10-K 1 a2074973z10-k.txt FORM 10-K ================================================================================ 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, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM______ TO_____ Commission File No. 1-935 QUESTAR GAS COMPANY (Exact name of registrant as specified in its charter) STATE OF UTAH 87-0155877 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 180 East 100 South, P.O. Box 45360, Salt Lake City, Utah 84145-0360 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (801) 324-5555 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933: Notes: Medium Term Notes, 6.30% to 8.43%, due 2007 to 2024 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / / State the aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 1, 2002: $0. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 1, 2002: 9,189,626 shares of Common Stock, $2.50 par value. (All shares are owned by Questar Regulated Services Company.) Registrant meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K Report with the reduced disclosure format. ================================================================================ TABLE OF CONTENTS
Heading Page ------- ---- PART I Items 1. and 2. BUSINESS AND PROPERTIES............................................. 1 General......................................................... 1 Gas Distribution................................................ 1 Gas Supply...................................................... 3 Competition and Growth.......................................... 4 Regulation...................................................... 5 Relationships with Affiliates................................... 7 Employees.......................................................10 Environmental Matters...........................................10 Research and Development........................................10 Item 3. LEGAL PROCEEDINGS...................................................11 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................................11 PART II Item 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.....................................12 Item 6. OMITTED.............................................................12 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION...........................................................13 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........17 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................18 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................18
i
PART III Items OMITTED.............................................................18 10-13 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.............................................18 SIGNATURES........................................................................38
ii FORM 10-K ANNUAL REPORT, 2001 PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES. GENERAL Questar Gas Company (the "Company" or "Questar Gas") distributes natural gas to 731,900 sales and transportation customers in Utah and southwestern Wyoming. It is part of the Regulated Services group within Questar Corporation ("Questar"), which is a publicly-owned and diversified energy company. The Company, through a predecessor, began distributing natural gas in 1929 when a pipeline was built to transport natural gas from southwestern Wyoming to Salt Lake City, Utah. Between 1929 and the present time, Questar Gas expanded its system to include over 90 percent of Utah's population and to capture a market share of over 90 percent for furnaces and water heaters within its service area. During 2001, the Company completed the acquisition/merger of Utah Gas Service Company ("Utah Gas"), making it the only natural gas public utility in the state of Utah. The Company has traditionally capitalized on two competitive advantages--owning natural gas reserves and offering natural gas services to customers at reasonable prices. Questar Gas intends to maintain a competitive position in its traditional service area. GAS DISTRIBUTION As of December 31, 2001, Questar Gas was serving 731,900 residential, commercial, and industrial customers, a 3.9 percent increase from the 704,629 customers served as of the end of 2000. (Customers are defined in terms of active meters.) The Company distributes gas to customers in the major populated area of Utah, commonly referred to as the Wasatch Front, in which the Salt Lake metropolitan area, Provo, Ogden, and Logan are located. It also serves customers in eastern, central, and southwestern Utah with Price, Roosevelt, Fillmore, Richfield, Cedar City, and St. George as the primary cities. Over 96 percent of the Company's customers are in Utah. Questar Gas serves the communities of Rock Springs, Green River, and Evanston in southwestern Wyoming and the community of Preston in southeastern Idaho. The Utah Gas merger added customers in the cities of Vernal, Moab, and Monticello, which are all located in eastern Utah. The concurrent acquisition and merger of Wyoming Industrial Gas Company ("Wyoming Industrial") added the Wyoming communities of Kemmerer and Diamondville. Questar Gas added 27,271 customers in 2001, compared to 18,312 customers in 2000. These customer additions include 10,500 customers from Utah Gas and Wyoming Industrial. The population of the Company's service area in Utah continues to grow faster than the national average, although the rate of increase is slowing down. Questar Gas has been granted the necessary regulatory approvals by the Public Service Commission of Utah ("PSCU"), the Public Service Commission of Wyoming ("PSCW"), and the Public Utilities Commission of Idaho ("PUCI") to serve these areas. It also has long-term franchises granted by communities and counties within its service area. The Company's sales to residential and commercial customers are seasonal, with a substantial portion of such sales made during the heating season. The typical residential customer in Utah (defined as a customer using 115 decatherms ("Dth") per year) uses more than 75 percent of total gas requirements in the coldest six months of the year. (A Dth is an amount of heat energy equal to 10 therms or 1 million Btu.) The Company's revenue forecasts used to set rates are based on normal temperatures. Historically, revenues and resulting net income have been affected by temperature patterns that are below or above normal. As measured in degree days, temperatures in the Company's service area were two percent warmer than normal in 2001, which was the eighth consecutive year in which temperatures have been warmer than normal. The Company'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 since 1997, adjusts the non-gas cost portion of a customer's monthly bill as the actual degree days in the billing cycle are warmer or colder than normal. This mechanism reduces the sometimes dramatic fluctuations in any given customer's monthly bill from year to year due to weather variations. During 2001, Questar Gas sold 83.7 million decatherms ("MMDth") of natural gas to residential and commercial customers compared to the 83.4 MMDth in 2000. General service sales to residential and commercial customers were responsible for 87.8 percent of the Company's total revenues in 2001. The modest increase in sales volumes reflects colder weather and customer additions. Customers are continuing to decrease their usage on a temperature-adjusted basis as they make a transition to more efficient gas-burning appliances and respond to higher commodity prices with conservation measures. Questar Gas has designed its distribution system and annual gas supply plan to handle design- day demand requirements. The Company periodically updates its design-day demand, which is the volume of gas that firm customers could use during extremely cold weather. For the 2001-02 heating season, the Company used a design-day demand of 1.036 billion cubic feet ("Bcf") for firm sales customers. Questar Gas is also obligated to have capacity, but not gas supply, for firm transportation customers. The Company's management believes that the distribution system is adequate to meet the demands of its firm customers. The Company's tariff permits industrial customers to make annual elections for interruptible sales or transportation service. The Company's total industrial deliveries, including both sales and transportation, were basically flat between 2000 (65.2 MMDth) and 2001 (65.3 MMDth). The Company's largest transportation customers, as measured by revenue contributions in 2001, are the Geneva Steel plant in Orem, Utah; the Gadsby plant owned by Scottish Power (electric utility) in Salt Lake City; the mineral extraction operations of Magnesium Corporation of America in Tooele County, west of Salt Lake; and the Kennecott copper processing operations, located in Salt Lake County. 2 Questar Gas owns and operates distribution systems throughout its Utah, Wyoming and Idaho service areas and has a total of 22,805 miles of street mains, service lines, and interconnecting pipelines. The Company has consolidated many of its activities in its operations center located in Salt Lake City, Utah. Questar Gas continues to own field offices and service center facilities in other parts of its service area. It has fee title to the properties on which its operation and service centers are constructed. The mains and service lines are constructed pursuant to franchise agreements or rights-of-way. GAS SUPPLY Questar Gas owns natural gas producing properties in Wyoming, Utah and Colorado that are operated by Wexpro Company ("Wexpro") and uses the gas produced from these properties for part of its base-load demand. Questar Gas is unique among local distribution companies because it does own gas reserves. During the last half of 2000 and the first several months of 2001 as spot prices escalated significantly, the Company relied on its cost-of-service gas to keep its increases attributable to gas costs lower than other distribution utilities. The Company's investment in these properties is included in its utility rate base. Questar Gas has regulatory approval to use this "cost-of-service" gas for firm sales customers. During 2001, approximately 44 percent of the Company's firm sales requirement was satisfied with cost-of-service gas produced from over 700 wells in more than 35 fields. (As defined, cost-of-service gas includes related royalty gas.) The volumes produced from such properties are transported for the Company by Questar Pipeline Company ("Questar Pipeline"). SEE "Relationships with Affiliates." During 2001, 42.2 MMDth of gas were delivered from such properties, compared to 48.0 MMDth in 2000. The Company estimates that it had reserves of 427.8 equivalent billion cubic feet ("Bcfe") of natural gas and hydrocarbon liquids as of year-end 2001 compared to 399.7 Bcfe as of year-end 2000. (These reserve numbers do not include gas attributed to royalty interest owners but they do include crude oil reserves. Reserve numbers are typically reported in volumetric units, such as Bcf, that don't reflect heating values.) The increased reserves were attributable to revisions and extensions as a result of Wexpro's drilling activities, which more than offset the production associated with such properties. Some of the wells on the Company's producing properties qualify for special tax credits, commonly referred to as "Section 29" or "tight sands" tax credits. During 2001, Questar Gas, as the party with the economic interest in the gas produced from such wells, claimed $1.8 million in Section 29 tax credits. To qualify for the special tax credits, production must flow from wells that meet specified tight sands criteria and that commenced drilling prior to January 1, 1993. Under current tax law, 2002 is the last year for which Section 29 tax credits are available. Questar Gas stores up to 13.4 Bcf of gas at Clay Basin, a base-load storage facility owned and operated by Questar Pipeline, to provide flexibility for handling gas volumes produced from cost-of-service properties. Gas volumes, as a general rule, are injected into the Clay Basin storage reservoir during the summer and withdrawn during the heating season. 