ITEM 3. LEGAL PROCEEDINGS
There are various legal proceedings pending that involve the Company and its affiliates. While it is not feasible to predict or determine the outcomes of these proceedings, the Company's management believes that the outcomes will not have a material adverse effect on the Company's financial position.
As a result of acquiring Questar Pipeline's gas purchase contracts, the Company is responsible for any judgment rendered against Questar Pipeline in a lawsuit that was tried before a Wyoming federal district court jury in late 1994. The jury awarded several million dollars to the producer from which Questar Pipeline purchased gas, but the trial judge, in June of 1998, entered a judgment that overturned most provisions of the jury verdict. The producer filed an appeal from the trial court's decision with the United States Court of Appeals for the Tenth Circuit, where briefs have been filed.
The plaintiff producer filed another case against the Company and its affiliates in 1997. It includes claims of fraud and antitrust violation in addition to the same claims heard in the first case for a subsequent period of time. The case, which was also filed in Wyoming's federal district court, has been stayed pending the outcome of the appeal.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its stockholders during the last quarter of 1998.
Part II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS
As of January 1, 1997, the Company's outstanding shares of common stock, $2.50 par value, are owned by Regulated Services. Information concerning the dividends paid on such stock and the ability to pay dividends is reported in the Statements of Common Shareholder's Equity and the Notes to Financial Statements included in Item 8.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The Company, as the wholly owned subsidiary of a reporting person, is entitled to omit the information requested in this Item.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Natural Gas Distribution - Questar Gas conducts natural gas distribution operations. Following is a summary of financial results and operating information:
Revenues, less natural gas purchases, decreased $3,471,000 in 1998 when compared with 1997 as a result of lower usage per customer in 1998 and switching between rate classifications. These downward pressures were partially offset by increased sales due to the addition of new customers. Revenues, net of gas costs, increased $9,762,000 in 1997 when compared with 1996 primarily from higher heating demand caused by colder temperatures and customer additions.
Usage of gas per retail customer fell during the first half of 1998 after increasing in the first half of 1997. This reduced usage appears to have been a reaction to rising gas costs included in rates during the latter part of 1997 and first part of 1998. Usage per customer had stabilized by the end of 1998, coinciding with lower gas costs. A rate surcharge, associated with constructing a distribution pipeline into southern Utah and in effect for the past 10 years, began phasing out in September of 1997. Also, some general-service customers, who met higher load-factor standards in 1998, shifted to firm commercial rates that have a lower margin.
Questar Gas added 21,696 customers in 1998 and 23,465 customers in 1997, representing increases of 3.4% and 3.8%, respectively. Customer additions in 1999 are expected to reach 20,000 to 21,000.
Temperatures were warmer than normal for the three years presented. The revenue impact of this warmer-than-normal temperature trend was mitigated as a result of a weather-normalization adjustment, which was part of a 1995 rate settlement. Virtually all of Questar Gas' residential and commercial volumes were covered under the weather-normalization adjustment in 1998 and 1997 compared with about 50% in 1996.
Gas deliveries to industrial customers increased 7% in 1998 and 5% in 1997 compared with the prior year. The increases were due to the effects of a strong regional economy, which produces expansion of operations and addition of industrial customers. Margins from gas delivered to industrial customers, either for gas sold or transported, are substantially lower than from gas delivered to residential and commercial customers.
Questar Gas' natural gas purchases increased in 1998 and 1997, resulting in a rising natural gas-cost component allowed in rates. The gas-cost component in Utah rates was also increased in 1998 and 1997 in an effort to recover sharply increased natural gas-purchase costs incurred during the 1996-1997 heating season. By the end of 1998, those costs had been substantially recovered. The balance in the purchased gas cost account had decreased from $37.3 million at December 31, 1997 to $2.1 million at December 31, 1998. In response to requests by Questar Gas, regulatory agencies approved on an interim basis decreases in gas costs charged to customers. The winter residential and small commercial customer gas-cost component for Utah decreased from $3.20 per dth to $2.78 beginning in January 1999 and from $2.88 to $2.63 per dth in Wyoming.
Questar Gas' operating and maintenance expenses decreased by 5% in 1998 compared with 1997 as a result of lower labor costs and capitalizing costs associated with installing new computer systems. Labor costs were $2 million lower in 1998 due to a reduction in the number of employees following an early retirement program offered to employees of Regulated Services. Operating and maintenance expenses increased 5% in 1997 due primarily to the costs of serving an expanding customer base, higher labor costs and modernization of key computer systems. In 1997, Questar Gas and Questar Pipeline combined functions common to gas-distribution and gas-transmission operations in order to eliminate duplications.
