ITEM 3. LEGAL PROCEEDINGS.
There are various legal proceedings pending against the Company and its affiliates. Management believes that the outcome of these cases will not have a material adverse effect on the Company's financial position or liquidity. Significant cases are discussed below.
TRANSCOLORADO. Questar TransColorado, Inc. ("QTC"), a subsidiary of Questar Pipeline, owns a 50 percent interest in the TransColorado Gas Transmission Company ("TransColorado), which is
the partnership that built and operates the TransColorado pipeline project. QTC and its partner, KN TransColorado, Inc. ("KNTC") are involved in a complex lawsuit that is pending in a state district court in Colorado. At center stage in the lawsuit is the validity of a contractual right claimed by QTC to put its 50 percent interest in TransColorado to KNTC during the 12-month period beginning March 31, 2001.
KNTC originally filed the lawsuit in June of 2000 alleging that Questar Pipeline and its affiliates breached their fiduciary duties to TransColorado and KNTC by developing a plan to construct and operate a new pipeline (this project--Mainline 104--is described under the section "Regulated Services, Transportation and Storage") that would compete with TransColorado, rendering it economically unviable. KNTC is seeking $150 million plus punitive damages, a declaratory judgment that KNTC's obligation to purchase QTC's interest in the project be declared void and unenforceable, and a dissolution of the partnership under Colorado law.
QTC and its affiliates subsequently filed a counterclaim and third party complaint against KNTC and its named affiliates, including Kinder Morgan, Inc., seeking a declaratory judgment that its contractual right to exercise the put is binding and enforceable and damages of at least $185 million.
The parties have entered into a stipulation and standstill agreement that preserves the claims made by the parties pending the resolution of the litigation. On December 31, 2000, QTC gave notice of its election to exercise its contractual right to sell its 50 percent interest in TransColorado to KNTC, subject to the standstill agreement. The Company determined that it will be required to account for its share of any operating results as of April 1, 2001. The parties are also evaluating the retention of an outside party to operate the TransColorado pipeline during the litigation, which is currently scheduled for trial in February of 2002.
BRIDENSTINE. On January 4, 2001, a district court judge in Oklahoma approved the settlement agreement in Bridenstine v. Kaiser-Francis Oil Company, a class action lawsuit that was originally filed against Questar E&P, other named affiliates including Questar and QMR, and unrelated defendants in 1995. Pursuant to the terms of the settlement, Questar E&P and Union Pacific Resources Company (predecessor in interest to Questar E&P) paid $22.5 million, with Questar E&P's portion being $16.5 million. Although the Questar defendants disputed claims that centered on allegations of an excessive and improper transportation charged against royalty payments, they settled the lawsuit to avoid continued legal costs and the uncertainty of a jury verdict.
GRYNBERG. Questar affiliates are named defendants in a lawsuit filed by an independent producer (Grynberg) under the Federal False Claims Act. This case and the 75 substantially similar cases filed by Grynberg against pipelines and their affiliates have been consolidated for discovery and pre-trial motions in Wyoming's federal district court. The cases involve allegations of industry-wide mismeasurement and undervaluation of gas volumes on which royalty payments are due the federal government. The complaint seeks treble damages and imposition of civil penalties. The federal district judge has not ruled on the defendants' motion to dismiss.
On March 8, 2001, the trial court judge granted a motion to dismiss another lawsuit filed by Grynberg against several Questar defendants including Questar Pipeline, Questar Gas Management and
Questar Energy Trading. This case, which was filed in a Utah state district court, claims that the Questar defendants mismeasured gas volumes attributable to Mr. Grynberg's working interest in a specified property in southwestern Wyoming. The plaintiff's allegations included breach of contract, negligent misrepresentation, fraud, breach of fiduciary duty, etc. The judge dismissed the lawsuit based on defendants' arguments that the applicable statute of limitation had expired and, there was no basis to support fraudulent concealment claims, or independent tort claims.
QUINQUE. Questar E&P, Questar Gas Management, Wexpro, Questar Gas, and Questar Pipeline 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.
Royalty class actions are being asserted in numerous states, including Wyoming, against other companies in the oil and gas production and marketing businesses in which QMR's subsidiaries participate. Similar actions could be filed against QMR and its subsidiaries.
