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 eight years. The most active case involves claims brought by Mr. Grynberg under the Federal False Claims Act. It and the 75 substantially similar cases filed by Grynberg against pipelines and their affiliates 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 Questar defendants in the case have joined with other defendants to file a comprehensive motion to dismiss, which has not yet been ruled on by the federal district judge.
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, although the district court did rule favorably on some issues before the case was stayed. The district court has not ruled on the defendants' motions for summary judgment.
Questar Gas and several affiliates are among the 220 named defendants in Quinque Operating Company v. Gas Pipelines, which was recently transferred from the Wyoming federal district court where it had been consolidated with the Grynberg cases to the Kansas state court where it had been originally filed. This case is very similar to the cases filed by Mr. Grynberg against the pipeline industry, but the allegations of 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.
See "Regulation" for a review of significant regulatory proceedings and appeals of decisions in such proceedings.
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 stockholder during the last quarter of 2000.
Part II
ITEM 5.
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.
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.
ITEM 7.
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:
Margin (Revenues less natural gas purchases)
Questar Gas' margin increased 5% in 2000 when compared with 1999 after declining by 2% in the prior year comparison. The improvement was primarily the result of a $13.5 million annual general rate increase. A $7.1 million portion of the Utah rate increase went into effect January 1, 2000, with the remainder reflected in rates beginning August 11, 2000. The rate case authorized Questar Gas to earn up to an 11% return on equity and included $5 million for annual gas processing costs. The rate case resolved an issue in which the Public Service Commission of Utah (PSCU) had denied recovery of $3.6 million of gas processing costs in 1999.
Usage per residential customer, calculated on a temperature adjusted basis, decreased in 2000 for the third consecutive year. Usage per residential customer was three decatherms or 3% lower in 2000 when compared with 1999 and two decatherms or 1% lower in 1999 compared with 1998. Temperatures have been warmer than normal for the past seven years. However, since 1995, the financial impact of warmer weather has been minimized because of a weather-normalization adjustment in rates. Customers served by Questar Gas grew by 18,312 or 2.7% in 2000, following growth rates of 3.5% in 1999 and 3.4% in 1998.
Industrial deliveries were 6% higher in 2000 due to an increase in natural gas volumes used to generate electricity. Gas deliveries to industrial customers decreased by 6% in 1999 because a major steel-producing customer reduced operations. Margins from gas delivered to industrial customers, either sold or transported, are substantially lower than from gas delivered to residential and commercial customers.
Significant gas-cost increases in the second half of 2000 due to rising demand for natural gas in the western U. S. did not affect the margin. Under rate regulation in Utah and Wyoming, Questar Gas can request authorization to recover from customers the cost of its gas supply on a dollar-for-dollar basis. Gas costs in Utah rates have risen from $1.72 per dth in 1999 to $2.91 at December 31, 2000. As of January 1, 2001, gas costs in rates rose to $4.67 per dth.
Operating expenses
Operating and maintenance expenses were 2% lower in 2000 due to decreases in legal, information technology and labor costs. Questar Gas improved a number of its information technology systems in 1999 as part of its year 2000 system-readiness program. Labor costs were lower as a result of early retirement programs effective October 31, 2000, and August 31, 1998. Operating and maintenance expenses were 7% higher in 1999 due to incremental costs of serving a growing customer base. Depreciation expense was $2.8 million lower in 2000 due to investments in several information systems being fully depreciated. Depreciation increased 10% in 1999 because of capital spending. Other taxes increased in 2000 because of a $1.4 million current-year adjustment of prior-year taxes and from higher property tax rates.
Questar Regulated Services initiated an early retirement window program effective October 31, 2000. A total of 262 employees from Questar Gas, Questar Pipeline and Questar Regulated Services elected to retire. The window program is projected to result in pretax labor-cost savings for Regulated Services of $6-8 million yearly. Questar Gas receives about two-thirds of the effect of the early retirement window.