3 Questar Gas has a balanced and diversified portfolio of gas supply contracts with a variety of suppliers located in the Rocky Mountain states of Wyoming, Colorado, and Utah. During 2001, the Company received regulatory recognition that price stability should be considered with cost and reliability as the three key factors to consider when obtaining gas supplies and that costs associated with hedging activities can be included in its balancing account for pass-through treatment. Questar Gas's gas acquisition objective is to obtain reliable, diversified sources of gas supply at competitive prices and to use different types of contracts. When filing its most recent pass-through application with the PSCU, the Company reported using a blend of fixed-price contracts, price-indexed contracts, and price-capped contracts as well as spot purchases to fulfill its purchased-gas supply contracts. In the latest purchased gas cost filing, the Company estimated that its 2002 average cost of purchased gas would be $2.94 per Dth for gas delivered to the upstream pipeline, compared to the $6.75 price it estimated a year earlier. COMPETITION AND GROWTH 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 the Company to serve over 90 percent of the residential space heating and water heating market in its service area and to distribute more energy, in terms of Btu content, than any other energy supplier to residential and commercial markets in Utah. The Company continues to focus marketing efforts to develop incremental load in existing homes and new construction. Almost all households in its service area connected to Questar Gas's system already use natural gas for space heating and water heating. Close to 100 percent of the new homes constructed in its service area that are connected to its system use natural gas for space heating and water heating. The Company's market share for other secondary appliances, e.g., ranges and dryers, has historically been less than 30 percent. Questar Gas believes that it must maintain a competitive price advantage in order to retain its residential and commercial customers and to build incremental load by convincing current customers to convert additional secondary appliances to natural gas. Historically, the Company's competitive position has been strengthened as a result of owning natural gas producing properties and satisfying as much as approximately 40-50 percent of its system requirements with the cost-of-service gas produced from such properties. Questar Gas develops an annual gas supply plan that provides for a judicious balance between cost-of-service gas and purchased gas. The Company believes that it is important to continue owning gas reserves, producing them in a manner that will serve the best short- and long-term interests of its customers, and satisfying a significant portion of its supply requirements with gas produced from such properties. No other major distributor markets natural gas sales service in direct competition with the Company in its service area, but marketing firms are arranging direct purchase contracts between large users in the Company's service area and producers. These customers have not bypassed Questar Gas, but can take advantage of the open-access status of either the pipeline systems owned 4 by Questar Pipeline Company ("Questar Pipeline") or Kern River Gas Transmission Company ("Kern River"). The Company's sales rates are competitive when compared to other energy sources, but can be higher (or lower) than the delivered price of spot-market gas volumes transported through its system to large customers. The Kern River pipeline, which was built to transport gas from southwestern Wyoming to Kern County, California, runs through portions of the Company's service area and can provide an alternative delivery source to transportation customers. As of the date of this report, Questar Gas has lost no industrial load as a result of the Kern River line. The existence of the Kern River pipeline, however, coupled with the open-access status of Questar Pipeline's transmission system, has changed the nature of market conditions for the Company. Large industrial customers in Utah's Wasatch Front area can acquire taps on Kern River's system or direct taps on Questar Pipeline's system. The Company itself has taps on the Kern River line that enable it to obtain delivery of additional peak-day supplies to meet increasing demand. The existence and location of the Kern River pipeline system also made it possible for Questar Gas to develop additional sources of supply for its central and southern Utah system and to take delivery of additional supplies to meet increasing demand in the Wasatch Front. Questar Pipeline, an affiliate in the Regulated Services group, constructed a new line-Main Line 104-which became operational in November of 2001. This line extends from Price, Utah, near the Ferron area of coalbed methane gas, to the Company's system at Payson, Utah, and the Kern River line near Elberta, Utah. Questar Gas has firm transportation capacity on the line to enable it to meet its design-day requirements. In 1998, the PSCW approved a "supplier choice" program for the Company's customers in Wyoming. Under the terms of this program, general service customers have the option of selecting a different supplier of natural gas while purchasing transportation and related services from Questar Gas. However, no supplier has yet offered to provide service under the program. Questar Gas and all local distribution companies are faced with the challenges and opportunities posed by the unbundling and restructuring of traditional utility services, which have been complicated by some adverse experiences for customers and suppliers in deregulated states. At this point, it is too soon to set or predict a timetable for the Company's unbundling of services to residential and commercial customers. The Company has significantly reduced its costs over the last five years by centralizing key functions, such as call center activities; cross-training employees to handle different responsibilities; and utilizing technology, such as automated meter reading. Questar Gas will continue to examine its costs, take advantage of technological developments and improve its overall efficiency. REGULATION As a public utility, Questar Gas is subject to the jurisdiction of the PSCU and PSCW. (The Company's customers in Idaho are served under the provisions of its Utah tariff. Pursuant to a special contract between the PUCI and the PSCU, the rates for the Company's Idaho customers are regulated by the PSCU.) The Company's natural gas sales and transportation services are provided 5 under rate schedules approved by the two regulatory commissions. Questar Gas is authorized to earn a return on equity of 11 percent in Utah and 11.83 percent in Wyoming. Questar Gas has consistently endeavored to balance the costs of adding 17,000-20,000 customers each year with the cost savings associated with reducing labor costs, consolidating activities and utilizing new technology. The PSCU has generally used historic test year data when reviewing general rate increase requests to motivate Questar Gas to adopt efficiency measures. The Company's management is concerned about the costs associated with expanding its customer base in an environment where the effects of regulatory lag and the use of historic test years are combined with low authorized returns. Questar Gas did not earn its weighted average cost of capital in 2001. Regulatory treatment of processing costs has been an issue of contention. Questar Gas, in order to ensure customer safety and give its customers time to adjust the combustion settings in its service area to handle lower Btu-gas volumes, determined to enhance the Btu of such gas by contracting to have carbon dioxide removed from it and agreeing to pay the costs associated with this activity. The PSCU, however, refused to allow the Company to reflect such costs in its pass- through application. During 2001, the Company achieved a victory in its efforts to obtain recognition of carbon dioxide removal costs as proper costs for pass-through treatment. The Utah Supreme Court, in a decision dated October 23, 2001, determined that the PSCU was not precluded from considering Questar Gas's application for pass-through treatment of such costs according to previously approved balancing account procedures and remanded the case back to the PSCU for a decision on the merits of the case. The Company, in its most recent pass-through application, requested regulatory permission to recover $5.8 million of such costs through its balancing account for gas supply costs. The Company is still fighting another case involving its processing costs. After the PSCU granted permission for Questar Gas to recover a portion of such costs on a prospective basis in its 2000 general rate case, a state agency (the Committee of Consumer Services) filed an appeal from such order with the Utah Supreme Court. This case has not been briefed or argued. 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. During 2001, the Company filed two pass-through applications with both the Utah and Wyoming commissions to reflect decreased gas costs in its rates. In the last pass-through applications that became effective January 1, 2002, Questar Gas was allowed to reflect annualized gas costs of $321,711,555 in its Utah rates and $13,159,844 in its Wyoming rates (compared to estimated annual costs of $504,865,533 in Utah and $19,529,523 in Wyoming reflected in January 1, 2001 cases). A typical residential customer in Utah would have an annual bill of $681.02, using rates in effect as of January 1, 2002, compared to an annual bill of $905.02, using rates in effect as of January 1, 2001. The PSCW and PSCU have allowed the Company to collect the decreased gas costs in rates, subject to refund. As previously reported, the Company's pass-through application filed with the PSCU included a request to recover carbon dioxide removal costs from prior periods. (The PSCW had not contested Questar Gas's inclusion of such costs in Wyoming filings.) Questar Gas also requested 6 the PSCU to allow it to include, on a prospective basis, an allowance for the commodity and supplier non-gas cost portions of its bad debts in its gas balancing account. The PSCU has set a date of April 4, 2002, to receive a report from Questar Gas and other parties concerning the issues raised in the application. Questar Gas is not earning its authorized return on equity and will consider filing a general rate case in Utah during 2002. Under Utah law, tariff sheets reflecting a general rate increase become effective 240 days after filing if the PSCU doesn't render a decision concerning the requested increase by such date. Responsibility for gas acquisition activities involves inherent risks of regulatory scrutiny. The Company has been periodically involved in regulatory proceedings in which the prudence of its gas supply activities and gas processing costs have been challenged. The PSCU and PSCW have jurisdiction to examine the Company's relationships with its affiliates and the costs paid by the Company for services rendered by or goods purchased from its affiliates. A 1981 settlement agreement