMellon
Shareholder Services, L.L.C.
2Exhibit so marked is management contract or compensation plan or
arrangement.
(b) The Company did not file any Current Reports 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 CORPORATION
SALT LAKE CITY, UTAH
FORM 10-K -- ITEM 14 (a) (1) AND (2)
QUESTAR CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following financial statements of Questar Corporation and
subsidiaries are included in Item 8:
Consolidated Statements of income for Years ended December 31, 1998,
1997 and 1996
Consolidated balance sheets at December 31, 1998 and 1997
Consolidated statements of common shareholder's equity for Years
ended December 31, 1998, 1997 and 1995
Consolidated statements of cash flows for Years ended December 31,
1998, 1997 and 1996
Notes to consolidated 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.
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
Questar Corporation
We have audited the accompanying consolidated balance sheets of
Questar Corporation and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income and
common shareholders' 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 consolidated
financial position of Questar Corporation and subsidiaries at
December 31, 1998 and 1997, and the consolidated results of their
operations and their 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
<PAGE>
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
REVENUES $906,256 $936,337 $817,981
OPERATING EXPENSES
Natural gas and other product purchases 365,168 399,941 314,271
Operating and maintenance 212,358 204,834 196,389
Depreciation and amortization 125,157 118,037 105,209
Write-down of oil and gas properties 34,000 6,000
Other taxes 36,792 37,370 30,489
TOTAL OPERATING EXPENSES 773,475 766,182 646,358
OPERATING INCOME 132,781 170,155 171,623
INTEREST AND OTHER INCOME 18,202 19,667 12,040
EARNINGS FROM UNCONSOLIDATED
AFFILIATES 2,917 4,341 927
DEBT EXPENSE (47,971) (43,766) (41,083)
INCOME BEFORE INCOME TAXES 105,929 150,397 143,507
INCOME TAXES 29,030 45,602 45,362
NET INCOME $76,899 $104,795 $98,145
EARNINGS PER COMMON SHARE
Basic $0.93 $1.27 $1.20
Diluted 0.93 1.27 1.19
Average common shares outstanding
Basic 82,365 82,166 81,655
Diluted 82,817 82,667 82,072
</TABLE>
See notes to consolidated financial statements
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31,
1998 1997
(In Thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and short-term investments $17,489 $17,271
Accounts receivable 141,186 149,712
Unbilled gas accounts receivable 36,444 37,302
Inventories, at lower of average cost or market
Gas stored underground 26,797 19,881
Materials and supplies 11,020 9,187
Total inventories 37,817 29,068
Purchased-gas adjustments 2,067 37,251
Prepaid expenses and deposits 11,864 14,420
TOTAL CURRENT ASSETS 246,867 285,024
PROPERTY, PLANT AND EQUIPMENT
Market Resources 1,412,641 1,175,241
Regulated Services - gas distribution 948,280 882,936
Regulated Services - gas transmission 670,456 580,603
Regulated Services - other 3,066 2,579
Corporate and other operations 70,079 100,578
3,104,522 2,741,937
LESS ALLOWANCES FOR DEPRECIATION
AND AMORTIZATION
Market Resources 717,129 617,065
Regulated Services - gas distribution 382,657 354,761
Regulated Services - gas transmission 215,589 202,427
Regulated Services - other 2,216 1,940
Corporate and other operations 39,290 34,524
1,356,881 1,210,717
NET PROPERTY, PLANT AND EQUIPMENT 1,747,641 1,531,220
SECURITIES AVAILABLE FOR SALE,
approximates fair value 56,910 55,925
INVESTMENT IN UNCONSOLIDATED
AFFILIATES 58,638 29,952
OTHER ASSETS
Unamortized costs of reacquired debt 13,326 11,666
Income taxes recoverable from customers 9,409 10,923
Other noncurrent assets 28,490 20,307
TOTAL OTHER ASSETS 51,225 42,896
$2,161,281 $1,945,017
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
1998 1997
(In Thousands)
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt $221,100 $131,200
Accounts payable and accrued expenses
Accounts and other payables 170,670 134,976
Federal income taxes 8,698 6,447
Other taxes 22,712 19,527
Interest 7,676 7,994
Total accounts payable and accrued expenses 209,756 168,944
Current portion of long-term debt 6,006 6,068
TOTAL CURRENT LIABILITIES 436,862 306,212
LONG-TERM DEBT, less current portion 615,770 541,986
DEFERRED INCOME TAXES 197,206 214,818
OTHER LONG-TERM LIABILITIES 27,450 29,801
DEFERRED INVESTMENT TAX CREDITS 6,035 6,422
COMMITMENTS AND CONTINGENCIES - Note 6
COMMON SHAREHOLDERS' EQUITY
Common stock - without par value; 350,000,000
shares authorized; 82,632,078 outstanding at
December 31, 1998 and 82,142,084 outstanding
at December 31, 1997 298,888 291,322
Retained earnings 564,958 541,663
Other comprehensive income 18,067 22,966
Note receivable from employee
investment plan (ESOP) (3,955) (10,173)
TOTAL COMMON SHAREHOLDERS' EQUITY 877,958 845,778
$2,161,281 $1,945,017
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Other
Note Compre- Compre-
Common Stock Retained Receivable hensive hensive
Shares Amount Earnings from ESOP Income Income
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996 81,395,628 $283,776 $438,284 $(21,238) $11,853
Issuance of common stock 744,334 10,396
Purchase of common stock (90,188) (1,559)
1996 net income 98,145 $98,145
Payment of dividends
Preferred stock (391)
Common stock of $.595 per share (48,589)
Income tax benefit of dividends
paid to ESOP 350
Collection of note receivable from ESOP 5,682
Other comprehensive income
Unrealized loss on securities available
for sale, net of income tax benefits of
$2,752,000 (4,443) (4,443)
Foreign currency translation adjustment,
net of income tax benefits of $97,000 (181) (181)
Balances at December 31, 1996 82,049,774 292,613 487,799 (15,556) 7,229 $93,521
Issuance of common stock 745,212 11,328
Purchase of common stock (652,902) (12,619)
1997 net income 104,795 104,795
Payment of dividends
Preferred stock (192)
Common stock of $.62 per share (50,943)
Premium paid on retired preferred stock (48)
Income tax benefit of dividends
paid to ESOP 252
Collection of note receivable from ESOP 5,383
Other comprehensive income
Unrealized gain on securities
available for sale,
net of income taxes of $9,642,000 15,564 15,564
Foreign currency translation adjustment,
net of income taxes of $98,000 173 173
Balances at December 31, 1997 82,142,084 291,322 541,663 (10,173) 22,966 120,532
Issuance of common stock 521,879 8,243
Purchase of common stock (31,885) (677)
1998 net income 76,899 $76,899
Payment of common stock dividends
of $.6525 per share (53,747)
Income tax benefit of dividends
paid to ESOP 143
Collection of note receivable from ESOP 6,218
Other comprehensive income
Unrealized loss on securities
available for sale,
net of income tax benefit of $3,086,000 (4,992) (4,992)
Foreign currency translation adjustment,
net of income taxes of $53,000 93 93
Balances at December 31, 1998 82,632,078 $298,888 $564,958 $(3,955) $18,067 $72,000
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $76,899 $104,795 $98,145
Depreciation and amortization 128,664 122,517 110,006
Deferred income taxes (14,524) 5,929 17,137
Deferred investment tax credits (387) (388) (461)
Write-down of oil and gas properties 34,000 6,000
Income from unconsolidated affiliates, net
of cash distributions (360) (2,541) (655)
Gain from sales and conversion of securities (10,474) (9,376) (6,265)
213,818 226,936 217,907
Changes in operating assets and liabilities
Accounts receivable 9,922 (9,555) (51,604)
Inventories (7,238) (6,725) 5,767
Prepaid expenses and deposits 2,556 (865) (2,590)
Accounts payable and accrued expenses 38,207 686 44,571
Federal income taxes 2,251 7,444 3,048
Purchased-gas adjustments 35,184 (13,041) (33,392)
Other (10,015) (2,202) (786)
NET CASH PROVIDED FROM OPERATING
ACTIVITIES 284,685 202,678 182,921
INVESTING ACTIVITIES
Capital expenditures
1 Purchase of property, plant and equipment (427,680) (199,919) (287,489)
Other investments (33,667) (12,878) (4,346)
Total capital expenditures (461,347) (212,797) (291,835)
Proceeds from disposition of property, plant
and equipment, and investments 44,496 13,118 10,418
Proceeds from sales of securities 6,759 17,268 13,202
NET CASH USED IN INVESTING ACTIVITIES (410,092) (182,411) (268,215)
FINANCING ACTIVITIES
Issuance of common stock 8,243 11,328 10,396
Purchase of Questar common stock (677) (12,619) (1,559)
Redemption of preferred stock (4,876) (129)
Issuance of long-term debt 152,743 60,047 181,500
Repayment of long-term debt (77,198) (70,479) (61,985)
Increase in short-term loans 89,900 53,400 600
Collection of note receivable from ESOP 6,218 5,383 5,682
Income tax benefit of dividends paid to ESOP 143 252 350
Payment of dividends (53,747) (51,135) (48,980)
NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES 125,625 (8,699) 85,875
CHANGE IN CASH AND SHORT-TERM INVESTMENTS 218 11,568 581
BEGINNING CASH AND SHORT-TERM INVESTMENTS 17,271 5,703 5,122
ENDING CASH AND SHORT-TERM INVESTMENTS 17,489 17,271 5,703
</TABLE>
See notes to consolidated financial statements
<PAGE>
QUESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Accounting Policies
Principles of Consolidation: The consolidated financial
statements contain the accounts of Questar Corporation and
subsidiaries (Questar or the Company). Questar is an intregrated
resources and energy services holding company with two principal
lines of business: nonregulated and regulated. The Company's
nonregulated activities of exploration and production, gas
gathering and processing, and energy marketing are conducted by
Market Resources. The Company's regulated activities of
natural-gas distribution, transmission and storage operations are
conducted by Regulated Services. Natural gas-distribution
activities are conducted by Questar Gas, formerly named Mountain
Fuel, and transmission and storage activities are conducted by
Questar Pipeline. Regulated Services also includes Questar Energy
Services, formerly part of Market Services, which conducts retail
energy-services operations. Corporate and other operations
include data processing, telecommunications and corporate
activities. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Investments in Unconsolidated Affiliates: Questar uses the
equity method to account for investments in affiliates in which
it does not have control. Principal affiliates include:
Overthrust Pipeline Company, TransColorado Gas Transmission
Company, Canyon Creek Compression Company, Western Market Center
and Blacks Fork Gas Processing Company. Generally, the Company's
investment in these affiliates equals the underlying equity in
net assets.