The Company continues to monitor the Wasatch Chemical property in Salt Lake City, which is still included on the national priorities list, commonly known as the "Superfund" list. The Wasatch Chemical property was the location of chemical mixing operations and is the subject of a 1992 consent order. Questar conducted the necessary soil remediation and groundwater remediation activities and expects that the site will be eventually removed from the Superfund list.
See "Regulated Services, Retail Distribution, Regulation" for a review of significant regulatory proceedings and appeals from 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 stockholders during the last quarter of 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information concerning the market for the common equity of the Company and the dividends paid on such stock is located in Note 11 of the Notes to Consolidated Financial Statements under Item 14. As of March 14, 2001, Questar had 11,279 shareholders of record and estimates that it had an additional 25,000-30,000 beneficial holders.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SUMMARY
Questar Corporation earned $156.7 million in 2000, representing a 59% improvement over net income reported for 1999. Following is a year to year comparison of net income by line of business.
Questar Market Resources' net income rose 85% in 2000 compared with 1999 due primarily to higher energy prices, a 10% increase in natural gas production and increased investment by Wexpro in gas-development properties.
Net income of Questar Regulated Services increased 390% in 2000. In 1999, Questar Pipeline recorded a write-down of its investment in the TransColorado partnership and ongoing operating losses from the TransColorado partnership. Questar Gas received a $13.5 million general rate increase effective August 11, 2000, including $7.1 million of interim rate relief beginning January 1, 2000.
Net income of corporate and other operations decreased 59% in 2000 primarily as the result of reduced sales of securities. Corporate and other operations recorded after tax gains from selling securities of $13.8 million in 2000 compared with $36.9 million in 1999.
Repurchase of 3.2 million shares of Questar common stock beginning in April 1999 and continuing through August 2000 increased earnings per share by $.04 in 2000.
RESULTS OF OPERATIONS
QUESTAR MARKET RESOURCES (Market Resources) conducts Questar's exploration and production, gas development, gathering, processing and marketing activities. Following is a summary of financial results and operating information.
Revenues Revenues were 49% higher in 2000 when compared with 1999 because of higher prices for natural gas, oil and NGL and increased natural gas production. Natural gas production rose 10% to 69 Bcf and the average selling price increased 40%. U. S. gas production increased 3% to 61.7 Bcf, while Canadian production rose 152% to 7.3 Bcf. Questar acquired Canadian reserves and producing properties in January 2000. Approximately 53% of gas production in 2000 was hedged at an average price of $2.16 per Mcf, net to the well. Hedging activities reduced revenues from gas sales by $33.7 million in 2000, but had an insignificant impact in 1999 and 1998.
Selling prices of oil and NGL for nonregulated operations increased 47% to a combined average of $20.50 per barrel and more than offset a 4% decrease in production volumes. Approximately 73% of the nonregulated oil production was hedged at an average price of $17.36 per barrel. Hedging activities reduced revenues from oil sales by $15.5 million in 2000, but had an insignificant impact in 1999 and 1998. Production declined in 2000 as a result of selling nonstrategic properties in the fourth quarter of 1999.
For 2001, Questar has used swaps, costless collars and fixed-price contracts to hedge approximately 55% of estimated gas production based on December 2000 reserves. The average hedged price is $2.90 per Mcf (net to the well) assuming floor prices on collars. The average hedged price increases to $3.15 per Mcf (net to the well) if collar ceiling prices are assumed. Approximately 62% of 2001 estimated oil production, based on December 2000 reserves, is hedged at an average price of $17.20 per barrel, net to the well. Quantities of hedged production in any given month range between 49% and 66% for gas and 56% and 70% for oil.
Revenues from cost-of-service operations were 21% higher in 2000 compared with 1999. Wexpro manages and develops oil and natural gas properties on behalf of Questar Gas and receives a return on its investment in successful wells. The natural gas production is delivered to Questar Gas at cost of service. Oil is sold at market prices. Any net income from oil sales remaining after recovery of expenses and Wexpro's return on investment is divided between Wexpro and Questar Gas. Questar Gas's portion is reported as oil-income sharing. Wexpro's investment base, net of deferred income taxes, grew 15% in 2000 when compared with 1999. The average return on investment was 19.5% in 2000 and 20% in 1999.