involving cost-of-service gas and defining certain contractual obligations between the Company and Wexpro continues to be monitored by the Utah Division of Public Utilities and its agents. Under Utah law, Questar Gas must report dividends paid on its common stock to the PSCU and must allow at least 30 days between declaring and paying dividends. The PSCU can investigate any dividend declared by the Company to determine if payment of such dividend would impair its capital or service obligations. The PSCW and the PUCI, but not the PSCU, have jurisdiction to review the issuance of long-term securities by Questar Gas. The PSCU and PSCW have adopted regulations or issued orders that affect the Company's business practices in such areas as main extensions, credit and collection activities, and termination of service standards. RELATIONSHIPS WITH AFFILIATES The Company has significant business relationships with affiliated companies. The following diagram shows the corporate structure of the Company and its primary affiliates: 7 Questar Corporation | ------------------------------------|-------------------------------- | | | Questar Questar Questar Market Regulated InfoComm, Resources, Services Inc. Inc. Company | | | ----------------------|--------------------- | | | | | Questar QUESTAR Questar | Pipeline GAS Energy | Company COMPANY Services, Inc. ----------------------------|----------------------------- | | | Wexpro Other QMR Entities (Questar Questar Gas Company Exploration and Production Management Company, Questar Energy Trading Company Company, Shenandoah Energy, Inc.) The Company's relationships with its primary affiliates are described below. QUESTAR REGULATED SERVICES COMPANY. The Company's direct parent, Questar Regulated Services Company ("QRS"), is a subholding company that was created to link Questar Gas and Questar Pipeline. The same group of officers manages all entities within the group. QRS provides various services--administrative, accounting, engineering, regulatory, legal--for all entities within it. The creation of the Regulated Services group allowed its members to lower administrative costs. QUESTAR PIPELINE COMPANY. Questar Pipeline owns a two-pronged transmission system running from southwestern Wyoming and western Colorado into the Company's Utah service area. Questar Gas has reserved capacity of about 849,000 Dth per day or about 60 percent of reserved capacity and reserves another 50,000 Dth per day during the months of December, January and February. Questar Gas transports both cost-of-service gas and purchased gas on Questar Pipeline's transmission system. (The Company also transports gas volumes on the transmission systems owned by The Williams Companies, Inc. and Colorado Interstate Gas Company. Questar Gas purchases "city gate" gas supplies from transportation customers on Kern River's system.) The Company releases its firm transportation capacity, pursuant to capacity release procedures adopted by the Federal Energy Regulatory Commission ("FERC"), when it does not need such service for its sales customers. Because Questar Gas has sufficient capacity on the system to meet peak-demand periods, it has unused capacity for the balance of the year. 8 During 2001, Questar Pipeline transported 110.3 MMDth of gas for Questar Gas, compared to 108.2 MMDth in 2000. Under Questar Pipeline's "straight fixed-variable" rate schedules, Questar Gas is obligated to pay demand charges for firm capacity, regardless of the volumes actually transported. The Company, in 2001, paid approximately $52.1 million in demand charges to Questar Pipeline for firm transportation capacity and "no notice" transportation. Questar Gas's primary transportation agreement with Questar Pipeline was recently extended and expires on June 30, 2017. Questar Gas purchases storage capacity at Clay Basin, a large base-load storage facility operated by Questar Pipeline, and also has peaking storage capacity at three additional storage reservoirs owned by Questar Pipeline. The Company paid Questar Pipeline $7.3 million during 2001 in connection with firm storage services at Clay Basin. A subsidiary of Questar Pipeline also operates a processing plant near Price, Utah, that removes the carbon dioxide from gas volumes delivered to Questar Gas's system. During 2001, the Company paid $7.7 million for services provided at the plant. The Company combined some operation activities with Questar Pipeline after a 2000-early retirement program. In some areas, Questar Gas and Questar Pipeline share service centers and operations employees are cross-trained to handle responsibilities for both entities. QUESTAR GAS MANAGEMENT COMPANY. Questar Gas Management Company ("QGM") owns the gathering facilities that were originally built to gather production from the Company's cost-of-service properties. During 2001, QGM gathered 37.2 MMDth of natural gas for Questar Gas, compared to 36.8 MMDth in 2000. Under the terms of the gathering agreement between the parties, QGM will gather gas volumes produced from cost-of-service properties for the life of such properties and charge cost-of- service rates. WEXPRO COMPANY. Wexpro, another company within Questar's Market Resources segment, operates certain properties owned by Questar Gas. Under the terms of a 1981 settlement agreement, which was approved by the PSCU and PSCW and upheld by the Utah Supreme Court, the Company owns gas produced from specified properties that were productive as of August 1, 1981 (the effective date of the settlement agreement). Such gas is reflected in rates at cost-of-service prices based on rates of return established by the settlement agreement. In addition, Wexpro produces gas from specified properties for Questar Gas and is reimbursed for its costs plus a current rate of return in 2001 that averaged 19.7 percent (adjusted annually using a specified formula) on its net investment in such properties, adjusted for working capital and deferred taxes. At year-end 2001, Wexpro's investment (net of deferred taxes) in cost-of-service operations was $161.3 million compared to $124.8 million at year-end 2000. Under the terms of the settlement agreement, the costs of unsuccessful wells are borne by Wexpro. The settlement agreement also permits Questar Gas to share income from hydrocarbon liquids produced from certain properties operated by Wexpro after Wexpro recovers its expenses and a specified rate of return. The income received by Questar Gas from Wexpro is used to reduce natural gas costs reflected in the Company's rates. QUESTAR INFOCOMM, INC. The Company receives data processing and telecommunication services from its affiliate, Questar InfoComm. Questar Gas utilizes a customer information system and related software systems that are maintained by Questar InfoComm. 9 OTHER AFFILIATES. Questar Energy Services, Inc. ("QES"), another member of the Regulated Services group, offers a variety of non-regulated products and services. The Company does not have a significant business relationship with QES. In addition to QGM and Wexpro, the Market Resources segment of Questar includes Questar Energy Trading Company, Questar Exploration and Production Company, and Shenandoah Energy Inc. Questar Gas does not have significant business relationships with these entities. Questar, the Company's ultimate parent, provides certain administrative services, e.g., public and government relations, financial, and audit, to the Company and other members of the consolidated group. Questar also sponsors the qualified and welfare benefit plans in which the Company's employees participate. Questar Gas is responsible for a proportionate share of the costs associated with these services and benefit plans. EMPLOYEES As of December 31, 2001, the Company had 789 employees, compared to 741 at year-end 2000. Regulated Services, the Company's parent, has 361 employees, compared to 358 at year-end 2000, who perform specified services, e.g., administrative, engineering, legal, accounting, budget, for Questar Gas, Questar Pipeline and QES. The Company's employees are nonunion employees who are not represented under collective bargaining agreements. Employee relations are generally deemed to be satisfactory. ENVIRONMENTAL MATTERS The Company is subject to the National Environmental Policy Act and other federal and state legislation regulating the environmental aspects of its operations. Although Questar Gas does not believe that environmental protection laws and regulations will have any material effect on its competitive position, it does believe that such provisions have added and will continue to add to the Company's expenditures and annual maintenance and operating expenses. Questar Gas has an obligation to treat waste water and monitor the effectiveness of an underground slurry wall that was constructed in 1988 at its operations center in Salt Lake City, Utah. The slurry wall was built to contain contaminants from an abandoned coal gasification plant that operated on the site from 1908 to 1929. Questar Gas emphasizes the environmental advantages of natural gas. The Company's marketing campaigns have featured the clean-burning characteristics of natural gas fireplaces. Natural gas vehicles are also being encouraged on the basis of environmental considerations. RESEARCH AND DEVELOPMENT The Company conducts limited studies of gas conversion equipment, gas piping, and engines using natural gas and has funded demonstration projects using such equipment. The total dollar amount spent by the Company on research activities is not material. 10 ITEM 3. LEGAL PROCEEDINGS. Questar Gas is involved in various legal and regulatory proceedings. While it is currently impossible to predict or determine the outcome of these proceedings, management believes that the outcome will not have a material adverse effect on the Company's financial position or liquidity. The Company is a named defendant in two cases that have been filed by Jack Grynberg, an independent producer that has sued Questar Gas and its affiliates a number of times during the last ten years. The most active case involves claims brought by Mr. Grynberg under the Federal False Claims Act and is substantially similar to cases filed by Grynberg against pipelines and their affiliates that have been consolidated for discovery and pre-trial discovery motions in Wyoming's federal district court. The cases involve allegations of industry-wide mismeasurement and undervaluation of gas volumes on which royalty payments are due the federal government. The complaint seeks treble damages and imposition of civil penalties. The federal district judge denied the motions filed by the defendants to dismiss the lawsuits, but has not set a date for a scheduling conference. Another Grynberg case was filed against Questar Gas and several affiliates in 1997. This case involves claims of fraud and antitrust violations in addition to some take-or-pay, breach of contract, and intentional interference with a contract claims. The case was stayed pending Grynberg's appeal of another case involving the Company to the Tenth Circuit Court of Appeals. The judge, in June of 2001, entered an order granting the motion for partial summary judgment filed by the Questar defendants that dismissed the antitrust claims from the case, but has not yet ruled on other motions for summary judgment dealing with "ratable take" and fraud. Questar Gas and several affiliates are among the numerous named defendants in WILL PRICE V. GAS PIPELINES (formerly known as QUINQUE OPERATING COMPANY V. GAS PIPELINES), that has been filed against the pipeline industry. Pending in a Kansas state district court, this case is similar to the cases filed by Grynberg, but the allegations of a conspiracy by the pipeline industry to set standards that result in the systematic mismeasurement of natural gas volumes and resulting underpayment of royalties are made on behalf of private and state lessors, rather than on behalf of the federal government. The defendants, including the Questar defendants, have filed motions to dismiss for lack of personal jurisdiction. See "Regulation" for a review of significant regulatory proceedings and an important appellate court decision. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matters to a vote of its stockholder during the last quarter of 2001. 11 Part II ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS. All of the Company's outstanding shares of common stock, $2.50 par value, are owned by Regulated Services. Information concerning the dividends paid on such stock and the ability to pay dividends is reported in the Statements of Common Shareholder's Equity and the Notes to Financial Statements included in Item 8. ITEM 6. SELECTED FINANCIAL DATA. The Company, as the wholly owned subsidiary of a reporting company under the Securities Exchange Act of 1934 ("the Act"), is entitled to omit the information requested in this Item. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Questar Gas conducts natural gas distribution operations. Following is a summary of financial results and operating information:
Year Ended December 31, 2001 2000 1999 ----------------------------------------------- (Dollars In Thousands) OPERATING INCOME Revenues Residential and commercial sales $618,451 $467,293 $396,882 Industrial sales 56,200 38,993 28,938 Industrial transportation 7,233 6,968 6,594 Other 22,229 23,508 17,523 ----------------------------------------------- Total revenues 704,113 536,762 449,937 Natural gas purchases 498,545 334,193 257,265 ----------------------------------------------- Margin 205,568 202,569 192,672 Operating expenses Operating and maintenance 103,427 101,486 103,308 Depreciation and amortization 35,030 34,450 36,426 Other taxes 8,729 10,213 7,625 ----------------------------------------------- Total expenses 147,186 146,149 147,359 ----------------------------------------------- Operating income $58,382 $56,420 $45,313 =============================================== OPERATING STATISTICS Natural gas volumes (in Mdth) Residential and commercial sales 83,650 83,373 82,201 Industrial deliveries Sales 10,684 10,314 9,823 Transportation 54,624 54,836 51,643 ----------------------------------------------- Total industrial 65,308 65,150 61,466 ----------------------------------------------- Total deliveries 148,958 148,523 143,667 =============================================== Natural gas revenue (per dth) Residential and commercial $7.39 $5.60 $4.83 Industrial sales 5.26 3.78 2.95 Transportation for industrial customers 0.13 0.13 0.13 System natural gas cost (per dth) $4.92 $3.54 $2.61 Heating degree days (normal 5,609) 5,487 5,402 5,317 Warmer than normal 2% 4% 5% Usage per customer (dth) 121.0 126.2 128.5 Number of customers at December 31, Residential and commercial 730,579 703,306 684,950 Industrial 1,321 1,323 1,367 ----------------------------------------------- 731,900 704,629 686,317 ===============================================
13 MARGIN (REVENUES LESS NATURAL GAS PURCHASES) Questar Gas's margin was 1% higher in 2001 when compared with 2000 and 5% higher in 2000 when compared with 1999. The higher margins were primarily the result of a $13.5 million annualized general rate increase in Utah, effective August 11, 2000, and a 3.9% larger customer base. An acquisition of two small distribution systems accounted for 10,500 of the 27,271 increase in customers. Usage per residential customer has been steadily declining for the past several years in large part as a result of higher energy prices and more energy-efficient appliances and home construction. Usage, calculated on a temperature adjusted basis, has decreased by 4%, 2% and 1% in 2001, 2000 and 1999, respectively. Temperatures in 2001 were near normal; however, temperatures have been warmer than normal for nine of the last ten years. The financial impact of actual weather variations from normal are minimized by a weather-normalization adjustment in rates. Industrial deliveries were flat in 2001 and 6% higher in 2000. An increase in natural gas volumes used to generate electricity offset lower deliveries to a steel producer. In 2002, the steel producer announced plans to reorganize under protection of bankruptcy laws. Margins from gas delivered to industrial customers are substantially lower than margins from gas delivered to residential and commercial customers. A significant increase in purchased gas costs in the second half of 2000 and the first quarter of 2001 resulted in higher charges to customers but did not directly affect the margin. The recovery of gas costs is authorized through rate regulation in Utah and Wyoming. Gas costs in Utah rates, which peaked at $4.67 per dth in a January 1, 2001 filing, have subsided to $2.68 per dth in a January 1, 2002 gas-cost filing. In 2001, 44% of Questar Gas's supplies came from company-owned reserves, which cost less than gas purchased from third-party suppliers. OPERATING EXPENSES Operating and maintenance (O & M) expenses were 2% higher in 2001 due largely to a $3.7 million increase in bad debt expenses that more than offset labor savings from a fourth-quarter 2000 early retirement program. An economic recession, increased number of bankruptcies and higher energy costs resulted in more frequent collection problems. O & M expenses were 2% lower in 2000 when compared with 1999 due to lower legal costs and reduced information-technology related expenses. Depreciation expense increased 2% in 2001 due to capital spending. Depreciation expense was $2.8 million lower in 2000 due to investments in several information systems being fully depreciated. In 2000, other taxes increased when compared with 1999 because of a $1.4 million adjustment of prior-year taxes. ACQUISITION OF DISTRIBUTION SYSTEMS Questar Gas completed the purchase of 100% of the stock of Utah Gas Service Company and Wyoming Industrial Gas in exchange for 390,000 shares of Questar common stock on July 12, 2001. As a result of the acquisition, Questar Gas will add service to about 10,500 customers in Moab, Monticello and Vernal, Utah and Kemmerer and Diamondville, Wyoming. The acquisition cost $10.9 million, including $6 million of goodwill, and was accounted for as a purchase. INTEREST AND OTHER INCOME Interest and other income increased $3.5 million in 2001 compared with 2000 due to the return from larger gas-storage volumes, interest earned on higher purchased-gas balances and larger gains from the disposition of property. In 2000, there was a decrease of $1.3 million compared with 1999 due to smaller gains from the disposition of property in 2000. 14 DEBT EXPENSE Interest expense increased 13% in 2001 compared with 2000 primarily from higher debt borrowings which more than offset lower short-term debt rates in 2001. Questar Gas added $60 million of medium-term notes with a 6.3% interest rate in the fourth quarter of 2001. INCOME TAXES The effective combined federal and state rate was 34.9% in 2001, 34.8% in 2000 and 31.9% in 1999. The effective income tax rate was below the combined federal and state statutory rate of about 38% primarily due to noncoventional fuel credits related to production of gas from certain properties. These credits amounted to $1.8 million in 2001, $1.8 million in 2000 and $1.9 million in 1999. RETURN ON ASSETS Questar Gas's return on assets for 2001 was 7.64%, which is near its weighted average cost of capital. Management is concerned about Questar Gas's future ability to earn a competitive return and will likely be addressing its concerns through a general rate case filing in 2002. LIQUIDITY AND CAPITAL RESOURCES Operating Activities
Year Ended December 31, 2001 2000 1999 --------------------------------------------- (In Thousands) Net income $25,873 $24,163 $19,219 Non-cash adjustments to net income 24,741 51,528 43,850 Changes in operating assets and liabilities (8,353) (14,048) 1,108 --------------------------------------------- Net cash provided from operating activities $42,261 $61,643 $64,177 =============================================
Net cash provided from operating activities decreased in 2001 compared with 2000 due primarily to the higher amounts paid to purchase gas, which were partially offset by the collection of customer accounts receivable and purchased-gas costs under collected through customer rates at December 31, 2000. The decrease in 2000 compared with 1999 is due primarily to an increase in customer account receivables and under collection of purchased-gas costs in customer rates. Investing Activities Following is a summary of capital expenditures for 2001 and 2000, and a forecast of 2002 expenditures.
2002 Forecast 2001 2000 ----------------------------------------------- (In Thousands) Distribution system and customer additions $55,100 $62,266 $49,454 General 13,500 16,525 16,313 ----------------------------------------------- $68,600 $78,791 $65,767 ===============================================
The distribution system was extended by 1,145 miles of main, feeder and service lines to accommodate the addition of 27,271 customers. This includes $10.9 million for the acquisition of two small distribution systems. 15 Financing Activities Questar Gas generated sufficient net cash provided from operating activities to fund 54% of its 2001 capital expenditures. Questar Gas issued $60 million of long-term debt and received a $40 million equity investment and used the proceeds to repay a portion of short-term debt and capital expenditures. Forecasted 2002 capital expenditures are expected to be financed with net cash provided from operations and borrowing from Questar. On October 9, 2001, Questar Gas sold $60 million of 11-year medium-term notes with a 6.3% coupon rate. In the fourth quarter of 2001, the Company received a $40 million equity investment from Questar. Questar makes loans to Questar Gas under a short-term borrowing arrangement. Short-term notes payable to Questar totaled $66.6 million at December 31, 2001 with an interest rate of 2.31% and $105.6 million at December 31, 2000 with an interest rate of 6.91%. The Company typically has negative net working capital at December 31 because of short-term borrowing. The borrowing is seasonal and generally peaks at the end of the year because of cold-weather gas purchases. Questar Gas's capital structure at December 31, 2001, was composed of 48% long-term debt and 52% common equity. Moody's and Standard and Poor's have rated the Company's long-term debt A1 and A+, respectively. Critical Accounting Policies RATE REGULATION Rate regulatory agencies establish rates for the 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 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 other businesses because of cost-allocation methods used in establishing rates. 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. Questar Gas will continue to pursue hedging activities to mitigate energy-price fluctuations for gas-distribution customers. The PSCU has agreed that the benefits and the costs of hedging are to be included in the purchased-gas adjustment account. The stipulation allows Questar Gas to record mark-to-market adjustments for hedging contracts in the purchased-gas adjustment account. The PSCW also allows the inclusion of hedging activities in the purchase-gas adjustment account. 