Depreciation expense was higher in 1998 compared with 1997 primarily as a result of increased investment in property, plant and equipment. Interest expense was higher in 1998 due primarily to an issuance of $50 million of medium-term notes with an average interest rate of 6.88 % in the third and fourth quarters of 1997.
The effective income tax rate was 33.5% in 1998, 31.7% in 1997 and 1996. The effective income tax rate was below the combined federal and state statutory rate of about 38% primarily due to income tax credits received from production of gas from certain properties. These credits amounted to $2,217,000 in 1998, $2,686,000 in 1997 and $3,246,000 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash provided from operating activities increased in 1998 compared to 1997 due primarily to the collection of purchased-gas costs and accounts receivable from natural gas distribution customers and the timing of payments of accounts payable associated with construction.
Investing Activities
Following is a summary of capital expenditures for 1998 and 1997, and a forecast of 1999 expenditures.
Expansion of the distribution system in response to the rapid growth in the number of customers was the focus of capital spending. The distribution system was extended by 720 miles of main, feeder and service lines.
Financing Activities
Questar Gas used net cash provided from operating activities to fund 1998 capital expenditures and dividend payments. Questar Gas borrowed $50 million of medium-term notes and increased short-term debt by $23.8 million in 1997. Forecasted 1999 capital expenditures of $60 million are expected to be financed with net cash provided from operations and borrowings from Questar.
Questar makes loans to Questar Gas under a short-term borrowing arrangement. Short-term notes payable to Questar totaled $96.7 million at December 31, 1998 with an interest rate of 5.71% and $100 million at December 31, 1997 with an interest rate of 6.02%.
Questar Gas' capital structure at December 31, 1998 was composed of 50% long-term debt and 50% common equity. Moody's and Standard and Poor's have rated the Company's long-term debt A1 and A+, respectively.
Year 2000
Introduction
Questar Gas is addressing the issue of computer programs and embedded computer chips being unable to distinguish between the year 1900 and the year 2000 ("Y2K").
In a coordinated effort with its parent Questar Corporation's Y2K project team, the basic approach is to provide company-wide management and coordination combined with distributed compliance responsibility at the various business units. The Y2K team is responsible for fostering awareness; establishing company-wide strategy; coordinating Questar Gas action items and information; and providing periodic internal status reports. The effort is designed to be consistent with the Questar Corporation's Y2K project and the prudent efforts of publicly traded companies of similar size, business, and complexity.
Questar InfoComm, Inc. (an affiliate which provides information technology services) is responsible for Y2K compatibility of all communications systems; networks (LANs and WANs); corporate-wide applications and operating systems; mainframe resident commercial off-the-shelf products; and for developing, implementing and coordinating testing procedures.
General
The Y2K team operates under a written plan (the "Plan") addressing infrastructure, applications software (infrastructure and applications software are sometimes collectively referred to as "IT systems"), outside suppliers and customers, and process control and instrumentation containing embedded chips (non-IT systems). The Company's in-house programmers and systems analysts (including those of Questar InfoComm, Inc.) are primarily responsible for the conversion and testing of certain non-compliant application software code. In addition, the services of outside consultants and programmers were engaged to assist with project management and completion of coding for certain software programs. The general phases common to all business units are:
(1) Inventory (2) Prioritization (3) Project start-up (4) Assessment (5) Remediation (6) Testing; and (7) Project closeout.
Implementation of the Plan is generally proceeding on schedule.
Status
Inventory and Assessment. The inventory and assignment of priority for each business unit were essentially completed in September 1998. Throughout the ongoing Y2K project, these inventory listings continue to be monitored. Material items were defined as those the Company believed to involve a risk to the safety of individuals; or which may cause damage to property or the environment; or which may affect the Company's ability to provide gas production, transportation, or delivery.
Projects Planning. Based on the inventory and determined priorities, more than 45 individual items have been combined into 4 projects. Project managers have been assigned, standard project documentation has been established, training sessions are being held with the various project managers, and standard management reporting forms have been devised and are being utilized. All of the foregoing activities comprise what has been defined as "project start-up."
Applications Software. The applications software section of the Plan addresses both the conversion of applications software that is not Y2K compliant and the replacement of such software. The testing phase of this section is scheduled for completion by the third quarter of 1999. The testing phase is conducted as the software is remediated or replaced. Currently there are 4 projects identified in this section: 0 in start-up, 2 in assessment, 0 in remediation, 1 in testing, and 1 completed and deemed to be Y2K ready. Contingency planning for this section began in the third quarter of 1998 and will be completed by mid-1999.