Higher energy prices were responsible for substantial increases in revenues for energy marketing and improved plant-processing margins. Increased gas demand led to higher volumes of gas gathering.
Revenues in 1999 improved 9% compared with 1998 as a result of increased prices for gas, oil and NGL and a 22% rise in gas production. Natural gas selling prices averaged 4% higher in 1999.
Operating Expenses Operating and maintenance expenses were 34% higher in 2000 primarily due to an increase in the number of gas and oil properties and increased legal costs in the settlement of a major case. Depreciation and amortization expense increased 7% in 2000 due largely to a 10% improvement in natural gas production. The combined U.S. and Canadian full-cost amortization rate was $.79 per thousand cubic feet equivalent (Mcfe) for 2000, down from $.80 per Mcfe in 1999. Other taxes, primarily production related, rose 69% in 2000 driven by higher revenues and prices.
Nonregulated Gas and Oil Reserves Market Resources achieved a 261% reserve replacement ratio in 2000 compared with 131% in 1999. Reserve additions, revisions and purchases, net of sales in place, amounted to 214.8 Bcfe in 2000, more than double the 100.1 Bcfe added in 1999. Gains in reserves occurred through drilling results in the Pinedale Anticline and the acquisition of 61.1 Bcfe of proved reserves in Canada. In January 2001,
Market Resources closed on the sale of 290 producing properties and a gas gathering system in the Midcontinent for $27 million with an effective sale date of November 2000. The properties produced approximately 4.3 MMcf of gas and 180 barrels of oil per day, but were not compatible with the long-term strategic plans of the Company. In the fourth quarter of 1999, Market Resources sold producing properties mostly in the Permian Basin and Kansas with combined daily production of 4.3 MMcf of gas and 1,100 barrels of oil.
Market Resources achieved a five-year average finding cost of $.86 per Mcfe, excluding cost-of-service operations, in 2000 compared with $.90 per Mcfe in 1999.
QUESTAR REGULATED SERVICES (Regulated Services) conducts Questar's natural gas- distribution, transmission, storage and nonregulated retail energy services.
Natural Gas Distribution - 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 in 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.
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.
Natural Gas Transmission - Questar Pipeline conducts natural gas-transmission and storage operations. Following is a summary of financial results and operating information:
Revenues Revenues rose 6% in 2000 compared with 1999 due to an increase in the demand charges resulting from a higher quantity of transportation volumes under firm contracts and a full year of operation of a plant that removes excess carbon dioxide from the gas stream. The plant began operation mid-year 1999.
The transportation system experienced an increased demand for gas transportation resulting from colder fourth-quarter temperatures and expanded usage for regional power generation. As of December 31, 2000, approximately 77% of Questar Pipeline's transportation system was reserved by firm-transportation customers under contracts with varying terms and lengths. Questar Gas has reserved transportation capacity from Questar Pipeline of approximately 828,000 dth per day, representing 69% of the total reserved daily-transportation capacity at December 31, 2000. This contract, which accounts for 78% of the demand charges collected by Questar Pipeline, extends through June 2002.
Revenues from storage operations were unchanged in 2000 when compared with 1999 after increasing 3% in 1999. Questar Pipeline's primary storage facility at Clay Basin in eastern Utah was enlarged in May 1998. The storage facility is 100% subscribed under long-term contracts. Most of those contractual volumes have remaining terms of at least nine years. Questar Gas has contracted for 26% of firm-storage capacity for at least seven years.
Operating expenses Operating and maintenance expense climbed 14% in 2000 compared with 1999. A full year of expenses associated with a gas-processing plant added $2 million of expense and legal costs in a case involving the TransColorado pipeline added $1.8 million. The estimated useful life of the carbon-dioxide removal plant was increased from 10 to 20 years resulting in a $1.3 million reduction of depreciation expense in 2000. Because processing fees are determined on a cost-of-service basis, the lower depreciation expense resulted in a $1.3 million refund to Questar Gas, the primary customer of processing services. Depreciation expense increased 20% in 1999 resulting from capital investment in facilities and information-technology systems.