Regulation: Questar Gas 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. Questar
Pipeline is regulated by the Federal Energy Regulatory Commission
(FERC). These regulatory agencies establish rates for the
storage, transportation and sale 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 of rate-regulated businesses 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 nonrate regulated 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
records gas-distribution revenues for gas delivered to
residential and commercial customers but not billed at the end of
the accounting period. Rate regulated companies periodically
collect revenues subject to possible refunds pending final orders
from regulatory agencies. These companies establish reserves for
revenues collected subject to refund.
Purchased-Gas Adjustments: Questar Gas accounts for
purchased-gas costs in accordance with procedures authorized by
the PSCU and PSCW under which purchased-gas costs that are
different from those provided for in 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.
Securities Available for Sale: The value of securities available
for sale approximates fair value at the balance sheet date based
on published share prices. The Company records unrealized gains
or losses, based on market value net of income taxes, as a
separate component of other comprehensive income in shareholders'
equity at the balance sheet date. Gains or losses resulting from
the sale of securities are included in the determination of
income.
Property, Plant and Equipment: Property, plant and equipment is
stated at cost. The Company employs the full-cost accounting
method for a majority of its gas and oil exploration and
development activities. Under the full-cost method, all costs
associated with the acquisition, exploration and development of
oil and gas reserves are capitalized. If net capitalized costs
exceed the present value of estimated future net revenues from
proved gas and oil reserves plus the fair value of unproved
properties, (the full-cost ceiling) the excess is expensed.
Wexpro, a company in the Market Resources group, uses the
successful-efforts accounting method to account for its
development activities under the terms of the Wexpro settlement
agreement (Note 9). Questar follows the provisions of Statement
of Financial Accounting Standards (SFAS) 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." The provisions of SFAS 121 do not supersede
full-cost accounting rules, which require a quarterly full-cost
ceiling test.
The provision for depreciation and amortization is based upon
rates that will systematically charge the costs of assets against
income over the estimated useful lives of those assets. The
investment in natural gas distribution, transmission, storage and
gathering property, plant and equipment, and processing plants is
charged to expense using the straight-line method. The costs of
gas and oil wells and leaseholds are charged to expense using the
units-of-production method. Average depreciation and
amortization rates used were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Market Resources
Exploration and production,
per Mcf equivalent
Full-cost amortization rate
(U.S. and Canada) $0.85 $0.84 $0.79
Wexpro depreciation rate $0.39 $0.39 $0.45
Gas gathering 4.9% 5.8% 4.3%
Regulated Services
Natural gas distribution
Distribution plant 4.3% 4.2% 4.1%
Gas wells, per Mcf $0.17 $0.16 $0.16
Natural gas transmission 3.2% 3.5% 3.7%
Other operations 8.5% 6.7% 7.0%
</TABLE>
Acquisition: A subsidiary of Market Resources acquired 100
percent of the common stock of HSRTW, Inc., a wholly owned
subsidiary of HS Resources, Inc. for $155 million, effective
September 1, 1998. Market Resources obtained an estimated 150
billion cubic feet equivalent of proved oil and gas reserves
primarily in Oklahoma, as well as in Texas, Arkansas and
Louisiana as a result of the transaction. The transaction was
accounted for as a purchase.
Capitalized Interest: Questar's regulated subsidiaries
capitalize the cost of capital employed during the construction
period of plant and equipment and the Company's nonregulated
subsidiaries capitalize interest costs during construction of
assets when applicable. The sum of allowance for funds used
during construction (AFUDC) and capitalized interest amounted to
$2,847,000 in 1998, $2,268,000 in 1997 and $1,486,000 in 1996.
Reacquisition of Debt: Gains and losses on the reacquisition of
debt by regulated affiliates are deferred and amortized as debt
expense over the would-be remaining life of the retired debt or
the life of the replacement debt in order to match regulatory
treatment.
Foreign Currency Translation: The local currency is the
functional currency of the Company's foreign operations.
Translation from the functional currency to U. S. dollars is
performed for balance sheet accounts using the exchange rate in
effect at the balance sheet date. Revenue and expense accounts
are translated using an average exchange rate. Adjustments
resulting from such translations are reported as a separate
component of other comprehensive income in shareholders' equity.
Deferred income taxes have been provided on translation
adjustments because the earnings are not considered to be
permanently invested.
Energy Price Risk Management: Market Resources enters into
swaps, futures contracts or option agreements to hedge exposure
to price fluctuations in connection with marketing of the
Company's natural gas and oil production, and to secure a known
margin for the purchase and resale of gas, oil and electricity in
marketing activities. There is a high degree of correlation
between such contracts and the physical transactions. The timing
of production and of the hedge contracts is closely matched.
Hedge prices are established in the areas of Market Resources'
production operations. The Company settles most contracts in
cash and recognizes the gains and losses on hedge transactions
during the same time period as the related physical transactions.
Contracts no longer qualifying for high correlation with the
physical transactions would be marked-to-market and recognized in
current period income. Cash flows from the hedge contracts are
reported in the same category as cash flows from the hedged
assets. The Company does not enter into hedging contracts for
speculative purposes.
Interest Rate Risk Management: The Company uses fixed and
variable rate debt as part of its financing plans. These
agreements expose the Company to market risk related to changes
in interest rates. The Company has entered into interest-rate
swaps for the purpose of managing interest costs. Changes in
interest payable or receivable under these agreements are
recorded as increases or decreases of interest expense in the
accounting period incurred. The Company does not hold or issue
derivative financial instruments for speculative purposes.
Income Taxes: Regulated operations record cumulative increases
in deferred taxes as income taxes recoverable from customers.
Questar Gas and Questar Pipeline have adopted procedures with
their regulatory commissions to include under-provided deferred
taxes in customer rates on a systematic basis. Questar Gas and
Questar Pipeline use the deferral method to account for
investment tax credits as required by regulatory commissions.
Questar allocates income taxes to subsidiaries on a separate
return basis except that subsidiaries are paid for all tax
benefits utilized in the consolidated tax return.
Earnings Per Share: The Company presents basic and diluted
earnings per share (EPS) on the face of the income statement.
Basic EPS are computed by dividing net income available to common
shareholders by the weighted average number of common shares
outstanding during the accounting period, including ESOP shares.
Diluted EPS include the potential dilution as a result of
exercising stock options, which represents the difference between
the number of basic and diluted average shares outstanding shown
on the Consolidated Statements of Income. In June 1998, Questar's
common stock was split two shares for each share outstanding.
Comprehensive Income: Questar reports comprehensive income on the
Consolidated Statement of Shareholders' Equity. Other
comprehensive income transactions that currently apply to Questar
are the unrealized gains and losses in the value of investments
available for sale and foreign currency translation adjustments.
The accumulated foreign currency translation adjustments and
unrealized gains on securities available for sale amounted to
$85,000 and $17,982,000, respectively, at December 31, 1998 and
($8,000) and $22,947,000, respectively at December 31, 1997.
Income tax expenses associated with realized gains from selling
securities available for sale, which were included in other
comprehensive income in prior years, were $1.9 million in 1998,
$3.8 million in 1997 and $2.6 million in 1996.
Business Segments: Questar's lines of business disclosures are
presented in accordance with SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information," based on how
top management evaluates the performance of its business
segments. The new standard affects the level of information
disclosed, not the measurement of operating results, cash flows
or financial position. Certain intersegment sales include
intercompany profit.
Reclassifications: Certain reclassifications were made to the
1997 and 1996 financial statements to conform with the 1998
presentation.
New accounting standard: The Company is required to adopt the
accounting provisions of Statement of Financial Accounting (SFAS)
133 "Accounting for Derivative Instruments and Hedging
Activities" in 2000. The new accounting rules require that the
fair value of hedging instruments be measured and recorded as
either assets or liabilities on the balance sheet with a regular,
periodic mark-to-market adjustment. A majority of the Company's
hedging activities will likely qualify as cash flow hedges where
mark-to-market adjustments are recorded in other comprehensive
income. The new accounting rule is not expected to have a
significant effect on cash flow or net income. However, the
Company has not completed its evaluation of the impact of SFAS
133.