Non-IT Equipment. Inventory and assessment phases are in progress for non-IT systems. This section of the Plan is considered to be one project and addresses hardware, software and associated embedded computer chips used in the operation of all facilities operated by the Company. This section presents unique problems in that it is often difficult to determine whether embedded chips have a date function that present a Y2K problem. It is also difficult to take certain critical systems, such as compressors and pipeline valves, off-line for testing. Because of this, the Company has engaged the services of a consultant, Stone & Webster, to help with this effort. The Company believes the replacement, repair and testing of non-IT systems equipment is on schedule to be completed by third quarter 1999. As of December 31, 1998, the embedded chip project is active and in the assessment phase. Contingency planning for this section began in the third quarter of 1998 and will be completed by year end 1999.
Testing. The testing phases of the Plan are underway. The Company has developed a testing procedure and guidelines to help system users and project managers develop their specific test plans and to ensure consistency in testing. The Company has assembled a test facility which duplicates, in essential details, the production environment. The test facility is in operation. Critical systems already tested and determined to be Y2K ready include the SCADA gas control system and the company's internal telephone system (including switches) which connects to the local access provider. Other critical systems currently in the test facility include customer information systems (CIS) and gas measurement. Responsible project managers and system users continue to develop their test plans and schedule testing in the facility.
Critical Third Parties. The outside vendors and customers section of the Plan includes the process of identifying and prioritizing critical suppliers and customers and communicating with them about their plans and progress in addressing their Y2K problems. The various business units have formed Project teams which have begun the detailed evaluation of the most critical third parties and to elicit required information. The process of evaluating these external agents commenced in the third quarter of 1998 and first contacts with vendors have been made. This process is scheduled for completion by mid-1999, with follow-up reviews scheduled through the remainder of 1999. This procedure will include the development of contingency plans, scheduled for the second quarter of 1999, with completion by late 1999. The Company estimates that this section was on schedule at December 31, 1998.
Costs
The total cost associated with efforts to become Y2K compliant is not expected to be material to the Company's financial position. The current expense estimate of the Y2K project is $2.3 million. The expense estimate is expected to change as the project progresses. Funds for the project are included in existing operating budgets.
Risks
Failure to correct a material Y2K problem could result in an interruption, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Y2K problem - resulting in part from the uncertainty of the Y2K readiness of outside suppliers and customers and the embedded chip problems - the Company is unable to determine at this time whether the consequences of Y2K failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Y2K project has reduced and is expected to continue to significantly reduce the Company's level of uncertainty about the Y2K problem and, in particular, about the Y2K compliance and readiness of its material outside vendors and customers. The Company believes that the possibility of significant interruptions of normal operations is not significant.
Forward-Looking Statements
This annual report contains some forward looking statements about future operations and expectations of Questar Gas. Management believes they are reasonable representations of Questar Gas's expected performance at this time. Actual results may vary from management's stated expectations and projections.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are included in Part IV, Item 14, herein.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Questar Gas has not changed its independent auditors or had any disagreements with them concerning accounting matters and financial statement disclosures within the last 24 months.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company, as the wholly owned subsidiary of a reporting person, is entitled to omit all information requested in PART III (Items 10-13).
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1)(2) Financial Statements and Financial Statement Schedules. The financial statements identified in the List of Financial Statements are filed as part of this report.
(3) Exhibits. The following is a list of exhibits required to be filed as a part of this report in Item 14(c).
Exhibit No. Exhibit
3.1.* Restated Consolidated Articles of Incorporation dated August 15, 1980. (Exhibit No. 4(a) to Registration Statement No. 2-70087, filed December 1, 1980.)
3.2.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1982. (Exhibit No. 3(b) to Form 10-K Annual Report for 1982.)
3.3.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 10, 1983. (Included in Exhibit No. 4.1. to Registration Statement No. 2-84713, filed June 23, 1983.)
3.4.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated August 16, 1983. (Exhibit No. 3(a) to Form 8 Report amending the Company's Form 10-Q Report for Quarter Ended September 30, 1983.)
3.5.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated October 26, 1984. (Exhibit No. 3.5. to Form 10-K Annual Report for 1984.)
3.6.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1985. (Exhibit No. 3.1. to Form 10-Q Report for Quarter Ended June 30, 1985.)
3.7.* Articles of Amendment to Restated Consolidated Articles of Incorporation dated February 10, 1988. (Exhibit No. 3.7. to Form 10-K Annual Report for 1987.)
3.8.* Articles of Amendment to Restated Consolidated Articles of Incorporation dated December 31, 1997. (Exhibit No. 3.7. to Form 8-K Current Report for December 31, 1997.)
3.9.* Bylaws (as amended effective August 11, 1992). (Exhibit No. 3.8. to Form 10-K Annual Report for 1992.)
4.*1 Indenture dated as of May 1, 1992, between the Company and Citibank, as trustee, for the Company's Debt Securities. (Exhibit No. 4. to Form 10-Q Report for Quarter Ended June 30, 1992.)