TransColorado case Questar TransColorado Inc. (QTC), a subsidiary of Questar Pipeline, and KN TransColorado, Inc., (KNTC), a subsidiary of Kinder Morgan, are partners in the TransColorado Gas Transmission Company (TransColorado). The partners are involved in a complex lawsuit that is pending in a state district court in Colorado. At the center of the lawsuit is the validity of a contractual right claimed by QTC to put its 50% interest in TransColorado to KNTC during the 12-month period beginning March 31, 2001. QTC and KNTC entered a standstill agreement regarding various issues in the litigation. QTC provided notice to KNTC that it elected to put its interest in TransColorado as of March 31, 2001, were it not for the provisions of the standstill agreement.
Questar Pipeline recorded a $49.7 million pretax write-down of its investment in the TransColorado partnership in 1999. QTC share of TransColorado's operating losses ranged from $.3 million to $1.2 million per month.
CORPORATE AND OTHER OPERATIONS - This business segment is responsible for information-technology and communications services and corporate administration.
Revenues Revenues increased 27% because of the acquisitions of Consonus of Oregon at mid-year 2000 and two computer-networking businesses in the second half of 1999. Questar InfoComm is the majority owner of Consonus. Consonus is an e-commerce business that combines Internet services and network support in facilities designed to withstand many of the effects of natural disasters. The gross margin on products and services sold amounted to $8.3 million, $2.6 million and $2 million in 2000, 1999 and 1998, respectively.
Operating expenses Operating and maintenance expenses were 11% lower in 2000 when compared with 1999. The impact of adding businesses was partially offset by the effect of an early retirement program in 1999. A $2.9 million charge associated with an early retirement program was recorded in 1999 when 50 employees elected to retire. The workforce reduction resulted in a $2.8 million decrease of operating expenses in 2000. Amortization of goodwill, incurred because of the acquisition of Consonus, amounted to $1.7 million in 2000.
CONSOLIDATED OPERATING RESULTS
Revenues Consolidated revenues rose 37% in 2000 compared with 1999 as a result of higher energy prices, a 10% increase in gas produced from nonregulated sources and a boost in revenues from e-commerce business. Higher energy prices increased revenues from gas and oil production, energy marketing, natural gas distribution and gas plant processing. Consolidated revenues increased 2% in 1999 compared with 1998 due primarily to increased gas production, higher selling prices for energy and the revenues from electronic commerce services. These increases were largely offset by lower revenues from gas distribution due to lower gas costs collected in rates.
Cost of natural gas and other products sold Higher energy prices were apparent in the cost of natural gas and other products sold. The dominant areas were natural gas purchased for resale to distribution customers and energy purchases in marketing transactions. In addition, the cost of e-commerce services increased in 2000. The cost of natural gas and other products sold was 4% lower in 1999 due to lower gas costs allowed in distribution rates.
Operating and maintenance Operating and maintenance expenses increased by 14% in 2000 when compared with 1999. Through an acquisition of Canadian properties and development drilling, Market Resources increased the number of producing properties. Legal expenses grew in 2000. A major lawsuit involving affiliates of Market Resources was settled in 2000, while a lawsuit involving affiliates of Questar Pipeline began in 2000. Operating and maintenance expenses increased 6% in 1999 compared with 1998 resulting from higher costs of serving a growing number of gas-distribution customers, adding gas and oil producing properties, and the cost of an early retirement program for information-technology employees. Labor costs were about $4.6 million lower in 1999 compared with 1998 as a result of an early retirement program offered to employees of Regulated Services in 1998.
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.
Depreciation and amortization Depreciation and amortization increased 3% in 2000 when compared with 1999 as a result of increased gas production and investment in depreciable assets. A lower full-cost amortization rate partially mitigated the increased production. The combined full-cost amortization rate for U.S. and Canadian operations was $.79 per Mcfe in 2000 compared with $.80 in 1999 and $.85 in 1998. The reduction in the amortization rate resulted primarily from increasing reserves and selling properties from the full- cost asset pool at prices in excess of the book value. Software that reached the end of its depreciable life and an increase of the estimated useful life of a processing plant resulted in a $4.1 million reduction of 2000 depreciation expense. Depreciation and amortization was 10% higher in 1999 as a result of increased gas production and more investment in exploration and production, distribution and transmission facilities. The Company wrote down the book value of its full-cost oil and gas properties by $34 million in 1998 because of weak energy prices.