Note 2 - Debt
Questar has short-term line-of-credit arrangements with several
banks under which it may borrow up to $285,200,000. The
Company's lines of credit borrowing capacity was expanded in 1998
to provide interim financing to accommodate capital spending
until long-term financing can be arranged. These lines have
interest rates generally below the prime interest rate.
Commercial paper borrowings are backed by the short-term
line-of-credit arrangements. The details of short-term debt were
as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(Dollars In Thousands)
<S> <C> <C>
Commercial paper with variable interest rates $171,100 $131,200
Bank loans with variable interest rates 50,000
$221,100 $131,200
Weighted average interest rate at December 31 5.38% 6.14%
The details of long-term debt were as follows:
December 31,
1998 1997
(In Thousands)
Market Resources
Revolving-credit loan due 2002 with variable
interest rates (5.68% at December 31, 1998) $181,624 $133,387
Regulated Services - Natural gas distribution
Medium-term notes 6.85% to 8.43%, due 2007
to 2024 225,000 225,000
Regulated Services - Natural gas transmission
Medium-term notes 5.85% to 6.48%, due 2008
to 2018 88,400
9 3/8% debentures due 2021 85,000 85,000
9 7/8% debentures due 2020 30,000 50,000
Corporate and other
Revolving-credit term loan due 2001 with variable
interest rates (5.72% at December 31, 1998) 6,000 13,000
8.28% ESOP notes due 1999 6,000 11,300
7.11% senior notes due 2012 secured by real estate 30,638
Other 161 166
Total long-term debt outstanding 622,185 548,491
Less current portion 6,006 6,068
Less unamortized debt discount 409 437
$615,770 $541,986
</TABLE>
Maturities of long-term debt for the five years following
December 31, 1998, are as follows:
(In Thousands)
1999 $6,006
2000 7
2001 6,008
2002 185,883
2003 4,260
Cash paid for interest was $49,430,000 in 1998, $42,289,000 in
1997 and $41,338,000 in 1996.
The 7.11% senior notes due 2012 were repaid in the fourth quarter
of 1998 in connection with the sale and lease-back of Questar's
headquarters building.
At December 31, 1998, Questar Pipeline guaranteed $80 million of
long-term debt borrowed by TransColorado Gas Transmission
Company. Market Resources guaranteed $9 million of long-term
debt borrowed by Blacks Fork Gas Processing Company.
Note 3 - Common Stock
In June 1998, Questar's common stock was split into two shares
for each share outstanding. Common stock disclosures in prior
period financial statements have been restated to reflect the
stock split.
Employee Investment Plan: The Employee Investment Plan (ESOP)
allows eligible employees to purchase shares of Questar
Corporation common stock or other investments through payroll
deduction. Beginning January 1, 1999, employee purchases will be
limited to pretax contributions. The Company will increase its
matching contributions of common stock to the ESOP from 75% to
80% of the employees' purchases and continue to contribute an
additional $200 of common stock to the account of each eligible
employee. In June 1989, Questar sold 3,985,768 shares of its
common stock (LESOP shares) to the trustee of the ESOP to prefund
its matching obligation for a 10-year period. This prefunding
arrangement combined with an increase in stock price has enabled
the Company to provide an additional annual contribution of 10%
to 80% to the 75% matching contribution since 1993. The
prefunding terms of the LESOP expire in June of 1999.
The ESOP trustee financed the purchase of stock by borrowing $35
million from the Company. A note receivable from the ESOP was
recorded as a reduction of common shareholders' equity. At the
same time, Questar borrowed $35 million from a group of insurance
companies. Final payment of the loan will be made July 1999.
Interest expense on these notes to the insurance companies
totaled $716,000 in 1998, $1,130,000 in 1997 and $2,109,000 in
1996.
The ESOP is repaying the loan to Questar over 10 years using
Company contributions and dividends on LESOP shares. As the
LESOP loan is repaid, shares are released and allocated to
employee accounts. Employee accounts are credited with an
equivalent number of shares for dividends paid on allocated LESOP
shares and used by the ESOP to repay the Company. At December
31, 1998, 3,682,809 shares were allocated to employees, with the
remaining 302,959 shares unallocated. The Company's contribution
to the ESOP is determined by the amount of debt service required
after considering dividends paid on LESOP shares. Questar's
expense and contribution to the ESOP, dividends paid by the
Company to the ESOP, and income tax benefits for dividends paid
on ESOP shares and dividends paid directly to the ESOP are
summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Company's expense and contribution to the ESOP
Dividends paid by the Company to the ESOP $4,542 $4,289 $3,849
Allocated shares
Unallocated shares $2,195 $1,879 $1,571
374 660 915
Income tax benefits for dividends paid on $2,569 $2,539 $2,486
ESOP shares were recorded as
Reduction of income tax expense $840 $719 $601
Direct increase to retained earnings 143 252 350
$983 $971 $951
</TABLE>
Dividend Reinvestment and Stock Purchase Plan: The Dividend
Reinvestment and Stock Purchase Plan (Reinvestment Plan) allows
shareholders to reinvest dividends or invest additional funds in
common stock. The Reinvestment Plan purchased common stock from
the Company amounting to 329,794 shares in 1998, 296,178 shares
in 1997 and 261,874 shares in 1996. At December 31, 1998,
2,614,808 shares were reserved for future issuance.
Stock Plans: The Company has a Long-term Stock Incentive Plan
for officers and key employees and a Stock Option Plan for
nonemployee directors (Stock Plans). The number of shares made
available for a given year for options or other stock awards
under the Long-term Stock Incentive Plan is 1% of the outstanding
shares of common stock on the first day of the calendar year. No
awards may be granted under the Stock Plans after May 2001. The
option price equals the market price of the stock on the grant
date. Stock options for employees have a 10-year life and vest
in four equal annual installments beginning six months after
grant date. Nonemployee directors may receive shares of common
stock instead of cash in payment for directors fees under a
separate plan. At December 31, 1998 there were 95,602 shares
available for future issuance under this plan.
No expense has been recorded on the options granted to
nonemployee directors to date. However, a new accounting
interpretation expected to be finalized in 1999 contains a
provision that will require the Company to record an expense
based on the fair value of the options on the vesting date. Fair
value will be determined using a mathematical model.
No compensation expense is recorded for stock options issued to
employees. If compensation expense had been recorded, it would
be based on an estimate of the fair value of stock options
granted, and the Company's net income and earnings per share
would have been lower. The pro forma amounts of net income and
earnings per share shown below were calculated for options
granted since January 1, 1995. For purposes of the pro forma
expense, the weighted average fair value of the options was
amortized over the vesting period. The pro forma estimates rely
upon subjective assumptions and the use of a mathematical model
to estimate value, and may not be representative of future
results.
<TABLE>
<CAPTION>
1998 1997 1996
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
As reported
Net income $76,899 $104,795 $98,145
Diluted earnings per share $0.93 $1.27 $1.19
Pro forma
Net income $74,347 $102,073 $95,874
Diluted earnings per share $0.90 $1.24 $1.17
</TABLE>
Transactions involving option shares in the Stock Plans are
summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price Range Price
<S> <C> <C> <C>
Balance at January 1, 1996 2,958,526 $8.85- $15. $13.56
Granted 858,200 16.81 16.81
Cancelled (76,500) 13.69 - 16 15.28
Exercised (701,416) 8.85 - 16. 12.00
Balance at December 31, 1996 3,038,810 9.81 - 16.81 14.80
Granted 795,400 19.13 19.13
Cancelled (155,200) 13.69 - 19 16.34
Exercised (738,400) 9.81 - 16. 13.43
Balance at December 31, 1997 2,940,610 9.81 - 19.1 16.22
Granted 857,800 21.38 21.38
Cancelled (77,200)13.69 - 21.3 17.33
Exercised (437,209)9.81 - 16.81 14.72
Balance at December 31, 1998 3,284,001 $9.81 -$21.3 $17.74
Exercisable at December 31, 1998 2,140,251 $16.53
Available for future grant at December 31 1,163,974
</TABLE>
The stock options at December 31, 1998 had a weighted average
remaining life of 7.3 years. The fair value of the stock options
was determined on the grant date using the Black-Scholes option
valuation model. The calculated fair value of options granted
and major assumptions used in the model at the date of grant were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Fair value of options at grant date $3.94 $3.76 $3.75
Risk-free interest rate 5.56% 6.15% 5.73%
Expected price volatility 20.2% 19.0% 20.9%
Expected dividend yield 3.09% 3.19% 3.51%
Expected life in years 4.4 5.1 8
</TABLE>
In addition to stock options, the Company issued restricted
shares to officers and key employees as part of its payment of
bonuses. Compensation expense is recorded when the bonus is
earned. Restricted stock vests in two equal, annual installments
beginning one year after grant. Stock is issued at the market
price on date of issuance. Recipients of restricted stock awards
are entitled to full voting rights and receipt of dividends.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Shares of restricted stock awarded 7,620 24,274 46,972
Market price at award date $17.00 $21.38 $19.13
</TABLE>
Shareholder Rights: On February 13, 1996, Questar's Board of
Directors declared a stock right dividend for each outstanding
share of common stock. The stock rights were issued March 25,
1996. The rights become exercisable if a person, as defined,
acquires 15% or more of the Company's common stock or announces
an offer for 15% or more of the common stock. Each right
initially represents the right to buy one share of the Company's
common stock for $87.50. Once any person acquires 15% or more of
the Company's common stock, the rights are automatically
modified. Each right not owned by the 15% owner becomes
exercisable for the number of shares of Questar's stock that have
a market value equal to two times the exercise price of the
right. This same result occurs if a 15% owner acquires the
Company through a reverse merger when Questar and its stock
survive. If the Company is involved in a merger or other
business combination at any time after the rights become
exercisable, rightsholders will be entitled to buy shares of
common stock in the acquiring company having a market value equal
to twice the exercise price of each right. The rights may be
redeemed by the Company at a price of $.005 per right until 10
days after a person acquires 15% ownership of the common stock.