10.1.*2Stipulations and Agreement, dated October 14, 1981, executed by Mountain Fuel Supply Company; Wexpro Company; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Form 10-K Annual Report for 1981.)
10.2.*3Annual Management Incentive Plan adopted by Questar Gas Company, Questar Pipeline Company, and Questar Regulated Services Company as amended and restated effective May 19, 1998. (Exhibit No. 10.1. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.3.*2,3Mountain Fuel Supply Company Window Period Supplemental Executive Retirement Plan effective January 24, 1991. (Exhibit No. 10.9. to Form 10-K Annual Report for 1990.)
10.4.*2,3Questar Gas Company Deferred Compensation Plan for Directors as amended and restated effective May 19, 1998. (Exhibit No. 10.2. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.5.*2Gas Gathering Agreement between Mountain Fuel Supply Company and Questar Pipeline Company effective September 1, 1993. (This agreement has been transferred to Questar Gas Management Company.) (Exhibit No. 10.11. to Form 10-K Annual Report for 1994.)
10.6.*2Amendment to Gas Gathering Agreement between Mountain Fuel Supply Company and Questar Gas Management Company effective September 1, 1997.
24. Power of Attorney.
27. Financial Data Schedule. _______________________
*Exhibits so marked have been filed with the Securities and Exchange Commission as part of the referenced filing and are incorporated herein by reference.
1First Security Bank, N.A. serves as the successor trustee.
2This document has not been formally amended to refer to the Company's current name.
3Exhibit so marked is a management contract or compensation plan or arrangement.
(b) Questar Gas Company did not file a Current Report on Form 8-K during the last quarter of 1998.
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a) (1) and (2), and (d)
LIST OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 1998
QUESTAR GAS COMPANY
SALT LAKE CITY, UTAH
FORM 10-K -- ITEM 14 (a) (1) AND (2)
QUESTAR GAS COMPANY
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of Questar Gas Company are included in Item 8:
Statements of income -- Years ended December 31, 1998, 1997 and
Balance sheets -- December 31, 1998 and 1997
Statements of common shareholder's equity -- Years ended December 31, 1998, 1997 and 1995
Statements of cash flows -- Years ended December 31, 1998, 1997 and 1996
Notes to financial statements
Financial statement schedules, for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable, and therefore have been omitted.
Report of Independent Auditors
Board of Directors Questar Gas Company
We have audited the accompanying balance sheets of Questar Gas Company as of December 31, 1998 and 1997, and the related statements of income and common shareholder's equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Questar Gas Company at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP Salt Lake City, Utah February 8, 1999
QUESTAR GAS COMPANY STATEMENTS OF INCOME
See notes to financial statements.
QUESTAR GAS COMPANY BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
See notes to financial statements.
QUESTAR GAS COMPANY STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
See notes to financial statements.
QUESTAR GAS COMPANY STATEMENTS OF CASH FLOWS
See notes to financial statements.
QUESTAR GAS COMPANY NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Accounting Policies
Questar Gas Company (the Company or Questar Gas), formerly Mountain Fuel Supply, is a wholly-owned subsidiary of Questar Regulated Services Company (Regulated Services). Regulated Services is a holding company and wholly-owned subsidiary of Questar Corporation (Questar). Regulated Services was organized in 1996 and provides administrative, accounting, engineering, legal and regulatory functions for its three subsidiaries, Questar Gas, Questar Pipeline Company (Questar Pipeline) and Questar Energy Service. Significant accounting policies are presented below.
Business and Regulation: Questar Gas distributes natural gas to residential, commercial and industrial customers. The Company is regulated by the Public Service Commission of Utah (PSCU) and the Public Service Commission of Wyoming (PSCW). While Questar Gas also serves a small area of southeastern Idaho, the Public Utilities Commission of Idaho has deferred to the PSCU for rate oversight of this area. These regulatory agencies establish rates for the sale and transportation of natural gas. The regulatory agencies also regulate, among other things, the extension and enlargement or abandonment of jurisdictional natural gas facilities. Regulation is intended to permit the recovery, through rates, of the cost of service including a rate of return on investment.
The financial statements are presented in accordance with regulatory requirements. Methods of allocating costs to time periods, in order to match revenues and expenses, may differ from those of nonregulated businesses because of cost-allocation methods used in establishing rates.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent liabilities reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition: Revenues are recognized in the period that services are provided or products are delivered. Questar Gas accrues gas-distribution revenues for gas delivered to residential and commercial customers but not billed at the end of the accounting period.
Purchased-Gas Adjustments: Questar Gas accounts for purchased-gas costs in accordance with procedures authorized by the PSCU and PSCW under which purchased-gas costs that are different from those provided for in the present rates are accumulated and recovered or credited through future rate changes.