Other taxes Production and property taxes increased in 2000 because of higher revenues. Lower revenues in prior years caused a decrease of other taxes in 1999. Rising property values caused higher property taxes in 2000. A current-year adjustment of a prior-year tax added $1.4 million to expense in 2000.
Interest and other income Gain from selling securities of other companies is a significant part of interest and other income. However, the level of securities sales dropped in 2000 because of the general decline in market value of technology companies. These sales generated a pretax gain of $26.5 million ($16.3 million after tax) in 2000 and a pretax gain of $60.7 million ($36.9 million after tax) in 1999.
Operations of unconsolidated affiliates Higher energy prices and not repeating TransColorado's operating losses resulted in earnings in 2000 as opposed to losses the year before. This income-statement line item included a $49.7 million write-down of investment in the TransColorado partnership and $5.9 million of operating loss, net of AFUDC, from TransColorado in 1999.
Debt expense Interest expense increased due to higher short- and long-term borrowing and to higher interest rates in 2000.
Income taxes The effective combined federal, state and foreign income tax rate was 35.3% in 2000, 32.6% in 1999 and 27.4% in 1998. Income tax rates were below the combined statutory rate of about 38% primarily due to nonconventional fuel credits, which amounted to $6.5 million in 2000, $7.2 million in 1999 and $8 million in 1998. In addition, a Colorado state income tax credit derived from conducting business in a designated enterprise zone reduced state income taxes by $3.2 million in 2000.
LIQUIDITY AND CAPITAL RESOURCES Operating Activities
Net cash provided from operating activities increased 21% in 2000 when compared with 1999 due primarily to a 59% increase in net income. Changes in operating assets and liabilities resulted in a decrease of cash flow due to the timing differences associated with the effect of higher energy prices on accounts receivable and the purchased-gas adjustments. This was partially offset by the change in accounts payable. Interest bearing deposits with energy brokers, included in accounts receivable, increased significantly in 2000. Net cash provided from operating activities decreased 24% in 1999 compared with 1998 as a result of disbursements on accounts payable. The balance in payables was higher at the end of 1998 due to construction projects completed in 1999. The write-downs of investments in partnership and oil and gas properties were noncash expenses.
Investing Activities
Capital expenditures amounted to $323.8 million in 2000 and $268 million in 1999. Capital spending in 2001 is expected to range between $368 million and $563 million. The upper spending level is contingent upon several key projects going forward. A 75-mile pipeline planned for central Utah is awaiting final environmental approval. If approval is received in 2001 and the pipeline is constructed, Questar Pipeline could spend an additional $74 million. Another major pipeline project, Questar Southern Trails Pipeline could begin construction in 2001 pending final right of way agreements. This would further increase capital spending by $45 million. The development of Questar's e-commerce business is dependent upon the level of outside venture capital invested.
Questar Market Resources Capital expenditures in 2000 primarily reflected exploration for and development of gas and oil reserves and a purchase of a Canadian company, which added 61 Bcfe of proved reserves. Market Resources participated in drilling 316 wells (94 net wells) in 2000 that resulted in 223 gas wells, 18 oil wells, 21 dry holes and 54 wells in progress at year end. The success rate was 92%.
Questar Regulated Services - Natural gas distribution The distribution system was extended by 964 miles of main, feeder and service lines to accommodate the addition of 18,312 customers.
Questar Regulated Services - Natural gas transmission Capital spending focused on expansion of the gas transmission network, conversion of a crude-oil pipeline to transport gas into Southern California and the acquisition of an additional 18% interest in a pipeline partnership.
Corporate and Other Operations Capital expenditures included acquiring e-commerce operations and developing information- technology facilities.
Financing Activities
Cash flow generated from operations plus proceeds from the sales of securities and release of cash previously held in escrow were used to fund capital expenditures, reduce short- and long-term borrowings, repurchase shares of Questar common stock and pay dividends to holders of common stock. Proceeds from a 1999 sale of nonstrategic gas and oil properties were placed in an escrow account pending possible reinvestment in other producing properties.