The rights expire March 25, 2006.
Note 4 - Financial Instruments and Risk-Management Activities
The carrying value and estimated fair values of the Company's
financial instruments were as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term investments $17,489 $17,489 $17,271 $17,271
Financial liabilities
Short-term loans 221,100 221,100 131,200 131,200
Long-term debt, including
current portion 622,185 670,075 548,491 596,804
Gas and oil price hedging contracts 6,000 2,600
</TABLE>
The Company used the following methods and assumptions in
estimating fair values: (1) Cash and short-term investments and
short-term loans - the carrying amount approximates fair value;
(2) Long-term debt - the carrying amount of variable-rate debt
approximates fair value. The fair value of fixed-rate debt is
based on quoted market prices, and on the discounted present
value of cash flows using the Company's current borrowing rates;
(3) Gas and oil price hedging contracts - the fair value of
contracts is based on market prices as posted on the NYMEX,
Inside FERC or other indices at the end of the year.
The average price of the oil contracts at December 31, 1998, was
$17.75 per bbl and was based on the average of fixed amounts in
contracts which settle against the NYMEX. All oil contracts
relate to Company-owned production where basis adjustments would
result in a net to the well price of $16.26 per bbl. The average
price of the gas contracts at December 31, 1998 was $1.97 per Mcf
representing the average of contracts with different terms
including fixed, various into-the-pipe postings and NYMEX
references. Gas-hedging contracts were in place for Market
Resources-owned production and gas-marketing transactions.
Transportation and heat-value adjustments on the hedges of
Company-owned gas as of December 31, 1998, would result in an
average price of $2.07 per Mcf, net back to the well.
Fair value is calculated at a point in time and does not
represent the amount the Company would pay to retire the debt
securities. In the case of gas and oil price-hedging activities,
the fair value calculation does not consider the physical side of
gas and oil transactions.
Energy Price Risk Management: The Market Resources group held
open hedge contracts covering the price exposure for about 45.3
million dth of gas and 464,000 bbls of oil at December 31, 1998,
and 45 million dth of natural gas and 167,000 bbls of oil at
December 31, 1997. The contracts at December 31, 1998 had terms
extending through March 2000, with about 96% of those contracts
expiring by the end of 1999. A primary objective of energy-price
hedging is to protect product sales from adverse changes in
energy prices. The Company does not enter into hedging contracts
for speculative purposes.
Interest Rate Risk Management: The Market Resources group
entered into a three-year interest rate-swap agreement in 1995
covering $25 million notional principal of floating-rate debt.
The Market Resources group recognizes interest expense and
receives a payment based on LIBOR (5.3125% at December 31, 1998)
in exchange for making a payment at a fixed rate of 5.55%. The
agreement terminated January 1999.
Credit Risk: The Company's primary market areas are the Rocky
Mountain and Midcontinent regions of the United States. Exposure
to credit risk may be impacted by the concentration of customers
in these regions 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 5 - Income Taxes
Details of Questar's income tax expenses and deferred income
taxes are provided in the following tables. 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 $39,454 $36,131 $21,412
Deferred (7,160) 6,773 18,732
State
Current 3,918 5,742 4,442
Deferred 346 639 1,273
Deferred investment tax credits (387) (388) (461)
Foreign income tax benefits (7,141) (3,295) (36)
$29,030 $45,602 $45,362
</TABLE>
The difference between income tax expense reported 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 $105,929 $150,397 $143,507
Federal income taxes at 35% $ 37,075 $ 52,639 $ 50,227
State income taxes, net of federal income
tax benefit 2,773 4,138 4,160
Tight-sands gas production credits (7,953) (9,319) (9,491)
Investment tax credits utilized (387) (388) (461)
Deferred taxes related to regulated assets
that were not provided in prior years 922 884 857
Tax benefits from dividends paid to ESO (840) (719) (601)
Foreign income tax benefits (1,061) (1,340) (36)
Other (1,499) (293) 707
Income tax expense $29,030 $45,602 $45,362
Effective income tax rate 27.4% 30.3% 31.6%
</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 $200,213 $199,888
Purchased-gas adjustments 785 14,155
Other 24,901 29,275
Total deferred tax liabilities 225,899 243,318
Deferred tax assets
Alternative minimum tax and production credit
carryforwards 12,591 15,133
Depletion and ITC carryforwards 3,661
Other 16,102 13,367
Total deferred tax assets 28,693 32,161
Less a valuation allowance 3,661
Net deferred tax assets 28,693 28,500
Net deferred tax liabilities $197,206 $214,818
</TABLE>
Cash paid for income taxes was $35,036,000 in 1998, $29,653,000
in 1997 and $22,455,000 in 1996.
Note 6 - Litigation and Commitments
Universal Resources, a subsidiary of Market Resources, is a named
defendant in a class action lawsuit involving royalty payments in
Oklahoma state court. In Bridenstine v. Kaiser-Francis Oil
Company, the plaintiffs allege fraud and contract claims and
assert damages against all defendants for a 15-year period in
excess of $35,000,000 plus punitive damages. The plaintiffs'
primary claim alleges that a transportation fee charged against
royalty payments was improper or excessive. The claims involve
wells connected to an intrastate gathering system that Questar
Gas Management, a subsidiary of Market Resources, presently owns
and operates. Kaiser-Francis and Universal Resources are the
major working interest owners and operators of a majority of the
wells connected to this pipeline system.
The Oklahoma Supreme Court has denied defendants' appeal from the
trial court's decision to certify the Bridenstine case as a class
action. Universal Resources disputes these claims. Management
cannot predict the outcome of the lawsuit, but believes it will
not have a material effect on results of operations, cash flows
or the balance sheet.
Questar Pipeline and some of its affiliates have been named as
defendants in a lawsuit filed under the federal false claims act
by an individual who is engaged in natural gas production. The
case is one of 77 substantially similar cases filed
contemporaneously by this producer against pipelines and their
respective affiliates, in which the producer alleges
mismeasurement of the heat content of natural gas volumes and
understatement of the value of gas on which royalty payments are
due the federal government. The complaint also claims treble
damages and seeks imposition of civil penalties. The producer's
complaint does not include a request for any specific monetary
damages. Management believes that the producer's allegations and
claims against the Company do not have merit. The outcome of the
case cannot be predicted at this time.
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.
There are various other legal proceedings against Questar and its
subsidiaries. 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 materially 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.
Questar Energy Trading has reserved certain volumes of pipeline
capacity for which it is obligated to pay $3 million annually for
the next eight years, whether or not it is able to market the
capacity to others.
Questar sold its headquarters building under a sale and
lease-back arrangement in 1998. The operating agreement commits
the Company to occupy the building for the next 13 years with an
option for renewal. The annual lease payment is $3.4 million for
the next five years.
Note 7 - Rate Matters
Questar Gas and Questar Pipeline last filed general rate cases in
1995. In its 1995 rate case, Questar Gas was granted a return on
rate base between 10.22% and 10.34% in Utah and 10.54% in
Wyoming. A rate of return on equity was not specified. Questar
Pipeline was granted an 11.75% return on equity in its last FERC
rate proceeding. Neither company currently plans to file a
general rate case in 1999.
A subsidiary of Questar Pipeline, Questar Southern Trails
Pipeline Company, filed an application with the FERC in January
1999 requesting permission to convert a 700-mile crude oil
pipeline, extending from New Mexico to Long Beach, California, to
carry natural gas. The application also seeks authority to
install required compression equipment and to upgrade the system
to carry 120 MMdth of gas per day.
Questar Gas routinely 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 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.
In an order issued March 2, 1998, in FERC Docket No. IN97-1, the
FERC found that Questar Pipeline was not liable for any refunds
related to charges paid by Questar Gas to Questar Pipeline for
rendering gathering services from 1988 through 1992. The FERC
had investigated whether Questar Pipeline may have violated a
provision of the Natural Gas Act and its tariff by charging
gathering rates higher than the rates specified in Questar
Pipeline's tariff.
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
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.
Note 8 - Employee Benefits
Pension Plan: The Company has a defined-benefit pension plan
covering the majority of its employees. Benefits are generally
based on the employee's age at retirement, years of service and
highest earnings in a consecutive 72 pay-period interval during
the ten years preceding retirement. The Company's policy is to
make contributions to the plan at least sufficient to meet the
minimum funding requirements of the Internal Revenue Code. Plan
assets consist principally of equity securities and corporate and
U.S. government debt obligations.
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.