Cash and Short-Term Investments: Short-term investments consist principally of repurchase agreements with maturities of three months or less.
Property, Plant and Equipment: Property, plant and equipment are stated at cost. The provision for depreciation and amortization is based upon rates which will systematically charge the costs of assets over their estimated useful lives. The costs of natural gas distribution property, plant and equipment, excluding gas wells, are amortized using the straight-line method ranging from 3% to 33% per year and averaging 4.3% in 1998. The costs of gas wells were amortized using the units-of-production method at $.17 per Mcf of natural gas production in 1998.
Allowance for Funds Used During Construction: The Company capitalized the cost of capital during the construction period of plant and equipment using a method required by regulatory authorities amounting to $797,000 in 1998, $261,000 in 1997 and $277,000 in 1996.
Reacquisition of Debt: Gains and losses on the reacquisition of debt are deferred and amortized as debt expense over the life of the replacement debt in order to match regulatory treatment.
Income Taxes: Questar Gas records cumulative increases in deferred taxes as income taxes recoverable from customers. The Company has adopted procedures with its regulatory commissions to include under-provided deferred taxes in customer rates on a systematic basis. Questar Gas uses the deferral method to account for investment-tax credits as required by regulatory commissions. The Company's operations are consolidated with those of Questar and its subsidiaries for income tax purposes. The income tax arrangement between Questar Gas and Questar provides that amounts paid to or received from Questar are substantially the same as would be paid or received by the Company if it filed a separate return. Questar Gas also receives payment for tax benefits used in the consolidated tax return even if such benefits would not have been usable had the Company filed a separate return.
Reclassification: Certain reclassifications were made to the 1997 and 1996 financial statements to conform with the 1998 presentation.
Note 2 - Debt
Questar makes loans to Questar Gas under a short-term borrowing arrangement. Short-term notes payable to Questar totaled $96.7 million at December 31, 1998 with an interest rate of 5.71% and $100 million at December 31, 1997 with an interest rate of 6.02%.
Questar Gas' long-term debt consists of medium-term notes with interest rates ranging from 6.85% to 8.43%, due 2007 to 2024. There are no maturities of long-term debt for the five years following December 31, 1998 and no long-term debt provisions restricting the payment of dividends.
Cash paid for interest was $19,963,000 in 1998, $17,933,000 in 1997 and $16,346,000 in 1996.
Note 3 - Financial Instruments and Credit Management Activities
The carrying amounts and estimated fair values of the Company's financial instruments were as follows:
The Company used the following methods and assumptions in estimating fair values: (1) Cash and short-term investments, and short-term loans - book value approximates fair value; (2) Long-term debt - the fair value of the medium-term notes is based on the discounted present value of cash flows using the Company's current borrowing rates. Fair value is calculated at a point in time and does not represent what the Company would pay to retire the debt securities.
Credit Risk: Questar Gas' primary market area is the Rocky Mountain region of the United States. Exposure to credit risk may be impacted by the concentration of customers in this region due to changes in economic or other conditions. Customers include individuals and numerous industries that may be affected differently by changing conditions. Management believes that its credit-review procedures, loss reserves and customer deposits have adequately provided for usual and customary credit-related losses.
Note 4 - Income Taxes
The components of income taxes were as follows:
The difference between income tax expense and the tax computed by applying the statutory federal income tax rate of 35% to income before income taxes is explained as follows:
Significant components of the Company's deferred tax liabilities and assets were as follows:
Cash paid for income taxes was $18,985,000 in 1998 and $1,516,000 in 1997. Questar Gas applied an overpayment of 1995 income taxes to more than offset payment of 1996 taxes.
Note 5 - Rate Matters, Litigation and Commitments
Questar Gas last filed general rate cases in 1995. Questar Gas was granted a return on rate base between 10.22% and 10.34% in Utah and 10.54% in Wyoming in 1995 rate cases. A rate of return on equity was not specified. Currently, the Company does not plan to file a general rate case in 1999.
Questar Gas has filed an application with PSCU to recover the costs associated with the a new carbon dioxide processing plant that is being built to deal with the low Btu problem in coal seam gas. The Company is proposing that costs be handled as gas costs eligible for pass-through treatment. Some parties in the case are reviewing the Company's conclusion that the plant is the best and cheapest alternative to address the Btu problem and the Company's proposal for pass-through treatment of costs. Hearings in conjunction with the application will be held during April of 1999.
In an order issued December 31, 1998, the PSCU rejected the request of the Utah Division of Public Utilities to deny Questar Gas recovery of approximately $7.6 million in costs paid by Questar Gas to Questar Gas Management for field gathering of Questar Gas' system supplies.