Acquisition of distribution systems
Questar Gas has agreed in principle to acquire two gas distribution systems in exchange for 390,000 shares of Questar Corporation common stock. The acquisitions, pending approval from the PSCU and Public Service Commission of Wyoming (PSCW), will add about 10,500 customers in Utah and Wyoming. The transactions will be accounted for as a purchase.
Debt expense
Interest expense increased due to higher interest rates and borrowing from Questar in 2000.
Income taxes
The effective combined federal and state rate was 34.8% in 2000, 31.9% in 1999 and 33.5% in 1998. 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 $1,798,000 in 2000, $1,872,000 in 1999 and $2,217,000 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash provided from operating activities decreased in 2000 compared with 1999 due primarily to an increase in customer account receivables and under collection of purchased-gas costs in customer rates. The decrease in 1999 compared with 1998 was due primarily to a collection of about $35 million of purchased-gas costs in 1998.
Investing Activities
Following is a summary of capital expenditures for 2000 and 1999, and a forecast of 2001 expenditures.
The distribution system was extended by 964 miles of main, feeder and service lines to accommodate the addition of 18,312 customers.
Financing Activities
Questar Gas generated sufficient net cash provided from operating activities to fund 94% of its 2000 capital expenditures. Forecasted 2001 capital expenditures are expected to be financed with net cash provided from operations and borrowing from Questar.
Questar makes loans to Questar Gas under a short-term borrowing arrangement. Short-term notes payable to Questar totaled $105.6 million at December 31, 2000 with an average interest rate of 6.91% and $79.3 million at December 31, 1999 with an interest rate of 6.61%.
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. Negative working capital at year end was exacerbated by rising energy prices experienced in the second half of 2000 and extending into the first quarter of 2001.
Questar Gas' capital structure at December 31, 2000, was composed of 46% long-term debt and 54% common equity. Moody's and Standard and Poor's have rated the Company's long-term debt A1 and A+, respectively.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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.
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
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.
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. 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)
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*2 Gas Gathering Agreement between Mountain Fuel Supply 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 Mountain Fuel Supply Company and Questar Gas Management Company effective September 1, 1997.
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.
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.
(b) Questar Gas Company did not file any Current Reports on Form 8-K during the last quarter of 2000.
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, 2000
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, 2000, 1999 and 1998
Balance sheets, December 31, 2000 and 1999
Statements of common shareholder's equity, Years ended December 31, 2000, 1999 and 1998
Statements of cash flows, Years ended December 31, 2000, 1999 and 1998
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, 2000 and 1999, 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, 2000. 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 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young
Ernst & Young
Salt Lake City, Utah March 6, 2001
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), 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. 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 nonregulated businesses because of cost-allocation methods used in establishing rates.
The amounts included as regulatory assets on the balance sheet include income taxes recoverable from customers, early retirement window costs and gains and losses on the reacquisition of debt.
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 the present rates are accumulated and recovered or credited through future rate changes.
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:
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. 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 $909,000 in 2000, $358,000 in 1999 and $797,000 in 1998.
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: 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. The Company 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.
New Accounting Standard: The Company is required to adopt the accounting provisions of Statement of Financial Accounting Standards 133, as amended, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) beginning January 1, 2001. 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 either be reported in income or comprehensive income. 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. The Company does not enter into any commodity or interest rate-based derivative instruments.
Reclassifications: Certain reclassifications were made to the 1999 and 1998 financial statements to conform with the 2000 presentation.
Note 2 - Debt
Questar makes loans to Questar Gas under a short-term borrowing arrangement. Short-term notes payable to Questar totaled $105.6 million at December 31, 2000 with an average interest rate of 6.91% and $79.3 million at December 31, 1999 with an interest rate of 6.61%.
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, 2000 and no long-term debt provisions restricting the payment of dividends.
Cash paid for interest was $21,235,000 in 2000, $19,906,000 in 1999 and $19,963,000 in 1998.
Note 3 - Financial Instruments and Risk Management
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 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.
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, customer deposits and collection procedures have adequately provided for usual and customary credit-related losses.