In April 1999, the Company announced plans to repurchase up to $50 million of its shares over the next two years. From April 1999 through August 2000, the Company acquired 3.2 million shares for $51.4 million, with about half of those purchases occurring in 2000. The Company used part of the $121.9 million in proceeds from its 1999 and 2000 sales of Nextel and other securities to fund those stock repurchases.
Short-term borrowings amounted to $181.1 million of commercial paper and $28 million of bank loans at December 31, 2000. A year earlier, short-term debt consisted of $128.4 million of commercial paper and $15.7 million of bank loans. The weighted average interest rate on balances at December 31 was 6.68% in 2000 and 6.14% in 1999. Parent-company commercial-paper borrowings are backed by short-term line-of-credit arrangements and rated P1 and A1 by Moody's and Standard and Poor's, respectively. In the third quarter of 2000, Market Resources initiated an unrated commercial-paper program with a $100 million capacity. Commercial-paper borrowings are limited to and supported by available capacity on Market Resources' existing revolving credit facility. Market Resources had a commercial-paper balance of $12.5 million that was included in the total $181.1 million balance at December 31, 2000.
On March 6, 2001, Market Resources issued in a public offering $150 million of 7.5% notes due 2011. Market Resources applied the proceeds of the debt offering to repay a portion of its outstanding floating-rate debt. In 1999, Market Resources entered into a long-term revolving-credit facility with a syndication of banks. The credit facility has a $300 million capacity. Market Resources had borrowed $244.4 million as of December 31, 2000 under this arrangement.
On February 27, 2001, Questar Pipeline gave notice that it will redeem $30 million of its 9 7/8% debentures on March 30, 2001. The redemption price is equal to 104.67% of the principal amount plus interest from December 1, 2000.
The Company typically has negative net working capital at December 31 because of short-term borrowings. These borrowings are seasonal and generally peak at year end 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's consolidated capital structure consisted of 42% long-term debt and 58% common shareholders' equity at December 31, 2000. Moody's and Standard and Poor's have rated the long-term debt of Questar Gas and Questar Pipeline A1 and A+, respectively. Questar Market Resources' debt rating is BBB+ by Standard and Poor's and Baa2 by Moody's.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Questar's primary market-risk exposures arise from commodity-price changes for natural gas, oil and other hydrocarbons and changes in long-term interest rates. The Company has an investment in a foreign operation that may subject it to exchange-rate risk. Market Resources also has
reserved pipeline capacity for which it is obligated to pay $3 million annually for the next six years, regardless of whether it is able to market the capacity to others.
Hedging Policy The Company has established policies and procedures for managing market risks through the use of commodity-based derivative arrangements. A primary objective of these hedging transactions is to protect the Company's commodity sales from adverse changes in energy prices. The volume of production hedged and the mix of derivative instruments employed are regularly evaluated and adjusted by management in response to changing market conditions and reviewed periodically by the Board of Directors. Additionally, under the terms of the Market Resources' revolving credit facility, not more than 75% of Market Resources' production quantities can be committed to hedging arrangements. The Company does not enter into derivative arrangements for speculative purposes.
Energy-Price Risk Management Energy-price risk is a function of changes in commodity prices as supply and demand fluctuate. Market Resources bears a majority of the risk associated with changes in commodity prices. The Company uses hedge arrangements in the normal course of business to limit the risk of adverse price movements; however, these same arrangements usually limit future gains from favorable price movements.
Market Resources held hedge contracts covering the price exposure for about 50.5 million dth of gas and 1 million barrels of oil at December 31, 2000. A year earlier the contracts covered 72.1 million dth of natural gas and 2.4 million barrels of oil. The hedging contracts exist for a significant share of Questar-owned gas and oil production and for a portion of gas-marketing transactions. The contracts at December 31, 2000, had terms extending through December 2003, with about 91% of those contracts expiring by the end of 2001.