As a result of acquiring Questar Pipeline's gas purchase contracts in 1994, Questar Gas is responsible for any judgment rendered against Questar Pipeline in a lawsuit that was tried before a Wyoming federal district court jury in 1994. The jury awarded several million dollars to the producer from whom Questar Pipeline purchased gas. However, in a ruling issued June 2, 1998, the trial judge set aside all aspects of the jury's verdict, except for $500,000 related to certain take-or-pay contract issues. The producer is pursuing an appeal at the U. S. Court of Appeals for the 10th Circuit.
This same producer has recently filed additional claims against the Company and its affiliates in the same court and with the same presiding judge. The new lawsuit, which is currently assigned to the same judge presiding over the earlier litigation, updates the claims in the original lawsuit for the period since the trial and adds new claims of fraud and antitrust violations. The Company has informed the producer that it will make any payments for the period subsequent to the date covered by the original trial once the presiding judge enters judgment and rules on pending post-trial motions. The Company's management believes that the producer's new allegations of fraud and antitrust violation are without merit.
Questar Gas files for adjustment of purchased-gas costs with the PSCU and the PSCW on a semiannual basis. Because of lower forecasted gas prices and the fact that prior gas cost increases have been largely recovered, Questar Gas received approval to reduce annual gas costs in rates by $1.1 million in Utah and $356,000 in Wyoming effective July 1, 1998. Also, in January 1999, Questar Gas received approval, pending a final order, to further reduce annual gas costs by $39.3 million in Utah and $801,000 in Wyoming.
In March 1998, the PSCW approved Questar Gas' gas-merchant unbundling proposal that was offered in 1997. Under this plan, a transportation-service option is extended to residential and commercial customers as well as industrial customers each year. Customers choosing transportation service are allowed to secure gas supplies directly from producers and marketers and pay Questar Gas a fee for transportation services. Questar Gas continues to offer a traditional bundled service as well. In 1998, no competitors qualified under the program. Questar Gas expects that the option of unbundled service in Wyoming will not have a material effect on earnings. Questar Gas will maintain its current structure in Utah. As of December 31, 1998, Questar Gas served 21,858 customers in Wyoming, representing 3% of its total customers.
Questar Gas was involved in an environmental clean-up action on a site that included numerous other parties. Recently, the parties have agreed to dismiss Questar Gas from the case.
There are various legal proceedings against the Company. While it is not currently possible to predict or determine the outcomes of these proceedings, it is the opinion of management that the outcomes will not have a material adverse effect on the Company's results of operations, financial position or liquidity.
Each year, Questar Gas purchases significant quantities of natural gas under numerous gas-purchase contracts with varying terms and conditions. Purchases under these agreements totalled $100,058,000 in 1998, $122,106,000 in 1997 and $67,249,000 in 1996. Historically, gas-purchase contracts extended over many years. Current practice, however, sets contract terms for anywhere from one day up to one year. As of February 1, 1998, substantially all long-term contracts had expired.
Note 6 - Employee Benefits
Pension Plan: Substantially all of Questar Gas' employees are covered by Questar's defined benefit pension plan. Benefits are generally based on years of service and the employee's 72 pay-period interval of highest earnings during the 10 years preceding retirement. It is Questar's policy to make contributions to the plan at least sufficient to meet the minimum funding requirements of applicable laws and regulations. Plan assets consist principally of equity securities and corporate and U.S. government debt obligations.
Questar Gas' portion of plan assets and benefit obligations is not determinable because the plan assets are not segregated or restricted to meet the Company's pension obligations. If the Company were to withdraw from the pension plan, the pension obligation for the Company's employees would be retained by the pension plan. At December 31, 1998, Questar's fair value of plan assets exceeded the accumulated benefit obligation.
Eligible employees in Regulated Services were offered an early-retirement program that was effective July 31, 1998. Enhanced benefits were paid to 178 employees taking advantage of the offer. Costs associated with the early-retirement program are being amortized over a five-year period in accordance with anticipated regulatory treatment.
Pension expense was $1,865,000 in 1998, $1,847,000 in 1997 and $2,820,000 in 1996.
Postretirement Benefits Other Than Pensions: Generally postretirement health-care benefits and life insurance are provided only to employees hired before January 1, 1997. Questar Gas pays a portion of postretirement health-care costs benefits as determined by an employee's years of service and limited to 170% of the 1992 contribution. The Company's policy is to fund amounts allowable for tax deduction under the Internal Revenue Code. Plan assets consist of equity securities, and corporate and U.S. government debt obligations. The Company is amortizing the transition obligation over a 20-year period, which began in 1992. Costs of postretirement benefits other than pensions were $1,844,000 in 1998, $1,993,000 in 1997 and $2,424,000 in 1996. Both the PSCU and the PSCW allow Questar Gas to recover future costs if the amounts are funded in an external trust.