A summary of pension expense is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Service cost $7,746 $7,226 $7,606
Interest cost 18,617 18,270 16,829
Expected return on plan assets (23,016) (20,970) (19,059)
Prior service and other costs 872 678 547
Amortization of early retirement costs 530 651 232
Pension expense $4,749 $5,855 $6,155
</TABLE>
Assumptions used to calculate pension costs were as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
Discount rate 6.75% 7.50% 7.00%
Rate of increase in compensation 5.00% 5.35% 5.35%
Long-term return on assets 8.50% 8.50% 8.50%
</TABLE>
The status of the pension plan was as follows:
<TABLE>
<CAPTION>
Pension Plan 1998 1997
(In Thousands)
<S> <C> <C>
Change in benefit obligation
Projected benefit obligation at January 1, $269,259 $234,234
Service cost 7,746 7,226
Interest cost 18,617 18,270
Plan amendments 7,022
Actuarial loss 15,768 20,339
Benefits paid (11,577) (10,391)
Early retirement settlements (54,036) (419)
Projected benefit obligation at December 31, 252,799 269,259
Change in plan assets
Fair value of plan assets at January 1, 284,698 252,071
Actual return on plan assets 40,347 38,217
Contributions to the plan 5,200 5,220
Benefits paid (11,577) (10,391)
Early retirement settlements (54,036) (419)
Fair value of plan assets at December 31, 264,632 284,698
Plan assets in excess of
projected benefit obligation 11,833 15,439
Unrecognized net actuarial gain (18,012) (13,265)
Unrecognized prior service cost 11,482 5,188
Unrecognized transition obligation 353 497
Prepaid pension cost recorded
in current assets $5,656 $7,859
</TABLE>
Postretirement Benefits Other Than Pensions: Generally,
postretirement health-care benefits and life insurance are
provided only to employees hired before January 1, 1997. The
Company pays a portion of the costs of health-care 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 its
transition obligation over a 20-year period, which began in 1992.
Regulated Services accounts for approximately 64% of the
postretirement benefit costs. The impact of postretirement
benefit costs on Questar's future net income will be mitigated by
recovery of these costs from customers. The regulatory agencies
allowed Questar Gas and Questar Pipeline to recover future costs
if the amounts are funded in external trusts.
A summary of the expense of postretirement benefits other than
pensions follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Service cost $1,138 $1,075 $1,015
Interest cost 4,094 4,050 3,452
Expected return on plan assets (1,830) (1,647) (1,408)
Amortization of transition obligation 1,878 1,971 1,971
Actuarial gain (68) (138)
Postretirement benefit expense $5,280 $5,381 $4,892
</TABLE>
Assumptions used to calculate postretirement benefit costs were
as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
Discount rate 6.75% 7.5% 7.0%
Long-term return on assets 8.50% 8.5% 8.5%
Health care inflation rate 11.00% 11.50% 12.0%
decreasing decreasing decreasing
to 5.5% by to 5.5% by to 5.5% by
2010 2010 2010
</TABLE>
A 1% increase in the health care inflation rate would increase
the service cost and interest cost by $153,000 and the
accumulated postretirement benefit obligation by $2,252,000. A 1%
decrease in the health care inflation rate would decrease the
service cost and interest cost by $142,000 and the accumulated
postretirement benefit obligation by $2,101,000.
The status of the postretirement benefit programs was as follows:
Postretirement Benefits Other Than Pensions
<TABLE>
<CAPTIOP>
1998 1997
(In Thousands)
<S> <C> <C>
Change in benefit obligation
Projected benefit obligation at January 1, $59,743 $48,424
Service cost 1,138 1,075
Interest cost 4,094 4,050
Plan amendments (1,409)
Actuarial loss 2,435 7,976
Benefits paid (1,756) (1,782)
Projected benefit obligation at December 31, 64,245 59,743
Change in plan assets
Fair value of plan assets at January 1, 24,684 20,477
Actual return on plan assets 4,161 2,919
Contributions to the plan 3,756 3,070
Benefits paid (1,756) (1,782)
Fair value of plan assets at December 31, 30,845 24,684
Projected benefit obligation
in excess of plan assets (33,400) (35,059)
Unrecognized transition obligation 26,284 29,571
Unrecognized net gain (3,195) (3,299)
Accrued postretirement benefit
liability recorded in current liabilities ($10,311) ($8,787)
</TABLE>
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.
Questar's postemployment liability at December 31 was $2,252,000
in 1998, $2,468,000 in 1997 and $2,412,000 in 1996. The PSCU and
the PSCW have allowed Questar Gas to recover postemployment costs
of about $1.1 million, as measured at December 31, 1994, over a
10-year period. The FERC has allowed Questar Pipeline to recover
$138,000 per year in 1998, 1997 and 1996 but required that
payments be deposited in an external trust.
Note 9 - Wexpro Settlement Agreement
Wexpro's operations are subject to the terms of the Wexpro
settlement agreement. The agreement was effective August 1,
1981, and sets forth the rights of Questar Gas' utility
operations to share in the results of Wexpro's operations. The
agreement was approved by the PSCU and PSCW in 1981 and affirmed
by the Supreme Court of Utah in 1983. Major provisions of the
settlement agreement are as follows:
a. Wexpro continues to hold and operate all oil-producing
properties previously transferred from Questar Gas' nonutility
accounts. The oil production from these properties is sold at
market prices, with the revenues used to recover operating
expenses and to give Wexpro a return on its investment. The rate
of return is adjusted annually and is currently 13.7%. Any net
income remaining after recovery of expenses and Wexpro's return
on investment is divided between Wexpro and Questar Gas, with
Wexpro retaining 46%.
b. Wexpro conducts developmental oil drilling on productive oil
properties and bears any costs of dry holes. Oil discovered from
these properties is sold at market prices, with the revenues used
to recover operating expenses and to give Wexpro a return on its
investment in successful wells. The rate of return is adjusted
annually and is currently 18.7%. Any net income remaining after
recovery of expenses and Wexpro's return on investment is divided
between Wexpro and Questar Gas, with Wexpro retaining 46%.
c. Amounts received by Questar Gas from the sharing of Wexpro's
oil income are used to reduce natural-gas costs to utility
customers.
d. Wexpro conducts developmental gas drilling on productive gas
properties and bears any costs of dry holes. Natural gas
produced from successful drilling is owned by Questar Gas. Wexpro
is reimbursed for the costs of producing the gas plus a return on
its investment in successful wells. The return allowed Wexpro
currently is 21.7%.
e. Wexpro operates natural-gas properties owned by Questar Gas.
Wexpro is reimbursed for its costs of operating these properties,
including a rate of return on any investment it makes. This rate
of return is currently 13.7%.
Note 10 - Oil and Gas Producing Activities (Unaudited)
The following information discusses Questar's oil and gas producing
activities, which are located in the United States and Canada.
Separate disclosures are presented for cost-of-service and
noncost-of-service activities.
Cost-of-service properties are those for which the operations and
return on investment are governed by the Wexpro settlement agreement
(Note 9). Production from gas properties owned or operated by Wexpro
is delivered to Questar Gas at cost of service. Production from
noncost-of-service properties is sold at market prices. These
properties include all Celsius Energy and Universal Resources
properties and Wexpro oil properties. Production from Wexpro oil
properties is sold at market prices and the income is shared with
Questar Gas after operating costs are recovered and a specified
return on investment is earned.
Information on the results of operations and standardized measure of
future net cash flows has not been included for cost-of-service
activities because operating results and the value of the related
properties are dependent upon returns established by state
regulatory agencies based on historical costs or the terms of the
Wexpro settlement agreement.
NONCOST-OF-SERVICE ACTIVITIES
Capitalized Costs: The aggregate amounts of costs capitalized for
noncost-of-service oil-and-gas producing activities and the related
amounts of accumulated depreciation and amortization follow:
December 31, 1998
United State Canada Total
(In Thousands)
Proved properties $974,768 $49,652 $1,024,420
Unproved properties 49,724 12,763 62,487
1,024,492 62,415 1,086,907
Accumulated depreciation
and amortization 538,480 29,163 567,643
$486,012 $33,252 $519,264
December 31, 1997
United State Canada Total
(In Thousands)
Proved properties $805,614 $42,882 $848,496
Unproved properties 19,200 13,390 32,590
824,814 56,272 881,086
Accumulated depreciation
and amortization 472,773 9,643 482,416
$352,041 $46,629 $398,670
December 31,
1996
United State Canada Total
(In Thousands)
Proved properties $760,329 $43,721 $804,050
Unproved properties 16,448 8,351 24,799
776,777 52,072 828,849
Accumulated depreciation
and amortization 428,708 1,494 430,202
$348,069 $50,578 $398,647
Full-Cost Amortization: Unproved properties held by Celsius Energy
and Universal Resources are excluded from amortization until
evaluation. A summary of costs excluded from the amortization pool
at December 31, 1998, and the year in which these costs were
incurred are listed below. Costs excluded from amortization
include $12,763,000 associated with Canadian properties.