Note 4 - Income Taxes
The components of income taxes were as follows:
Cash paid for income taxes was $7,570,000 in 2000, $2,133,000 in 1999 and $18,985,000 in 1998.
Note 5 - Rate Matters
On August 11, 2000, the Public Service Commission of Utah (PSCU) issued an order in the general rate case filed by Questar Gas. The PSCU granted $13.5 million in general rate relief and authorized an 11% return on equity. The $13.5 million in general rate relief includes the $7.1 million in interim rate relief that Questar Gas was authorized to collect, subject to refund, effective January 1, 2000. The PSCU's order allows Questar Gas to collect $5 million of carbon-dioxide-processing costs yearly.
In February 2000, the Public Service Commission of Wyoming (PSCW) reaffirmed Questar Gas's 11.83% authorized return on equity in a general rate case filing and approved the request for a $377,000 rate reduction. Cost efficiencies and slower population growth in Wyoming compared with Utah, enabled Questar Gas to reduce its rates in Wyoming. The PSCW's rate-ruling also ordered the Company to transfer the recovery of carbon dioxide gas processing costs from gas costs to general rates beginning April 2000.
Questar Gas routinely files semi-annual 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.
On May 31, 2000, Questar Gas filed with the PSCW to reflect annualized gas costs of $11.1 million in rates for Wyoming customers. The filing reflected a $53,000 increase from the previous filing. The PSCW authorized Questar Gas to reflect the request in rates effective July 1, 2000. On June 14, 2000, Questar Gas filed a request with the PSCU to reflect annualized gas costs of $286.6 million in rates for Utah customers effective July 1, 2000. The request slightly decreased rates for residential and commercial customers. However, the PSCU, by an interim order, chose to make no adjustment in rates.
Due to the rapidly rising gas prices caused by a high demand for energy, Questar Gas filed an out-of-period pass-on application on September 19, 2000, with the PSCW seeking approval to reflect an increase of annualized gas costs of $2.5 million in rates for Wyoming customers. The PSCW authorized the requested gas-cost increase in rates effective October 1, 2000. On September 20, 2000, Questar Gas filed a special pass-through application with the
PSCU requesting permission to reflect annualized gas cost increases of $63.5 million in rates for Utah customers. The PSCU, by interim order, authorized Questar Gas to reflect the increase in rates effective October 1, 2000.
As a result of a continuing growing demand for energy and the accompanying pressure on energy prices, Questar Gas filed on December 19, 2000, with the PSCU to reflect a $167.5 million increase of annualized gas cost in rates for Utah customers. The PSCU, by interim order, authorized Questar Gas to reflect the increase in rates effective January 1, 2001. On December 19, 2000, Questar Gas filed an application with the PSCW to increase gas costs in Wyoming rates by $7.1 million. The PSCW authorized the increase in Wyoming gas rates effective January 1, 2001.
Note 6 - Litigation and Commitments
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 eight years. The most active case involves claims brought by Mr. Grynberg under the Federal False Claims Act. It and the 75 substantially similar cases filed by Grynberg against pipelines and their affiliates 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 Questar defendants in the case have joined with other defendants to file a comprehensive motion to dismiss, which has not yet been ruled on by the federal district judge.
A second 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 Gyrnberg's appeal of another case involving the Company to the Tenth Circuit Court of Appeals, although the district court did rule favorably on some issues before the case was stayed. The district court has not ruled on the defendant's motions for summary judgement.
Questar Gas and several affiliates are among the 220 named defendants in the Quinque Operating Company v. Gas Pipelines, which was recently transferred from the Wyoming federal district court where it had been consolidated with the Grynberg cases to the Kansas state court where it had been originally filed. This case is very similar to the cases filed by Mr. Grynberg against the pipeline industry, but the allegations of 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.
There are other 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.
Historically, 45% 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 $184 million, $93 million and $100 million in 2000, 1999 and 1998, 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' 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, 2000, Questar's accumulated benefit obligation exceeded the fair value of plan assets.