The Company's portion of plan assets and benefit obligations related to postretirement medical and life insurance benefits is not determinable because the plan assets are not segregated or restricted to meet the Company's obligations.
Postemployment Benefits: The Company recognizes the net present value of the liability for postemployment benefits, such as long-term disability benefits and health-care and life-insurance costs, when employees become eligible for such benefits. Postemployment benefits are paid to former employees after employment has been terminated but before retirement benefits are paid. The Company accrues both current and future costs. The PSCU and the PSCW have allowed Questar Gas to recover postemployment costs that were accumulated through December 31, 1994 in future rates. At December 31, 1998, the Company had a $623,000 regulatory asset that it is amortizing over the next six years.
Employee Investment Plan: Questar Gas participates in Questar's Employee Investment Plan (ESOP), which allows eligible employees to purchase Questar common stock or other investments through payroll deduction. The Company makes contributions of Questar common stock to the ESOP of approximately 75%, increasing to 80% in 1999, of the employees' purchases and contributes an additional $200 of common stock in the name of each eligible employee. The Company's expense and contribution to the plan was $1,616,000 in 1998, $1,552,000 in 1997 and $1,893,000 in 1996.
Note 7 - Related Party Transactions
Regulated Services began providing administrative, technical and accounting support in 1997 and charged Questar Gas $24,935,000 in 1998 and $26,061,000 in 1997. The majority of these costs are allocated and included in operating and maintenance expenses. The allocation methods are based on several methods dictated by the nature of the charges. Management believes that the allocation methods are reasonable.
Questar Gas has reserved transportation capacity on Questar Pipeline's system of approximately 800,000 decatherms per day and paid an annual demand charge of approximately $50.7 million for this reservation. Questar Gas releases excess capacity to its industrial transportation or other customers and receives a credit from Questar Pipeline for the released-capacity revenues and a portion of Questar Pipeline's interruptible-transportation revenues. Questar Gas purchased transportation and storage services from Questar Pipeline amounting to $67,528,000 in 1998, $64,924,000 in 1997 and $61,078,000 in 1996, which included demand charges. The costs of these services were included in natural gas purchases.
Wexpro, an affiliated company, operates certain properties owned by Questar Gas under the terms of the Wexpro Settlement Agreement. The Company receives a portion of Wexpro's income from oil operations after recovery of Wexpro's operating expenses and a return on investment. This amount, which is included in revenues and reduces amounts billed to gas distribution customers, was $1,050,000 in 1998, $2,347,000 in 1997 and $2,768,000 in 1996. Questar Gas paid Wexpro for the operation of gas properties owned by Questar Gas. These costs are included in natural gas purchases and amounted to $58,482,000 in 1998, $49,887,000 in 1997 and $53,119,000 in 1996.
Also included in natural gas purchases are amounts paid to Questar Gas Management, an affiliate, for gathering of Company-owned gas and purchased gas. These costs amounted to $9,047,000 in 1998, $12,472,000 in 1997 and $14,515,000 in 1996. Questar Gas purchased various other field-related services from Questar Gas Management amounting to $418,000 in 1998 and $1,167,000 in 1997.
Questar Gas purchased noncost-of-service gas from Wexpro amounting to $99,000 in 1998 and $133,000 in 1997. Also, Questar Gas purchased gas from Questar Energy Trading amounting to $7,125,000 in 1998 and $9,078,000 in 1997.
Questar Gas has a 13-year lease with Interstate Land, an affiliate, for some space in an office building located in Salt Lake City, Utah. The annual lease payment for the next five years is $1,155,000.
Questar InfoComm Inc. is an affiliated company that provides data processing and communication services to Questar Gas. The Company paid Questar InfoComm $16,480,000 in 1998, $19,875,000 in 1997 and $16,343,000 in 1996.
Questar charges Questar Gas for certain administrative functions amounting to $4,714,000 in 1998, $5,518,000 in 1997 and $5,746,000 in 1996. These costs are included in operating and maintenance expenses and are allocated based on each affiliated company's proportional share of revenues less gas costs; property, plant and equipment; and labor costs. Management believes that the allocation method is reasonable.
Questar Gas incurred debt expense to Questar of $2,403,000 in 1998, $3,575,000 in 1997 and $1,906,000 in 1996. The Company received interest income from affiliated companies of $126,000 in 1997.
Note 8 - Oil and Gas Producing Activities (Unaudited)
The following information discusses the Company's oil and gas producing activities. All of the properties are cost-of-service properties with the return on investment established by state regulatory agencies. Questar Gas has not incurred any costs for oil and gas producing activities for the three years ended December 31, 1998. Wexpro develops and produces gas reserves owned by the Company. See Note 7 for the amounts paid by Questar Gas to Wexpro.