<TABLE>
<CAPTION>
Year Costs Incurred
1995 and
Total 1998 1997 1996 Prior
(In Thousands)
<S> <C> <C> <C> <C> <C>
Leaseholds $49,729 $28,873 $5,747 $7,607 $7,502
Exploration 12,758 2,930 3,109 1,245 5,474
$62,487 $31,803 $8,856 $8,852 $12,976
</TABLE>
Costs Incurred: The following costs were incurred in
noncost-of-service oil-and gas-producing activities:
Year Ended December 31,
1998
United State Canada Total
(In Thousands)
Property acquisition
Unproved $29,367 $145 $29,512
Proved 126,723 3,144 129,867
Exploration 10,055 1,222 11,277
Development 45,497 5,363 50,860
$211,642 $9,874 $221,516
Year Ended December 31,
1997
United State Canada Total
(In Thousands)
Property acquisition
Unproved $4,057 $203 $4,260
Proved 2,155 2,155
Exploration 9,975 1,198 11,173
Development 45,067 4,437 49,504
$61,254 $5,838 $67,092
Year Ended December 31,
1996
United State Canada Total
(In Thousands)
Property acquisition
Unproved $1,159 $8,114 $9,273
Proved 111,994 42,380 154,374
Exploration 3,639 800 4,439
Development 13,367 778 14,145
$130,159 $52,072 $182,231
Results of Operations: Following are the results of operations of
noncost-of-service oil- and gas-producing activities before
corporate overhead and interest expenses. The Company recorded
write-downs of oil and gas properties in 1998 and 1997.
Year Ended December 31,
1998
United State Canada Total
(In Thousands)
Revenues
From unaffiliated customers $60,092 $10,384 $70,476
From affiliates 69,561 69,561
Total revenues 129,653 10,384 140,037
Production expenses 42,739 3,004 45,743
Oil-income sharing under Wexpro
settlement agreement 1,053 1,053
Depreciation and amortization 50,628 5,275 55,903
Write-down of oil and gas
properties 19,000 15,000 34,000
Total expenses 113,420 23,279 136,699
16,233 (12,895) 3,338
Income tax expense
(benefit) - Note 1 634 (5,300) (4,666)
Results of operations
before corporate overhead
and interest expenses $15,599 ($7,595) $8,004
Year Ended December 31,
1997
United State Canada Total
(In Thousands)
Revenues
From unaffiliated customers $60,650 $8,694 $69,344
From affiliates 76,858 76,858
Total revenues 137,508 8,694 146,202
Production expenses 41,981 2,424 44,405
Oil-income sharing under Wexpro
settlement agreement 2,347 2,347
Depreciation and amortization 46,372 5,374 51,746
Write-down of oil and gas
properties 3,000 3,000
Total expenses 90,700 10,798 101,498
46,808 (2,104) 44,704
Income tax expense
(benefit) - Note 1 10,500 (1,729) 8,771
Results of operations
before corporate overhead
and interest expenses $36,308 ($375) $35,933
Year Ended December 31,
1996
United State Canada Total
(In Thousands)
Revenues
From unaffiliated customers $77,235 $3,233 $80,468
From affiliates 30,814 30,814
Total revenues 108,049 3,233 111,282
Production expenses 33,824 750 34,574
Oil-income sharing under Wexpro
settlement agreement 2,768 2,768
Depreciation and amortization 40,655 1,526 42,181
Total expenses 77,247 2,276 79,523
30,802 957 31,759
Income tax expense
(benefit) - Note 1 5,349 186 5,535
Results of operations before
corporate overhead and
interest expenses $25,453 $771 $26,224
Note 1 - Income tax expense has been reduced by gas production tax
credits of $5,736,000 in 1998, $6,633,000 in 1997 and $6,245,000 in
1996.
Estimated Quantities of Proved Oil and Gas Reserves for
Noncost-of-Service Properties: The majority of the reserve
estimates located in the United States were made by Ryder Scott
Company, H. J. Gruy and Associates and Netherland, Sewell &
Associates, independent reservoir engineers, and the remainder by
the Company's reservoir engineers. Estimated Canadian reserves were
prepared by Gilbert Laustsen Jung Associates Ltd. Reserve estimates
are based on a complex and highly interpretive process that is
subject to continuous revision as additional production and
development-drilling information becomes available. The quantities
reported below are based on existing economic and operating
conditions using current prices and operating costs. All oil and
gas reserves reported were located in the United States and Canada.
The Company does not have any long-term supply contracts with
foreign governments or reserves of equity investees.
<TABLE>
<CAPTION>
Natural Gas Oil
United United
States Canada Total States Canada Total
(In Million Cubic Feet) (In Thousands of Barrels )
<S> <C> <C> <C> <C> <C> <C>
Proved Reserves
Balance at January 1, 1996 258,687 258,687 12,444 12,444
Revisions of estimates 19,219 3,354 22,573 1,286 (774) 512
Extensions and discoveries 8,331 2,534 10,865 540 84 624
Purchase of reserves in place 116,855 19,600 136,455 6,816 2,920 9,736
Sale of reserves in place (4,014) (4,014) (30) (30)
Production (39,506) (1,013) (40,519) (2,399) (103) (2,502)
Balance at December 31, 1996 359,572 24,475 384,047 18,657 2,127 20,784
Revisions of estimates 11,409 (4,635) 6,774 (1,847) (316) (2,163)
Extensions and discoveries 24,353 4,366 28,719 1,060 898 1,958
Purchase of reserves in place 8,166 8,166 351 351
Sale of reserves in place (1,292) (1,292) (450) (3) (453)
Production (44,370) (3,072) (47,442) (2,667) (271) (2,938)
Balance at December 31, 1997 357,838 21,134 378,972 15,104 2,435 17,539
Revisions of estimates 334 (3,568) (3,234) (3,199) 238 (2,961)
Extensions and discoveries 28,688 1,984 30,672 730 261 991
Purchase of reserves in place 129,207 5,110 134,317 3,720 71 3,791
Sale of reserves in place (440) (440) (76) (76)
Production (48,584) (2,725) (51,309) (2,490) (404) (2,894)
Balance at December 31, 1998 467,043 21,935 488,978 13,789 2,601 16,390
Proved Developed Reserves
Balance at January 1, 1996 245,357 245,357 11,756 11,756
Balance at December 31, 1996 299,219 14,683 313,902 16,686 1,880 18,566
Balance at December 31, 1997 300,859 16,670 317,529 13,209 1,851 15,060
Balance at December 31, 19 98 412,181 17,835 430,016 12,583 2,281 14,864
</TABLE>
Standardized Measure of Future Net Cash Flows Relating to Proved
Reserves for Noncost-of-Service Activities: Future net cash flows
were calculated at December 31 using year-end prices and known
contract-price changes. Year-end production, development costs and
income tax rates were used to compute the future net cash flows.
All cash flows were discounted at 10% to reflect the time value of
cash flows, without regard to the risk of specific properties.
The assumptions used to derive the standardized measure of future
net cash flows are those required by accounting standards and do not
necessarily reflect the Company's expectations. The usefulness of
the standardized measure of future net cash flows is impaired
because of the reliance on reserve estimates and production
schedules that are inherently imprecise, and because the costs of
oil-income sharing under the Wexpro settlement agreement were not
included.
Year Ended December 31,
1998
United State Canada Total
(In Thousands)
Future cash inflows $1,012,259 $66,873 $1,079,132
Future production and
development costs (374,046) (22,784) (396,830)
Future income tax expenses (81,076) (81,076)
Future net cash flows 557,137 44,089 601,226
10% annual discount for estimated
timing of net cash flows (220,117) (14,809) (234,926)
Standardized measure of discounted
future net cash flows $337,020 $29,280 $366,300
Year Ended December 31,
1997
United State Canada Total
(In Thousands)
Future cash inflows $937,059 $68,550 $1,005,609
Future production and
development costs (349,624) (25,066) (374,690)
Future income tax expenses (99,107) (99,107)
Future net cash flows 488,328 43,484 531,812
10% annual discount for estimated
timing of net cash flows (198,070) (14,885) (212,955)
Standardized measure of discounted
future net cash flows $290,258 $28,599 $318,857
Year Ended December 31,
1996
United State Canada Total
Future cash inflows $1,259,525 $123,186 $1,382,711
Future production and
development costs (443,074) (37,445) (480,519)
Future income tax expenses (187,263) (15,857) (203,120)
Future net cash flows 629,188 69,884 699,072
10% annual discount for estimated
timing of net cash flows (259,602) (23,188) (282,790)
Standardized measure of discounted
future net cash flows $369,586 $46,696 $416,282
The principal sources of change in the standardized measure of
discounted future net cash flows were:
Year Ended December 31,
1998 1997 1996
(In Thousands)
Beginning balance $318,857 $416,282 $222,082
Sales of oil and gas produced,
net of production costs (94,294) (101,797) (76,708)
Net changes in prices and
production costs (61,660) (138,678) 168,288
Extensions and discoveries,
less related costs 25,787 31,535 16,400
Revisions of quantity estimates (14,805) (4,979) 25,298
Purchase of reserves in place 129,867 2,155 154,374
Sale of reserves in place (540) (3,606) (3,045)
Accretion of discount 31,886 41,629 22,208
Net change in income taxes 15,727 73,804 (79,386)
Change in production rate 7,314 5,025 (19,738)
Other 8,161 (2,513) (13,491)
Net change 47,443 (97,425) 194,200
Ending balance $366,300 $318,857 $416,282
COST-OF-SERVICE ACTIVITIES
Capitalized Costs: Capitalized costs for cost-of-service oil- and
gas-producing activities net of the related accumulated depreciation
and amortization were as follows:
December 31,
1998 1997 1996
(In Thousands)
Questar Gas $27,739 $32,399 $34,334
Wexpro 104,492 87,927 81,229
$132,231 $120,326 $115,563
Costs Incurred: Costs incurred by Wexpro for cost-of-service
gas-producing activities were $24,549,000 in 1998, $10,281,000 in
1997 and $3,931,000 in 1996.