16 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. QUESTAR GAS ENERGY-PRICE RISK MANAGEMENT Questar Gas will continue to pursue hedging activities to mitigate energy-price fluctuations for gas-distribution customers. The PSCU has agreed that the benefits and the costs of hedging are to be included in the purchased-gas adjustment account. The stipulation allows Questar Gas to record mark-to-market adjustments for hedging contracts in the purchased-gas adjustment account. The PSCW also allows the inclusion of hedging activities in the purchase-gas adjustment account. All of the Company's long-term debt is borrowed at fixed rates. As the need arises, the Company borrows funds on a short-term basis, which bear variable interest rates. Forward-Looking Statements This report includes "forward-looking statements" within the meaning of Section 27(a) of the Securities Act of 1933, as amended, and Section 21(e) of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding the Company's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may", "will", "could", "expect", "intend", "project", "estimate", "anticipate", "believe", "forecast", or "continue" or the negative thereof or variations thereon or similar terminology. Although these statements are made in good faith and are reasonable representations of the Company's expected performance at the time, actual results may vary from management's stated expectations and projections due to a variety of factors. Important assumptions and other significant factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements include changes in general economic conditions, gas and oil prices and supplies, competition, rate-regulatory issues and other factors beyond the control of the Company. These other factors include the rate of inflation, quoted prices of securities available for sale, the weather and other natural phenomena, the effect of accounting policies issued periodically by accounting standard-setting bodies, and adverse changes in the business or financial condition of the Company. 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's financial statements are included in Part IV, Item 14, herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Questar Gas has not changed its independent auditors or had any disagreements with them concerning accounting matters and financial statement disclosures within the last 24 months. PART III The Company, as the wholly owned subsidiary of a reporting company under the Act, is entitled to omit all information requested in PART III (Items 10- 13). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1)(2) Financial Statements and Financial Statement Schedules. The financial statements and schedule identified in the List of Financial Statements are filed as part of this Report. (3) Exhibits. The following is a list of exhibits required to be filed as a part of this Report in Item 14(c). EXHIBIT NO. DESCRIPTION 3.1.* Restated Consolidated Articles of Incorporation dated August 15, 1980. (Exhibit No. 4(a) to Registration Statement No. 2-70087, filed December 1, 1980.) 3.2.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1982. (Exhibit No. 3(b) to Form 10-K Annual Report for 1982.) 3.3.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 10, 1983. (Included in Exhibit No. 4.1. to Registration Statement No. 2-84713, filed June 23, 1983.) 3.4.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated August 16, 1983. (Exhibit No. 3(a) to Form 8 Report amending the Company's Form 10-Q Report for Quarter Ended September 30, 1983.) 3.5.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated October 26, 1984. (Exhibit No. 3.5. to Form 10-K Annual Report for 1984.) 18 3.6.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1985. (Exhibit No. 3.1. to Form 10-Q Report for Quarter Ended June 30, 1985.) 3.7.* Articles of Amendment to Restated Consolidated Articles of Incorporation dated February 10, 1988. (Exhibit No. 3.7. to Form 10-K Annual Report for 1987.) 3.8.* Articles of Amendment to Restated Consolidated Articles of Incorporation dated December 31, 1997. (Exhibit No. 3.7. to Form 8-K Current Report for December 31, 1997.) 3.9.* Bylaws (as amended effective February 13, 2001) (Exhibit No. 3.9. to Form 10-K Annual Report for 2000.) 4.*1 Indenture dated as of May 1, 1992, between the Company and Citibank, as trustee, for the Company's Debt Securities. (Exhibit No. 4. to Form 10-Q Report for Quarter Ended June 30, 1992.) 10.1.*(2) Stipulations and Agreement, dated October 14, 1981, executed by the Company; Wexpro Company; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Form 10-K Annual Report for 1981.) 10.2*(2) Gas Gathering Agreement between the Company and Questar Pipeline Company effective September 1, 1993. (This agreement has been transferred from Questar Pipeline to Questar Gas Management Company.) (Exhibit No. 10.11. To Form 10-K Annual Report for 1994.) 10.3.*(2) Amendment to Gas Gathering Agreement between the Company and Questar Gas Management Company effective September 1, 1997. 12. Ratio of earnings to fixed charges. 23. Consent of Independent Auditors. 24. Power of Attorney. *Exhibits so marked have been filed with the Securities and Exchange Commission as part of the referenced filing and are incorporated herein by reference. (1)Wells Fargo Bank Northwest, N.A. serves as the successor trustee. (2)This document has not been formally amended to refer to the Company's current name. (b) Questar Gas Company did not file any Current Reports on Form 8-K during the last quarter of 2001. 19 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, 2001 QUESTAR GAS COMPANY SALT LAKE CITY, UTAH FORM 10-K -- ITEM 14 (a) (1) AND (2) QUESTAR GAS COMPANY LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following financial statements of Questar Gas Company are included in Item 8: Statements of income, Years ended December 31, 2001, 2000 and 1999 Balance sheets, December 31, 2001 and 2000 Statements of common shareholder's equity, Years ended December 31, 2001, 2000 and 1999 Statements of cash flows, Years ended December 31, 2001, 2000 and 1999 Notes to financial statements The following financial statement schedule is included in Item 8: Schedule: Valuation and Qualifying Accounts All other 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. 20 Report of Independent Auditors Board of Directors Questar Gas Company We have audited the accompanying balance sheets of Questar Gas Company as of December 31, 2001 and 2000, and the related statements of income, common shareholder's equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Questar Gas Company at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP ----------------------------- Ernst & Young LLP Salt Lake City, Utah February 8, 2002 21 QUESTAR GAS COMPANY STATEMENTS OF INCOME
Year Ended December 31, 2001 2000 1999 ------------------------------------------------ (In Thousands) REVENUES From unaffiliated customers $701,150 $531,988 $447,606 From affiliated companies 2,963 4,774 2,331 ------------------------------------------------ 704,113 536,762 449,937 OPERATING EXPENSES Natural gas purchases From affiliated companies 173,395 166,198 150,960 From unaffiliated parties 325,150 167,995 106,305 ------------------------------------------------ Total natural gas purchases 498,545 334,193 257,265 Operating and maintenance 103,427 101,486 103,308 Depreciation and amortization 35,030 34,450 36,426 Other taxes 8,729 10,213 7,625 ------------------------------------------------ TOTAL OPERATING EXPENSES 645,731 480,342 404,624 ------------------------------------------------ OPERATING INCOME 58,382 56,420 45,313 INTEREST AND OTHER INCOME 5,158 1,673 2,980 DEBT EXPENSE (23,777) (21,041) (20,062) ------------------------------------------------ INCOME BEFORE INCOME TAXES 39,763 37,052 28,231 INCOME TAXES 13,890 12,889 9,012 ------------------------------------------------ NET INCOME $25,873 $24,163 $19,219 ================================================
See notes to financial statements. 22 QUESTAR GAS COMPANY BALANCE SHEETS ASSETS
December 31, 2001 2000 -------------------------------- (In Thousands) CURRENT ASSETS Cash and cash equivalents $4,366 $882 Accounts receivable, net 53,697 69,808 Unbilled gas accounts receivable 53,613 45,293 Accounts receivable from affiliates 576 Federal income taxes recoverable 363 5,019 Inventories, at lower of average cost or market Gas stored underground 22,810 22,444 Materials and supplies 4,213 3,542 Purchased-gas adjustments 8,296 35,565 Prepaid expenses and other 1,097 773 -------------------------------- TOTAL CURRENT ASSETS 149,031 183,326 PROPERTY, PLANT AND EQUIPMENT Distribution 875,415 818,802 Production 97,870 97,870 General 139,299 125,970 Construction in progress 31,871 24,720 -------------------------------- 1,144,455 1,067,362 Less allowances for depreciation and amortization 489,583 447,496 -------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 654,872 619,866 OTHER ASSETS Goodwill 5,876 Regulatory assets 19,211 22,359 Other noncurrent assets 4,854 4,775 -------------------------------- TOTAL OTHER ASSETS 29,941 27,134 -------------------------------- $833,844 $830,326 ================================
23 LIABILITIES AND SHAREHOLDER'S EQUITY
December 31, 2001 2000 -------------------------------- (In Thousands) CURRENT LIABILITIES Notes payable to Questar $66,600 $105,600 Accounts payable and accrued expenses Accounts and other payables 50,960 97,397 Accounts payable to affiliates 23,364 25,701 Deferred income taxes 3,153 13,515 Other taxes 8,539 8,502 Interest 5,570 4,583 -------------------------------- Total accounts payable and accrued expenses 91,586 149,698 -------------------------------- TOTAL CURRENT LIABILITIES 158,186 255,298 LONG-TERM DEBT 285,000 225,000 DEFERRED INCOME TAXES 79,317 80,215 DEFERRED INVESTMENT TAX CREDITS 4,960 5,250 OTHER LONG-TERM LIABILITIES 452 507 COMMITMENTS AND CONTINGENCIES - Note 6 COMMON SHAREHOLDER'S EQUITY Common stock - par value $2.50 per share; authorized 50 million shares; 9,189,626 issued and outstanding 22,974 22,974 Additional paid-in capital 121,875 81,875 Retained earnings 161,080 159,207 -------------------------------- TOTAL COMMON SHAREHOLDER'S EQUITY 305,929 264,056 -------------------------------- $833,844 $830,326 ================================
See notes to financial statements. 24 QUESTAR GAS COMPANY STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
Additional Common Paid-in Retained Stock Capital Earnings ------------------------------------------------ (In Thousands) Balances at January 1, 1999 $22,974 $41,875 $162,325 1999 net income 19,219 Equity investment 40,000 Payment of common stock dividends (23,000) ------------------------------------------------ Balances at December 31, 1999 22,974 81,875 158,544 2000 net income 24,163 Payment of common stock dividends (23,500) ------------------------------------------------ Balances at December 31, 2000 22,974 81,875 159,207 2001 net income 25,873 Equity investment 40,000 Payment of common stock dividends (24,000) ------------------------------------------------ Balances at December 31, 2001 $22,974 $121,875 $161,080 ================================================
See notes to financial statements. 25 QUESTAR GAS COMPANY STATEMENTS OF CASH FLOWS