Estimated Quantities of Proved Oil and Gas Reserves: The following estimates were made by Questar's reservoir engineers. Reserve estimates are based on a complex and highly interpretive process which is subject to continuous revision as additional production and development drilling information becomes available. The quantities are based on existing economic and operating conditions using current prices and operating costs. All oil and gas reserves reported are located in the United States. Questar Gas does not have any long-term supply contracts with foreign governments or reserves of equity investees. No estimates are available for proved undeveloped reserves that may exist.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of March, 1998.
QUESTAR GAS COMPANY (Registrant)
By /s/ D. N. Rose D. N. Rose President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ D. N. Rose President and Chief Executive D. N. Rose Officer; Director (Principal Executive Officer)
/s/ S. E. Parks Vice President, Treasurer and Chief Financial S. E. Parks Officer (Principal Financial Officer)
/s/ G. H. Robinson Vice President and Controller G. H. Robinson (Principal Accounting Officer)
*R. D. Cash Chairman of the Board *W. Whitley Hawkins Director *Robert E. Kadlec Director *Dixie L. Leavitt Director *Gary G. Michael Director *G. L. Nordloh Director *D. N. Rose Director *Harris H. Simmons Director
March 27, 1998 *By /s/ D. N. Rose Date D. N. Rose, Attorney in Fact
EXHIBIT INDEX
Exhibit Number Exhibit
3.1.* Restated Consolidated Articles of Incorporation dated August 15, 1980. (Exhibit No. 4(a) to Registration Statement No. 2-70087, filed December 1, 1980.)
3.2.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1982. (Exhibit No. 3(b) to Form 10-K Annual Report for 1982.)
3.3.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 10, 1983. (Included in Exhibit No. 4.1. to Registration Statement No. 2-84713, filed June 23, 1983.)
3.4.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated August 16, 1983. (Exhibit No. 3(a) to Form 8 Report amending the Company's Form 10-Q Report for Quarter Ended September 30, 1983.)
3.5.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated October 26, 1984. (Exhibit No. 3.5. to Form 10-K Annual Report for 1984.)
3.6.* Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1985. (Exhibit No. 3.1. to Form 10-Q Report for Quarter Ended June 30, 1985.)
3.7.* Articles of Amendment to Restated Consolidated Articles of Incorporation dated February 10, 1988. (Exhibit No. 3.7. to Form 10-K Annual Report for 1987.)
3.8.* Articles of Amendment to Restated Consolidated Articles of Incorporation dated December 31, 1997. (Exhibit No. 3.7. to Form 8-K Current Report for December 31, 1997.)
3.9.* Bylaws (as amended effective August 11, 1992). (Exhibit No. 3.8. to Form 10-K Annual Report for 1992.)
4.*1 Indenture dated as of May 1, 1992, between the Company and Citibank, as trustee, for the Company's Debt Securities. (Exhibit No. 4. to Form 10-Q Report for Quarter Ended June 30, 1992.)
10.1.*2 Stipulations and Agreement, dated October 14, 1981, executed by Mountain Fuel Supply Company; Wexpro Company; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Form 10-K Annual Report for 1981.)
10.2.*3 Annual Management Incentive Plan adopted by Questar Gas Company, Questar Pipeline Company, and Questar Regulated Services Company as amended and restated effective May 19, 1998. (Exhibit No. 10.1. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.3.*2,3 Mountain Fuel Supply Company Window Period Supplemental Executive Retirement Plan effective January 24, 1991. (Exhibit No. 10.9. to Form 10-K Annual Report for 1990.)
10.4.*2,3 Questar Gas Company Deferred Compensation Plan for Directors as amended and restated effective May 19, 1998. (Exhibit No. 10.2. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.5.*2 Gas Gathering Agreement between Mountain Fuel Supply Company and Questar Pipeline Company effective September 1, 1993. (This agreement has been transferred to Questar Gas Management Company.) (Exhibit No. 10.11. to Form 10-K Annual Report for 1994.)
10.6.*2 Amendment to Gas Gathering Agreement between Mountain Fuel Supply Company and Questar Gas Management Company effective September 1, 1997.
24. Power of Attorney.
27. Financial Data Schedule. _______________________
*Exhibits so marked have been filed with the Securities and Exchange Commission as part of the referenced filing and are incorporated herein by reference.
1First Security Bank, N.A. serves as the successor trustee.
2This document has not been formally amended to refer to the Company's current name.
3Exhibit so marked is a management contract or compensation plan or arrangement.
(b) Questar Gas Company did not file a Current Report on Form 8-K during the last quarter of 1998.