Estimated Quantities of Proved Oil and Gas Reserves for
Cost-of-Service Properties: The following estimates were made by
the Company's reservoir engineers. No estimates are available for
cost-of-service proved undeveloped reserves that may exist.
Natural Gas Oil
(In Million (In Thousands
Cubic Feet) of Barrels)
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
Note 11 - Quarterly Financial and Stock Price Data (Unaudited)
Following is a summary of quarterly financial and stock price data.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
(Dollars In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
1998
Revenues $300,083 $179,157 $150,282 $276,734 $906,256
Operating income 67,056 25,084 18,173 22,468 132,781
Net income 40,882 16,196 8,235 11,586 76,899
Basic earnings per common share 0.50 0.19 0.10 0.14 0.93
Diluted earnings per common share 0.49 0.19 0.10 0.14 0.93
Dividends per common share 0.1575 0.165 0.165 0.165 0.6525
Market price per common share
High 22 9/32 22 3/8 19 13/16 20 3/8 22 3/8
Low 20 3/16 18 11/16 15 13/16 17 3/8 15 3/16
Close $ 20 25/32 $19 5/8 $19 1/4 $19 3/8 $19 3/8
Price-earnings ratio on closing price 16.4 15.1 15.9 20.8 20.8
Annualized dividend yield on closing price 3.2% 3.4% 3.4% 3.4% 3.4%
Market-to-book ratio on closing price 1.94 1.84 1.82 1.82 1.82
Average number of common shares
traded per day 171 165 169 188 173
1997
Revenues $358,378 $151,453 $138,632 $287,874 $936,337
Operating income 71,922 23,448 20,342 54,443 170,155
Net income 40,974 13,607 15,726 34,488 104,795
Basic and diluted earnings per common share 0.50 0.16 0.19 0.42 1.27
Dividends per common share 0.1525 0.1525 0.1575 0.1575 0.62
Market price per common share
High 20 1/4 21 1/2 21 7/16 22 3/8 22 3/8
Low 17 13/16 17 1/8 19 3/16 18 3/8 17 1/8
Close $18 $20 3/16 $20 9/32 $22 5/16 $22 5/16
Price-earnings ratio on closing price 14.2 16.3 16.0 17.5 17.5
Annualized dividend yield on closing price 3.4% 3.0% 3.1% 2.8% 2.8%
Market-to-book ratio on closing price 1.84 2.05 2.01 2.17 2.17
Average number of common shares
traded per day 124 182 172 148 157
1996
Revenues $225,723 $148,968 $156,469 $286,821 $817,981
Operating income 61,061 25,169 23,268 62,125 171,623
Net income 34,596 16,068 12,787 34,694 98,145
Basic earnings per common share 0.42 0.20 0.15 0.43 1.20
Diluted earnings per common share 0.42 0.19 0.15 0.42 1.19
Dividends per common share 0.1475 0.1475 0.1475 0.1525 0.595
Market price per common share
High 17 1/4 17 5/8 18 11/16 20 11/16 20 11/16
Low 15 7/16 15 3/4 15 11/16 17 1/8 15 7/16
Close $16 1/2 $17 $17 11/16 $18 3/8 $18 3/8
Price-earnings ratio on closing price 14.9 15.0 15.5 15.4 15.4
Annualized dividend yield on closing price 3.6% 3.5% 3.3% 3.3% 3.3%
Market-to-book ratio on closing price 1.80 1.85 1.90 1.94 1.94
Average number of common shares
traded per day 142 104 156 139 135
</TABLE>
Note 12 - Operations by Line of Business
Following is a summary of operations by line of business for the
Year Ended December 31. This summary has been restated from
previous years to include another line for Market Resources.
<TABLE>
<CAPTION>
Regulated Services
Natural Natural Other Corporate Interco. Questar
Market Gas Gas & Other Trans- Consol-
Resources Dist. Trans. Operations actions idated
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Revenues
From unaffiliated customers $382,791 $475,754 $37,156 $2,355 $8,200 $906,256
From affiliated companies 77,323 1,069 71,401 99 39,707 $(189,599)
460,114 476,823 108,557 2,454 47,907 (189,599) 906,256
Operating expenses
Natural gas and other
product purchases 232,135 281,004 (147,971) 365,168
Operating and maintenance 75,032 96,923 38,832 3,518 38,628 (40,575) 212,358
Depreciation and
amortization 71,377 33,261 13,927 17 6,575 125,157
Write-down of oil and
gas properties 34,000 34,000
Other expenses 26,041 8,185 2,600 1,019 (1,053) 36,792
Total operating expenses 438,585 419,373 55,359 3,535 46,222 (189,599) 773,475
Operating income (loss) 21,529 57,450 53,198 (1,081) 1,685 132,781
Interest and other income 3,638 3,566 78 655 22,756 (12,491) 18,202
Income (loss) from
unconsolidated affiliates (930) 4,011 (164) 2,917
Debt expense (12,631) (19,792) (14,456) (385) (13,198) 12,491 (47,971)
Income tax (expense) credit 2,131 (13,816) (14,940) 339 (2,744) (29,030)
Net income (loss) $13,737 $27,408 $27,891 ($472) $8,335 $76,899
Identifiable assets $778,694 $699,727 $556,226 $8,519 $118,115 $2,161,281
Investment in unconsolidated
affiliates 3,673 54,712 253 $58,638
Capital expenditures 254,546 76,328 114,318 493 15,662 $461,347
1997
Revenues
From unaffiliated customers $451,233 $445,684 $36,343 $595 $2,482 $936,337
From affiliated companies 74,584 2,539 69,094 135 36,453 $(182,805) -
525,817 448,223 105,437 730 38,935 (182,805) 936,337
Operating expenses
Natural gas and other
product purchases 293,174 248,933 (142,166) 399,941
Operating and maintenance 72,712 101,719 37,334 2,359 29,002 (38,292) 204,834
Depreciation and
amortization 67,078 31,160 14,797 9 4,993 118,037
Write-down of oil and gas
properties 6,000 6,000
Other expenses 27,916 8,174 2,816 811 (2,347) 37,370
Total operating expenses 466,880 389,986 54,947 2,368 34,806 (182,805) 766,182
Operating income (loss) 58,937 58,237 50,490 (1,638) 4,129 170,155
Interest and other income 5,854 3,388 1,323 314 19,488 (10,700) 19,667
Income (loss) from
unconsolidated affiliate (288) 4,629 4,341
Debt expense (10,882) (19,119) (13,536) (186) (10,743) 10,700 (43,766)
Income tax (expense) credit (11,522) (13,492) (16,338) 567 (4,817) (45,602)
Net income (loss) $42,099 $29,014 $26,568 ($943) $8,057 $104,795
Identifiable assets $648,170 $601,720 $410,481 $2,610 $282,036 $1,945,017
Investment in unconsolidated
affiliates 2,508 26,977 467 29,952
Capital expenditures 92,310 65,375 32,596 77 22,439 212,797
1996
Revenues
From unaffiliated customers $408,202 $368,905 $38,837 $3 $2,034 $817,981
From affiliated companies 75,878 3,023 65,341 29,723 $(173,965)
484,080 371,928 104,178 3 31,757 (173,965) 817,981
Operating expenses
Natural gas and other
product purchases 272,610 182,400 (140,739) 314,271
Operating and maintenance 66,301 97,110 39,959 514 22,963 (30,458) 196,389
Depreciation and
amortization 58,679 28,309 14,206 2 4,013 105,209
Other expenses 21,802 8,071 2,519 865 (2,768) 30,489
Total operating expenses 419,392 315,890 56,684 516 27,841 (173,965) 646,358
Operating income (loss) 64,688 56,038 47,494 (513) 3,916 171,623
Interest and other income (600) 3,033 1,798 15,447 (7,638) 12,040
Income from
unconsolidated affiliate 745 182 927
Debt expense (8,699) (16,637) (13,416) (6) (9,963) 7,638 (41,083)
Income tax (expense) credit (13,687) (13,446) (13,415) 197 (5,011) (45,362)
Net income (loss) $42,447 $28,988 $22,643 ($322) $4,389 $98,145
Identifiable assets $667,949 $554,476 $396,019 $272 $197,509 $1,816,225
Investment in unconsolidated
affiliates $4,378 14,347 467 19,192
Capital expenditures 191,788 51,657 23,808 4 24,578 291,835
</TABLE>
Market Resources revenues and operating expenses in 1997 have
been increased by $3,063,000 to conform with the 1998
presentations.
<PAGE>
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 25th day of March, 1999.
QUESTAR CORPORATION
(Registrant)
By /s/ R. D. Cash
R. D. Cash
Chairman, 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/ R. D. Cash Chairman, President and Chief
R. D. Cash Executive Officer (Principal
Executive Officer)
/s/ S. E. Parks Vice President, Treasurer and Chief
S. E. Parks Financial Officer (Principal Financial
and Accounting Officer)
*R. D. Cash Director
*Patrick J. Early Director
*U. Edwin Garrison Director
*W. W. Hawkins Director
*Robert E. Kadlec Director
*Marilyn S. Kite Director
*Dixie L. Leavitt Director
*Gary G. Michael Director
*G. L. Nordloh Director
*Scott S. Parker Director
*D. N. Rose Director
*Harris H. Simmons Director
March 25, 1999 *By /s/ R. D. Cash
Date R. D. Cash, Attorney in Fact
EXHIBIT INDEX
Exhibit
Number Exhibit
2.* Plan and Agreement of Merger dated as of December 16, 1986,
by and among the Company, Questar Systems Corporation, and
Questar E&P Corporation. (Exhibit No. (2) to Current Report
on Form 8-K dated December 16, 1986.)