Year Ended December 31, 2001 2000 1999 ------------------------------------------------ (In Thousands) OPERATING ACTIVITIES Net income $25,873 $24,163 $19,219 Adjustments to reconcile net income to net cash provided from operating activities Depreciation and amortization 38,310 37,994 39,479 Deferred income taxes and deferred investment tax credits (12,374) 13,637 5,320 Net gains from sales of properties (1,195) (103) (949) ------------------------------------------------ 50,614 75,691 63,069 Changes in operating assets and liabilities Accounts receivable 7,402 (32,003) (2,586) Inventories (877) (4,306) 616 Prepaid expenses and other (340) 2,395 (330) Accounts payable and accrued expenses (49,803) 70,027 (3,019) Federal income taxes 4,761 (7,985) 853 Purchased-gas adjustments 27,246 (35,133) 1,635 Other assets 3,328 (6,156) 2,875 Other liabilities (70) (887) 1,064 ------------------------------------------------ NET CASH PROVIDED FROM OPERATING ACTIVITIES 42,261 61,643 64,177 INVESTING ACTIVITIES Capital expenditures (78,791) (65,767) (68,447) Proceeds from disposition of property, plant and equipment 3,014 498 3,052 ------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (75,777) (65,269) (65,395) FINANCING ACTIVITIES Equity investments 40,000 40,000 Issuance of long-term debt 60,000 Change in notes payable to Questar (39,000) 26,300 (17,400) Payment of dividends (24,000) (23,500) (23,000) ------------------------------------------------ NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES 37,000 2,800 (400) ------------------------------------------------ CHANGE IN CASH AND CASH EQUIVALENTS 3,484 (826) (1,618) BEGINNING CASH AND CASH EQUIVALENTS 882 1,708 3,326 ------------------------------------------------ ENDING CASH AND CASH EQUIVALENTS $4,366 $882 $1,708 ================================================
See notes to financial statements. 26 QUESTAR GAS COMPANY NOTES TO FINANCIAL STATEMENTS Note 1 - Summary of Accounting Policies Questar Gas Company (the Company or Questar Gas), is a wholly owned subsidiary of Questar Regulated Services Company (Regulated Services). Regulated Services is a holding company and a wholly owned subsidiary of Questar Corporation (Questar). Regulated Services was organized in 1996 and provides administrative, accounting, engineering, legal and regulatory functions for its three subsidiaries, Questar Gas, Questar Pipeline Company (Questar Pipeline) and Questar Energy Services. Significant accounting policies are presented below. BUSINESS AND REGULATION: Questar Gas distributes natural gas to residential, commercial and industrial customers in Utah, Southwestern Wyoming and Southeastern Idaho. The Company is regulated by the Public Service Commission of Utah (PSCU) and the Public Service Commission of Wyoming (PSCW). While Questar Gas also serves a small area of southeastern Idaho, the Public Utilities Commission of Idaho has deferred to the PSCU for rate oversight of this area. These regulatory agencies establish rates for the sale and transportation of natural gas. The regulatory agencies also regulate, among other things, the extension of natural gas facilities. Regulation is intended to permit the recovery, through rates, of the cost of service including a return on investment. The financial statements are presented in accordance with regulatory requirements. Methods of allocating costs to time periods, in order to match revenues and expenses, may differ from those of non-regulated businesses because of cost-allocation methods used in establishing rates. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent liabilities reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION: Revenues are recognized in the period that services are provided or products are delivered. Questar Gas accrues gas-distribution revenues for gas delivered to residential and commercial customers but not billed at the end of the accounting period. PURCHASED-GAS ADJUSTMENTS: Questar Gas accounts for purchased-gas costs in accordance with procedures authorized by the PSCU and PSCW under which purchased-gas costs that are different from those provided for in present rates are accumulated and recovered or credited through future rate changes. Questar Gas will continue to pursue hedging activities to mitigate energy-price fluctuations for gas-distribution customers. The PSCU has agreed that the benefits and the costs of hedging are to be included in the purchased-gas adjustment account. The stipulation allows Questar Gas to record mark-to-market adjustments for hedging contracts in the purchased-gas adjustment account. The PSCW also allows the inclusion of hedging activities in the purchase-gas adjustment account. OTHER REGULATORY ASSETS AND LIABILITIES: Gains and losses on the reacquisition of debt are deferred and amortized as debt expense over the life of the replacement debt in order to match regulatory treatment. The cost of the early retirement windows offered to employees of Questar Gas is capitalized and amortized over a five-year period in accordance with regulatory treatment. Questar Gas records cumulative increases in deferred taxes as income taxes recoverable from customers. 27 CASH AND CASH EQUIVALENTS: Cash equivalents consist principally of repurchase agreements with maturities of three months or less. In almost all cases, the repurchase agreements are highly liquid investments in overnight securities made through commercial bank accounts that result in available funds the next business day. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. The provision for depreciation and amortization is based upon rates that will systematically charge the costs of assets over their estimated useful lives. The costs of natural gas distribution property, plant and equipment, excluding gas wells, are amortized using the straight-line method ranging from 3% to 33% per year. The average depreciation and amortization rates used for the twelve months ended December 31, were as follows:
2001 2000 1999 ------------------------------------------------ Distribution plant 3.8% 4.0% 4.2% Gas wells, per Mcf $0.14 $0.15 $0.15
TEST FOR IMPAIRMENT OF LONG-LIVED ASSETS The potential for property impairment is evaluated on a specific asset basis or in groups of similar assets, as applicable. An impairment is indicated when a triggering event occurs and the estimated undiscounted future net cash flows of an evaluated asset are less than its carrying value. ACQUISITION OF DISTRIBUTION SYSTEMS Questar Gas completed the purchase of 100% of the stock of Utah Gas Service Company and Wyoming Industrial Gas in exchange for 390,000 shares of Questar common stock on July 12, 2001. As a result of the acquisition, Questar Gas added service to about 10,500 customers in Moab, Monticello and Vernal, Utah and Kemmerer and Diamondville, Wyoming. The acquisition cost $10.9 million, including $6 million of goodwill, and was accounted for as a purchase. GOODWILL: Goodwill accounting rules changed July 1, 2001. Statement of Financial Accounting Standard (SFAS) 142, "Goodwill and Other Intangible Assets" eliminates the requirement to amortize acquired goodwill; instead, such goodwill shall be reviewed at least yearly for impairment or sooner if a specific event occurs. Goodwill acquired after July 1, 2001 is exempt from amortization. The Company acquired $6 million of goodwill in a purchase combination completed July 12, 2001. Refer to the "New Accounting Standards" discussion following. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION: The Company capitalizes the cost of capital during the construction period of plant and equipment using a method required by regulatory authorities. Capitalized financing costs, called allowance for funds used during construction (AFUDC), consist of debt and equity portions. The debt portion of AFUDC is recorded as a reduction of interest expense and the equity portion is recorded in other income. The debt expense was reduced by $.5 million in 2001, $.9 million in 2000 and $.4 million in 1999. No amounts of equity AFUDC were recorded in the three years ended December 31, 2001. CREDIT RISK: The Company's primary market area is the Rocky Mountain region of the United States. Exposure to credit risk may be impacted by the concentration of customers in this region due to changes in economic or other conditions. Customers include individuals and numerous industries that may be affected differently by changing conditions. Management believes that its credit-review procedures, loss reserves, customer deposits and collection procedures have adequately provided for usual and customary credit-related losses. Loss reserves are periodically reviewed for adequacy and may be established on a 28 specific case basis. Bad debt expense amounted to $6.5 million, $2.8 million and $2.5 million for the years ended December 31, 2001, 2000 and 1999, respectively. The allowance for bad debt expenses was $2.2 million and $1.2 million at December 31, 2001 and 2000 respectively. INCOME TAXES: The Company accounts for income tax expense on a separate return basis. Pursuant to the Internal Revenue Code and associated regulations, the Company's operations are consolidated with those of Questar and its subsidiaries for income tax reporting purposes. Questar Gas records tax benefits as they are generated. The Company receives payments from Questar for such tax benefits as they are utilized on the consolidated return. The Company records increases in deferred taxes as income taxes recoverable from customers. The Company has adopted procedures with its regulatory commissions to include under-provided deferred taxes in customer rates on a systematic basis. Questar Gas uses the deferral method to account for investment tax credits as required by regulatory commissions. ENERGY-PRICE FINANCIAL INSTRUMENTS: On January 1, 2001, the Company adopted the accounting provisions of SFAS 133, as amended, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 addresses the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the balance sheet at fair value. The accounting for changes in fair value, which result in gains or losses, of a derivative instrument would be reported in the purchased-gas adjustment account. The Company has identified a number of contracts that are derivative instruments as defined by SFAS 133, but are specifically excluded from the provisions of SFAS 133 on the basis of normal sales and purchase transactions. NEW ACCOUNTING STANDARDS: In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141, "Business Combinations," which addresses financial accounting and reporting for business combinations. SFAS 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for under the pooling method initiated before but completed after June 30, 2001. The Company applied the purchase method of accounting when recording an acquisition completed in the third quarter of 2001. In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets," which addresses, among other things, the financial accounting and reporting for goodwill subsequent to an acquisition. The new standard eliminates the requirement to amortize acquired goodwill; instead, such goodwill shall be reviewed at least yearly for impairment or sooner if a specific triggering event occurs. Goodwill acquired after July 1, 2001, is exempt from amortization. At December 31, 2001, the Company's balance of goodwill amounted to $6 million all of which was acquired after July 1, 2001. The Company will adopt SFAS 142 as of January 1, 2002 and has up to six months to perform an initial goodwill impairment test. However, if impairment is indicated in the initial test, the impairment must be recorded retroactive to January 1, 2002 as a cumulative effect of a change in accounting method. Subsequent impairments will be charged to operating results. An initial test under the new accounting rules indicates that the Company had no impairment. In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations," which addresses, among other things, the financial accounting and reporting of the fair value of legal obligations associated with the retirement of tangible long-lived assets. The new standard requires that retirement costs be estimated at fair value, capitalized and depreciated over the life of the assets. The new standard may affect the cost basis of rate-regulated assets. SFAS 143 is effective for 2003. The Company has not evaluated the impact of SFAS 143. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The new standard addresses financial accounting and reporting for the impairment or disposal of 29 long-lived assets, specifically, for a segment of a business accounted for as a discontinued operation and modifies the provisions of SFAS 121. SFAS 144 is effective for 2002. The Company has not evaluated the impact of SFAS 144. RECLASSIFICATIONS: Certain reclassifications were made to the 2000 and 1999 financial statements to conform with the 2001 presentation. Note 2 - Debt Questar makes loans to Questar Gas under a short-term borrowing arrangement. Short-term notes payable to Questar totaled $66.6 million at December 31, 2001 with an interest rate of 2.31% and $105.6 million at December 31, 2000 with an interest rate of 6.91%. Questar Gas's long-term debt consists of medium-term notes with interest rates ranging from 6.3% to 8.43%, due 2007 to 2024. There are no maturities of long-term debt for the five years following December 31, 2001 and no long-term debt provisions restricting the payment of dividends. During the third quarter of 2001, Questar Gas filed a Form S-3 with the Securities and Exchange Commission to issue up to $100 million of medium-term notes, series D, with maturities of nine months to 30 years. On October 9, 2001, Questar Gas issued $60 million of 11-year notes with a 6.3% coupon rate. Cash paid for interest was $22.7 million in 2001, $21.2 million 2000 and $19.9 million in 1999. Note 3 - Financial Instruments and Risk Management The carrying amounts and estimated fair values of the Company's financial instruments were as follows:
December 31, 2001 December 31, 2000 -------------------------------------------------------------- Book Estimated Book Estimated Value Fair Value Value Fair Value -------------------------------------------------------------- (In Thousands) Financial assets Cash and cash equivalents $4,366 $4,366 $882 $882 Financial liabilities Short-term loans 66,600 66,600 105,600 105,600 Long-term debt 285,000 300,504 225,000 240,884
The Company used the following methods and assumptions in estimating fair values: (1) Cash and cash equivalents, and short-term loans - book value approximates fair value; (2) Long-term debt - the fair value of the medium-term notes is based on the discounted present value of cash flows using the Company's current borrowing rates. Fair value is calculated at a point in time and does not represent what the Company would pay to retire the debt securities. 30 Note 4 - Income Taxes The components of income taxes were as follows:
Year Ended December 31, 2001 2000 1999 ------------------------------------------------ (In Thousands) Federal Current $21,759 ($1,999) $935 Deferred (10,032) 13,897 6,948 State Current 3,198 (2) 1,233 Deferred (640) 1,373 277 Deferred investment tax credits (395) (380) (381) ------------------------------------------------ $13,890 $12,889 $9,012 ================================================
The difference between the statutory federal income tax rate and the Company's effective income tax rate is explained as follows:
Year Ended December 31, 2001 2000 1999 ------------------------------------------------ (In Percentages) Federal income taxes at 35% 35.0 35.0 35.0 Increase (decrease) as a result of: State income taxes, net of federal income tax benefit 4.2 2.4 3.5 Non-conventional fuel credits (4.4) (4.9) (6.6) Investment tax credits (1.0) (1.0) (1.4) Deferred taxes related to regulated assets for which deferred taxes were not provided in prior years 2.3 2.5 3.3 Other (1.2) 0.8 (1.9) ------------------------------------------------ Effective income tax rate 34.9 34.8 31.9 ================================================
31 Significant components of the Company's deferred income taxes were as follows:
December 31, 2001 2000 -------------------------------- (In Thousands) Deferred tax liabilities Property, plant and equipment $80,315 $78,683 Other 4,323 5,812 -------------------------------- Total deferred tax liabilities 84,638 84,495 Deferred tax assets Deferred ITC and other 5,321 4,280 -------------------------------- Net deferred income taxes - noncurrent $79,317 $80,215 ================================ Deferred income taxes - current Purchased-gas adjustment $3,153 $13,515 ================================
Cash paid for income taxes was $18.5 million in 2001, $7.6 million in 2000 and $2.1 million in 1999. Note 5 - Rate Regulation and Other Matters STATE RATE REGULATION Questar Gas routinely files periodic applications with the PSCU and the PSCW requesting permission to reflect annualized gas cost increases or decreases depending on gas prices. These requests for gas cost increases or decreases are passed on to customers on a dollar-for-dollar basis with no markup. The impact of the gas cost increase on customers was lessened by the fact that approximately 40% to 50% of the Company's annual supply comes from its own wells and is priced to customers at cost-of-service prices rather than market prices. Effective January 1, 2001, the PSCU approved on an interim basis a $167 million increase in its Utah natural gas rates that resulted in a 29% increase for the typical residential Utah customer. The increase was based on significant increases in natural gas prices at the wellhead and was part of Questar Gas's purchased gas-cost adjustment or "pass-through" filings. Also, effective January 1, 2001, the PSCW approved a $7 million pass-through filing for Wyoming natural gas rates. On August 30, 2001, the Company filed a pass-on request with the PSCW seeking a $4.6 million reduction of future gas costs collected in rates. The PSCW approved the request. On September 17, 2001, Questar Gas filed a pass-through request with the PSCU that reduced gas costs in Utah rates by $110.9 million over the 12 months following an October 1, 2001 effective date. The PSCU approved the request. On November 30, 2001, the Company filed a pass-on request with the PSCW asking to reduce future gas costs collected in rates by $2.9 million. The request was approved effective January 1, 2002. In a similar request, the Company filed a pass-through rate request with the PSCU asking for a $66.9 million reduction of future gas costs. The PSCU granted the request effective January 1, 2002. In total, pass-through reductions filed between August 2001 and January 2002, resulted in a 25% decrease for a typical Utah residential customer. 32 On October 23, 2001, the Utah Supreme Court unanimously reversed a PSCU decision and agreed with Questar Gas's position that certain gas processing costs should have been considered for recovery through usual pass-through proceedings. In December 1999, PSCU denied the Company's request to recover certain costs of processing gas to remove carbon dioxide. In denying the Company's request, the PSCU provided guidance to seek recovery of future processing fees through other rate making procedures. The Company filed a general rate case that, when settled in August 2000, provided $5 million yearly toward processing costs. The Company appealed to the Utah Supreme Court, maintaining that the purchase-gas adjustment account and pass-through proceedings were the proper mechanisms for recovering those processing costs. The court's decision sends the case back to the PSCU allowing the opportunity for the Company to seek recovery of incurred costs. FEDERAL RATE REGULATION On September 27, 2001, the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rule making on Standards of Conduct for Transmission Providers (NOPR) that would significantly broaden the scope of the FERC's affiliate regulations for pipelines. The NOPR would require all transmission providers to comply with standards of conduct dealing with affiliated energy companies. Those standards include the separation of functions and non-discriminatory treatment of transmission customers. The NOPR would essentially diminish operational efficiencies and increase costs by mandating a complete separation of operations. Questar Regulated Services supplies administrative, technical, accounting, legal and regulatory support for both Questar Pipeline and Questar Gas. Questar Gas, Questar Pipeline, industry associations and other companies have filed written and verbal comments with the FERC about the problems this NOPR would create for the industry and its customers and asked the FERC to reconsider its proposal. Note 6 - Litigation and Commitments GRYNBERG LAWSUITS Questar Gas and several affiliates are named defendants in a lawsuit filed by independent gas producer Jack J. Grynberg under the Federal False Claims Act. This case and all substantially similar cases filed by Grynberg against pipelines and their affiliates have been consolidated for discovery and pre-trial rulings in Wyoming federal district court. The cases involve allegations of industry wide mismeasurement and undervaluation of gas on which royalty payments are due the federal government. The complaint seeks treble damages and imposition of civil penalties. The Wyoming district court judge denied the defendants' initial motion to dismiss. No motions are currently pending. It is too early to estimate the outcome of the cases filed by Grynberg against Questar affiliates. WILL PRICE V. GAS PIPELINES ET AL. (FORMERLY QUINQUE OPERATING CO. V. GAS PIPELINES): Questar Gas and a number of affiliates are named defendants in a purported nationwide class action alleging mismeasurement of volumes and heating content of gas produced from private and state lands. The plaintiffs are alleging a conspiracy among the defendants to set industry standards that undermeasure gas. The defendants have filed motions to dismiss the pending actions for lack of personal jurisdiction and for failure to state a claim. The producer's complaint does not include a request for any specific monetary damages. OTHER LEGAL PROCEEDINGS There are various other legal proceedings against Questar Gas. While it is not currently possible to predict 33 or determine the outcomes of these proceedings, it is the opinion of management that the outcomes will not have a material adverse effect on the Company's results of operations, financial position or liquidity. COMMITMENTS Historically, 40% to 50% of Questar Gas's gas-supply portfolio has been provided from company-owned gas reserves at the cost of service. The remainder of the gas supply has been purchased from various suppliers under agreements with a duration of one year or less and index-based pricing. Generally, at the conclusion of the heating season and after a bid process, new agreements for the upcoming heating season are put into place. Questar Gas bought significant quantities of natural gas under purchase agreements amounting to $261 million, $184 million and $93 million in 2001, 2000 and 1999, respectively. In addition, Questar Gas makes use of various storage arrangements to meet peak-gas demand during certain times of the heating season. Note 7 - Employee Benefits PENSION PLAN: Substantially all of Questar Gas's employees are covered by Questar's defined benefit pension plan. 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. The Company relies on a third-party consultant to calculate the pension plan projected benefit obligation. Questar Gas's portion of plan assets and benefit obligations is not determinable because the plan assets are not segregated or restricted to meet the Company's pension obligations. If the Company were to withdraw from the pension plan, the pension obligation for the Company's employees would be retained by the pension plan. At December 31, 2001, Questar's accumulated benefit obligation exceeded the fair value of plan assets. Regulated Services offered early retirement windows to eligible employees in 2000 with a total of 276 employees and recipients of long-term disability from Questar Gas, Questar Pipeline and Questar Regulated Services electing to retire effective October 31, 2000. The $14.4 million cost of the early retirement window is being amortized over a five-year period in accordance with regulatory treatment. Pension expense was $5.8 million in 2001, $2.1 million in 2000 and $1.7 million in 1999. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: 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. The Company relies on a third-party consultant to calculate the projected benefit obligation. The cost of postretirement benefits other than pensions was $1.5 million in 2001, $1.1 million in 2000 and $1.2 million in 1999. The Company's portion of plan assets and benefit obligations related to postretirement medical and life insurance benefits is not determinable because the plan assets are not segregated or restricted to meet the Company's obligations. At December 31, 2001, Questar's accumulated benefit obligation exceeded the fair value of plan assets. 34 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. In 2000, certain recipients of postemployment benefits accepted early retirement benefits in connection with Questar Regulated Services' early retirement program. Questar Gas's postemployment liability at December 31 was $.2 million in 2001, $.3 million in 2000 and $1.1 million in 1999. EMPLOYEE INVESTMENT PLAN: Questar Gas participates in Questar's Employee Investment Plan (Plan), which allows eligible employees to purchase shares of Questar Corporation common stock or other investments through payroll deduction. The Company matches 80% of employees' pretax purchases up to a maximum of 6% of their qualifying earnings. The Company's expense equals its matching contribution. The Company's expense of the Plan amounted to $1.4 million, $1.7 million and $1.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. Note 8 - Related Party Transactions Regulated Services provides administrative, technical, legal and accounting support to Questar Gas. The cost of this support was $35.4 million in 2001, $34 million in 2000 and $37.5 million in 1999. The majority of these costs are allocated and included in operating and maintenance expenses. The allocation methods are based on several methods dictated by the nature of the charges. Management believes that the allocation methods are reasonable. Questar Gas has reserved transportation capacity on Questar Pipeline's system of approximately 899,000 dth per day as of December 31, 2001 and paid an annual demand charge of approximately $52.1 million for this reservation in 2001. Questar Gas releases excess capacity to its industrial transportation or other customers and receives a credit from Questar Pipeline for the released-capacity revenues and a portion of Questar Pipeline's interruptible-transportation revenues. Questar Gas paid for transportation, storage and processing services provided by Questar Pipeline and a subsidiary amounting to $72.9 million in 2001, $73.7 million in 2000 and $71.6 million in 1999, which included demand charges. The costs of these services were included in natural gas purchases. Wexpro, an affiliated company, manages and develops certain properties owned by Questar Gas under the terms of the Wexpro settlement agreement. The Company receives a portion of Wexpro's income from oil operations after recovery of Wexpro's operating expenses and a return on investment. This amount, which is included in revenues and reduces amounts billed to gas distribution customers, was $2.9 million in 2001, $4.8 million in 2000 and $2.3 million in 1999. The amounts that Questar Gas paid Wexpro for the operation of gas properties owned by Questar Gas were $88.8 million in 2001, $73.7 million in 2000 and $62.3 million in 1999. Questar Gas reports these costs in natural gas purchases. Also included in natural gas purchases are amounts paid to Questar Gas Management, an affiliate, for gathering of Company-owned gas and purchased gas. These costs amounted to $8.2 million in 2001, $8.5 million in 2000 and $9 million in 1999. Questar Gas purchased various other field-related services from Questar Gas Management amounting to $.5 million in 2001, $.9 million in 2000 and $.8 million in 1999. Questar Gas purchased gas from Questar Energy Trading amounting to $2.1 million in 2001, $9.3 million in 2000 and $7.2 million in 1999. 35 Questar Gas has a 10-year lease with an option to renew with an affiliate for some space in an office building located in Salt Lake City, Utah. Rent expense was $1.3 million in 2001, $1.3 million in 2000 and $1.2 million in 1999. The annual lease payment for each of the next five years following 2001 is $1.4 million. Questar InfoComm Inc. is an affiliated company that provides data processing and communication services to Questar Gas. Direct charges paid by the Company to Questar InfoComm were $12.8 million in 2001, $15.4 million in 2000 and $13.7 million in 1999. Questar charged Questar Gas for certain administrative functions amounting to $5.4 million in 2001, $6.2 million in 2000 and $5 million in 1999. These costs are included in operating and maintenance expenses and are allocated based on each affiliated company's proportional share of revenues less product costs; property, plant and equipment; and labor costs. Management believes that the allocation method is reasonable. Questar Gas borrowed cash from Questar and incurred debt expense of $5 million in 2001, $3.5 million in 2000 and $1.9 million in 1999. Note 9 - Supplemental Gas and Oil Information (Unaudited) The following information discusses the Company's gas and oil producing activities. All of the properties are cost-of-service properties with the return on investment established by state regulatory agencies. Questar Gas has not incurred any costs for gas and oil producing activities for the three years ended December 31, 2001. See Note 8 for the amounts paid by Questar Gas to Wexpro. Estimated Quantities of Proved Gas and Oil Reserves: The following estimates were made by Questar's reservoir engineers. Reserve estimates are based on a complex and highly interpretive process which is subject to continuous revision as additional production and development drilling information becomes available. The quantities are based on existing economic and operating conditions using current prices and operating costs. All gas and oil reserves reported are located in the United States. Questar Gas does not have any long-term supply contracts with foreign governments or reserves of equity investees. Generally no estimates are available for proved undeveloped reserves that may exist. 36
Natural Gas Oil -------------------------------- (In Million (In Thousands Cubic Feet) of Barrels) Proved Developed Reserves Balance at January 1, 1999 340,135 2,723 Revisions of estimates 5,699 976 Extensions and discoveries 46,739 213 Production (38,890) (623) -------------------------------- Balance at December 31, 1999 353,683 3,289 Revisions of estimates 16,523 504 Extensions and discoveries 50,351 234 Production (41,546) (579) -------------------------------- Balance at December 31, 2000 379,011 3,448 Revisions of estimates (11,465) 275 Extensions and discoveries 76,042 479 Production (37,907) (515) -------------------------------- Balance at December 31, 2001 405,681 3,687 ================================
37 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 26th day of March, 2002. QUESTAR GAS COMPANY (Registrant) By /s/ D. N. Rose -------------------------------- D. N. Rose President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ D. N. Rose President and Chief Executive ---------------------------- Officer; Director (Principal D. N. Rose Executive Officer) /s/ S. E. Parks Vice President, Treasurer and Chief ---------------------------- Financial Officer (Principal Financial Officer) S. E. Parks /s/ D. M. Curtis Controller ---------------------------- (Principal Accounting Officer) D. M. Curtis *R. D. Cash Chairman of the Board *W. Whitley Hawkins Director *Robert E. Kadlec Director *Dixie L. Leavitt Director *Gary G. Michael Director *K. O. Rattie Director *D. N. Rose Director *Harris H. Simmons Director MARCH 26, 2002 *By /s/ D. N. Rose Date ----------------------------------- D. N. Rose, Attorney in Fact 38 QUESTAR GAS COMPANY Schedule of Valuation and Qualifying Accounts December 31, 2001 (In Thousands)
------------------------------------------------------------------------------------------------------------------------ Column A Column B Column C Column D Column E Description Beginning Balance Amounts charged Deductions for Ending Balance to expense accounts written off ------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 2001 Allowance for bad debts $1,185 $6,464 $5,443 $2,206 YEAR ENDED DECEMBER 31, 2000 Allowance for bad debts 1,006 2,760 2,581 1,185 YEAR ENDED DECEMBER 31, 1999 Allowance for bad debts 1,000 2,541 2,535 1,006
EXHIBIT INDEX Exhibit Number Description 3.1.* Restated Consolidated Articles of Incorporation dated August 15, 1980. (Exhibit No. 4(a) to Registration Statement No. 2-70087, filed December 1, 1980.) 3.2.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1982. (Exhibit No. 3(b) to Form 10-K Annual Report for 1982.) 3.3.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 10, 1983. (Included in Exhibit No. 4.1. to Registration Statement No. 2-84713, filed June 23, 1983.) 3.4.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated August 16, 1983. (Exhibit No. 3(a) to Form 8 Report amending the Company's Form 10-Q Report for Quarter Ended September 30, 1983.) 3.5.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated October 26, 1984. (Exhibit No. 3.5. to Form 10-K Annual Report for 1984.) 3.6.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1985. (Exhibit No. 3.1. to Form 10-Q Report for Quarter Ended June 30, 1985.) 3.7.* Articles of Amendment to Restated Consolidated Articles of Incorporation dated February 10, 1988. (Exhibit No. 3.7. to Form 10-K Annual Report for 1987.) 3.8.* Articles of Amendment to Restated Consolidated Articles of Incorporation dated December 31, 1997. (Exhibit No. 3.7. to Form 8-K Current Report for December 31, 1997.) 3.9.* Bylaws (as amended effective February 13, 2001) (Exhibit No. 3.9. to Form 10-K Annual Report for 2000.) 4.*(1) Indenture dated as of May 1, 1992, between the Company and Citibank, as trustee, for the Company's Debt Securities. (Exhibit No. 4. to Form 10-Q Report for Quarter Ended June 30, 1992.) 10.1.*(2) Stipulations and Agreement, dated October 14, 1981, executed by the Company; Wexpro Company; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Form 10-K Annual Report for 1981.) 10.2*(2) Gas Gathering Agreement between the Company and Questar Pipeline Company effective September 1, 1993. (This agreement has been transferred from Questar Pipeline to Questar Gas Management Company.) (Exhibit No. 10.11. To Form 10-K Annual Report for 1994.) 10.3.*(2) Amendment to Gas Gathering Agreement between the Company and Questar Gas Management Company effective September 1, 1997. 12. Ratio of earnings to fixed charges. 23. Consent of Independent Auditors. 24. Power of Attorney. ------------------------------ *Exhibits so marked have been filed with the Securities and Exchange Commission as part of the referenced filing and are incorporated herein by reference. (1)Wells Fargo Bank Northwest, N.A. serves as the successor trustee. (2)This document has not been formally amended to refer to the Company's current name. (b) Questar Gas Company did not file any Current Reports on Form 8-K during the last quarter of 2001.