Questar Regulated Services has offered early retirement windows to eligible employees in 2000 and 1998. In 2000, a total of 276 employees and recipients of long-term disability from Questar Gas, Questar Pipeline and Questar Regulated Services elected to retire effective October 31. The $14.4 million cost of the early retirement window will be amortized over a five-year period in accordance with regulatory treatment. In 1998, Regulated Services offered an early-retirement window that was accepted by 178 eligible employees. The $3.1 million cost of the window is being amortized over a five-year period beginning August 1998. About two-thirds of the early retirement window costs will be charged to Questar Gas. Pension expense was $2,075,000 in 2000, $1,735,000 in 1999 and $1,865,000 in 1998.
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. The cost of postretirement benefits other than pensions was $1,107,000 in 2000, $1,150,000 in 1999 and $1,844,000 in 1998.
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, 2000, the Company had a $253,000 regulatory liability that it is amortizing over the next five years.
Employee Investment Plan: Questar Gas participates in Questar's Employee Investment Plan (Plan), 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 Plan of approximately 80%, 75% prior to 1999, of the
employees' eligible 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 $1,657,000 in 2000, $1,596,000 in 1999 and $1,616,000 in 1998.
Note 8 - Related Party Transactions
Regulated Services provides administrative, technical and accounting support to Questar Gas. The cost of this support was $34,022,000 in 2000, $37,534,000 in 1999 and $24,935,000 in 1998. 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 828,000 dth per day and paid an annual demand charge of approximately $54.3 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 paid for transportation, storage and processing services provided by Questar Pipeline and a subsidiary amounting to $73,742,000 in 2000, $71,636,000 in 1999 and $67,528,000 in 1998, 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 $4,758,000 in 2000, $2,306,000 in 1999 and $1,050,000 in 1998. 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 $73,692,000 in 2000, $62,299,000 in 1999 and $58,482,000 in 1998.
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 $8,542,000 in 2000, $9,045,000 in 1999 and $9,047,000 in 1998. Questar Gas purchased various other field-related services from Questar Gas Management amounting to $864,000 in 2000, $755,000 in 1999 and $418,000 in 1998.
Questar Gas purchased gas from Questar Energy Trading amounting to $9,329,000 in 2000, $7,190,000 in 1999 and $7,125,000 in 1998.
Questar Gas has an 11-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 $1,300,000 in 2000 and $1,155,000 in 1999 and 1998. The annual lease payment for the five years following 2000 are scheduled as follows: $1,315,000 in 2001, $1,346,000 in 2002 and $1,378,000 in 2003 through 2005.
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 $15,372,000 in 2000, $13,700,000 in 1999 and $16,480,000 in 1998.
Questar charged Questar Gas for certain administrative functions amounting to $6,198,000 in 2000, $4,981,000 in 1999 and $4,714,000 in 1998. 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 incurred debt expense to Questar of $3,470,000 in 2000, $1,922,000 in 1999 and $2,403,000 in 1998.
Note 9 - Supplemental Oil and Gas Information (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, 2000. See Note 8 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, 2001.
QUESTAR GAS COMPANY (Registrant)
By /s/ D. N. Rose D. N. Rose President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ D. N. Rose President and Chief Executive D. N. Rose Officer; Director (Principal Executive Officer)
/s/ S. E. Parks Vice President, Treasurer and Chief S. E. Parks Financial Officer (Principal Financial Officer)
/s/ D. M. Curtis Controller D. M. Curtis (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 *K. O. Rattie Director *D. N. Rose Director *Harris H. Simmons Director
March 27, 2001 *By /s/ D. N. Rose Date D. N. Rose, Attorney in Fact
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)
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*2 Gas Gathering Agreement between Mountain Fuel Supply 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 Mountain Fuel Supply Company and Questar Gas Management Company effective September 1, 1997.
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 First Security Bank, N.A. serves as the successor trustee.
2 This document has not been formally amended to refer to the Company's current name.