3.1.* Restated Articles of Incorporation as amended effective May
19, 1998. (Exhibit No. 3.1. to Form 10-Q Report for Quarter
ended June 30, 1998.)
3.2.* Bylaws (as amended effective August 11, 1998). (Exhibit No.
3.2. to Form 10-Q Report for Quarter ended June 30, 1998.)
4.3.*1 Rights Agreement dated as of February 13, 1996, between the
Company and Chemical Mellon Shareholder Services L.L.C.
pertaining to the Company's Shareholder Rights Plan.
(Exhibit No. 4. to Current Report on Form 8-K dated February
13, 1996.)
10.1.* Stipulation and Agreement, dated October 14, 1981, executed
by Mountain Fuel; Wexpro; 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
Mountain Fuel Supply Company's Form 10-K Annual Report for
1981.)
10.2.*2 Questar Corporation Annual Management Incentive Plan, as
amended and restated effective May 19, 1998. (Exhibit No.
10.1. to Form 10-Q Report Quarter ended June 30, 1998.)
10.3.*2 Questar Corporation Executive Incentive Retirement Plan, as
amended and restated effective May 19, 1998. (Exhibit No.
10.2. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.4.*2 Questar Corporation Long-Term Stock Incentive Plan, as
amended and restated effective February 10, 1998. (Exhibit
No. 10.4. to Form 10-K Annual Report for 1997.)
10.5.*2 Questar Corporation Executive Severance Compensation Plan,
as amended and restated effective May 19, 1998. (Exhibit
No. 10.3. to Form 10-Q Report for Quarter Ended June 30,
1998.)
10.6.*2 Questar Corporation Deferred Compensation Plan for
Directors, as amended and restated effective May 19, 1998.
(Exhibit No. 10.5. to Form 10-Q Report for Quarter Ended
June 30, 1998.)
10.7.*2 Questar Corporation Supplemental Executive Retirement Plan,
as amended and restated effective June 1, 1998. (Exhibit
No. 10.6. to Form 10-Q Report for Quarter Ended June 30,
1998.)
10.8.*2 Questar Corporation Stock Option Plan for Directors, as
amended and restated effective October 29, 1998. (Exhibit
No. 10.10. to Form 10-Q Report for Quarter Ended September
30, 1998.)
10.9.*2 Form of Individual Indemnification Agreement dated February
9, 1993 between Questar Corporation and Directors. (Exhibit
No. 10.11. to Form 10-K Annual Report for 1992.)
10.10.*2 Questar Corporation Deferred Share Plan, as amended and
restated effective May 19, 1998. (Exhibit No. 10.7. to Form
10-Q Report for Quarter Ended June 30, 1998.)
10.11.*2 Questar Corporation Deferred Compensation Plan, as amended
and restated effective May 19, 1998. (Exhibit No. 10.10. to
Form 10-Q Report for Quarter Ended June 30, 1998.)
10.12.* Agreement and Plan of Reorganization dated April 29, 1994,
by and between Nextel Communications, Inc.; Questar
Corporation; Advance MobilComm, Inc.; Robert C. Mearns and
Francis G. Fuson. (Exhibit No. 10.14. to Form 10-Q Report
for Quarter ended June 30, 1994.)
10.13.*2 Questar Corporation Directors' Stock Plan as approved May
21, 1996. (Exhibit No. 10.15. to Form 10-Q Report for
Quarter ended June 30, 1996.)
10.14.*2 Questar Corporation Deferred Share Make-Up Plan. (Exhibit
No. 10.8. to Form 10-Q Report for Quarter Ended June 30,
1998.)
10.15.*2 Questar Corporation Special Situation Retirement Plan.
(Exhibit No. 10.10. to Form 10-Q Report for Quarter Ended
June 30, 1998.)
21. Subsidiary Information.
23. Consent of Independent Auditors.
24. Power of Attorney.
27. Financial Data Schedule.
99.1. Undertakings for Registration Statements on Form S-3 (No.
33-48168) and on Form S-8 (Nos. 33-4436, 33-15149, 33-40800,
33-40801, 33-48169, 333-04913, and 333-04951).
________________________
*Exhibits so marked have been filed with the Securities and
Exchange Commission as part of the indicated filing and are
incorporated herein by reference.
1The name of the Rights Agent has been changed to ChaseMellon
Shareholder Services, L.L.C.
2Exhibit so marked is management contract or compensation plan or
arrangement.
(b) The Company did not file any Current Reports on Form 8-K
during the last quarter of 1998.
SUBSIDIARY INFORMATION
Registrant Questar Corporation has the following subsidiaries:
Questar Regulated Services Company, Questar Market Resources, Inc.,
Questar InfoComm, Inc., Interstate Land Corporation, and Questar
Employee Services, Inc. Each of these companies is a Utah
corporation.
Questar Market Resources, Inc., has the following subsidiaries:
Wexpro Company, Celsius Energy Company, Questar Exploration and
Production Company, and Questar Energy Trading Company. Celsius
Energy is a Nevada corporation and Questar Exploration and Production
is a Texas corporation. The other listed companies are incorporated
in Utah.
Celsius Energy has a wholly owned subsidiary, Celsius Energy
Resources, Ltd., which is an Alberta corporation.
Questar Exploration and Production has three active subsidiaries:
URC Canyon Creek Compression Company, Questar WMC Corporation, and
Questar URC Company. The first two entities are Utah corporations;
the third entity is a Delaware corporation. Questar Exploration and
Production also does business under the names Universal Resources
Corporation, Questar Energy Company and URC Corporation.
Questar Regulated Services has three subsidiaries, all of which
are Utah corporations: Questar Gas Company, Questar Pipeline Company,
and Questar Energy Services, Inc. Questar Pipeline, in turn, has four
wholly owned subsidiaries: Questar TransColorado, Inc., Questar Line
90 Company, Questar Southern Trails Company, and Questar
Transportation Services Company, which are all Utah corporations.
Exhibit 23.
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement (Form S-8, No. 33-15149, Post-effective Amendment No. 3 to
No. 33-4436, No. 33-40800, No. 33-40801, and No. 33-48169; Form S-8,
No. 333-04951; and Form S-8, No. 333-04913) and the Registration
Statement (Form S-3, No. 33-48168) of Questar Corporation and in the
related Prospectus of our report dated February 8, 1999, with respect
to the consolidated financial statements of Questar Corporation
included in this Annual Report (Form 10-K) for the year ended December
31, 1998.
Salt Lake City, Utah
March 24, 1999
POWER OF ATTORNEY
We, the undersigned directors of Questar Corporation, hereby
severally constitute R. D. Cash 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 Corporation, 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 President & Chief
Executive Officer
/s/ Patrick J. Early Director 2-9-99
Patrick J. Early
/s/ U. Edwin Garrison Director 2-9-99
U. Edwin Garrison
/s/ W. Whitley Hawkins Director 2-9-99
W. Whitley Hawkins
/s/ R. E. Kadlec Director 2-9-99
R. E. Kadlec
/s/ Marilyn S. Kite Director 2-9-99
Marilyn S. Kite
/s/ Dixie L. Leavitt Director 2-9-99
Dixie L. Leavitt
/s/ Gary G. Michael Director 2-9-99
Gary G. Michael
/s/ Gary L. Nordloh Director 2-9-99
Gary L. Nordloh
/s/ Scott S. Parker Director 2-9-99
Scott S. Parker
/s/ D. N. Rose Director 2-9-99
D. N. Rose
/s/ Harris H. Simmons Director 2-9-99
Harris H. Simmons
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The following schedule contains summarized financial information extracted
from the Questar Corporation Consolidated 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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
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<CURRENT-ASSETS> 246,867 285,024
<PP&E> 3,104,522 2,741,937
<DEPRECIATION> 1,747,641 1,531,220
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<BONDS> 615,770 541,986
0 0
0 0
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<OTHER-SE> 579,070 554,456
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<TOTAL-REVENUES> 906,256 936,337
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<INTEREST-EXPENSE> 47,971 43,766
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TO BE INCORPORATED BY REFERENCE INTO REGISTRATION
STATEMENTS ON FORM S-3 (NO. 33-48168) AND ON
FORM S-8 (NOS. 33-4436, 33-15149, 33-40800, 33-40801,
33-48169, 333-04913, and 333-04951)
UNDERTAKINGS
(a) Rule 415 Offering.
The undersigned registrant hereby undertakes:
(l) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement;
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) that, individually or in the aggregate, represents
a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected on the form of prospectus filed by the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the registration statement is on Form S-3 or Form S-8 and
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
that remain unsold at the termination of the offering.
(b) Incorporation of Documents by Reference.
The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(e) Incorporated Annual and Quarterly Reports.
The undersigned registrant hereby undertakes to deliver or cause
to be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or
Rule 14c-3 under the Securities Exchange Act of 1934; and where
interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the prospectus, to deliver or
cause to be delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically incorporated
by reference in the prospectus to provide such interim financial
information.
(h) Registration Statements on Form S-8.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