The mark-to-market adjustment of gas and oil price-hedging contracts at December 31, 2000 was a negative $98 million and represented a liability owed to counterparties if terminated. A 10% decline in gas and oil prices would decrease the mark-to-market adjustment by $18.1 million; while a 10% increase in prices would increase the mark-to-market adjustment by $18.1 million. The mark-to-market adjustment of gas and oil price-hedging contracts at December 31, 1999 was a negative $6.2 million. A 10% decline in gas and oil prices at that time would have caused a positive mark-to-market adjustment of $16.7 million. Conversely, a 10% increase in prices would have resulted in a $16.3 million negative mark-to-market adjustment. The calculations used energy prices posted on the NYMEX, various "into the pipe" postings and fixed prices for the indicated measurement dates. These sensitivity calculations do not consider changes in the fair value of the corresponding scheduled physical transactions (i.e., the correlation between the index price and the price to be realized for the physical delivery of gas or oil production), which should largely offset the change in value of the hedge contracts.
Interest-Rate Risk Management The Company owed $714.9 million of long-term debt at December 31, 2000, of which $470.5 million was fixed-rate debt. The fair value of fixed-rate debt is subject to change as interest rates fluctuate. The fair value of Questar's long-term debt amounted to $735.6 million at December 31, 2000. The Company owed $735.4 million of long-term debt at December 31, 1999, of which $470.1 million was fixed-rate debt. The fair value of Questar's long-term debt amounted to $728.3 million at December 31, 1999. The fair-value calculation was based upon quoted market prices and the discounted present value of cash flows using the Company's current borrowing rates. If interest rates declined by 10%, fair value would increase to $758.4 million in 2000 and $753.3 million in 1999. Interest costs paid on variable-rate long-term debt would decrease about $1.7 million. The sensitivity calculations do not represent the cost to retire the debt securities. The book value of variable-rate debt approximates fair value.
Securities Available for Sale Securities available for sale represent equity instruments traded on national exchanges. The value of these investments is subject to day to day market volatility. A 10% change in prices would result in a change in value of $3.3 million in 2000 and $9.5 million in 1999.
Foreign Currency Risk Management The Company does not hedge the foreign currency exposure of its foreign operation's net assets and long-term debt. Long-term debt held by the foreign operation amounting to $54.4 million (U.S.) is expected to be repaid from future operations of the foreign company. In January 2000, Market Resources purchased 100% of the outstanding common stock plus debt of a Canadian company for $66.4 million (U.S.).
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, regulation of the Wexpro settlement agreement, availability of gas and oil properties for sale or for exploration 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 financial statements required by this Item are submitted in a separate section of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company has not changed its independent auditors or had any disagreements with them concerning accounting matters and financial statement disclosures within the last 24 months.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information requested in this item concerning Questar's directors is presented in the Company's definitive Proxy Statement under the section entitled "Election of Directors" and is incorporated herein by reference. A copy of the definitive Proxy Statement will be filed with the Securities and Exchange Commission on or about April 2, 2001.
The following individuals are serving as executive officers of the Company:
Primary Positions Held with Name the Company and Affiliates
R. D. Cash 58 Chairman of the Board of Directors (May 1985); President and Chief Executive Officer, Director (May 1984); President (May 1984 to February 2001); Chairman of the Boards of Directors, all affiliates except Questar Energy Trading.
K. O. Rattie 47 President and Chief Operating Officer, Director (February 2001); Vice Chairman and Director, QRS, QMR, Questar Gas, Questar Pipeline and most affiliates (February 2001).
G. L. Nordloh 53 President and Chief Executive Officer, all Market Resources affiliates (at various times beginning in March 1991); Executive Vice President, Questar (February 1996); Senior Vice President, Questar (March 1991 to February 1996); Director, (October 1996); Director, QMR (May 1991), all Market Resources subsidiaries (various times beginning in June 1989); Chairman, Questar Energy Trading (August 1998).
D. N. Rose 56 President and Chief Executive Officer, Questar Gas (October 1984), Questar Pipeline (March 1997), QRS (December 1996), QES (January 1999); Executive Vice President, Questar (February 1996); Senior Vice President, Questar (May 1985 to February 1996); Director (May 1984); Director, Questar Gas (May 1984), Questar Pipeline (May 1996), QRS (December 1996), and QES (January 1999).
S. E. Parks 49 Senior Vice President (March 2001); Vice President ( February 1990 to March 2001); Treasurer and Chief Financial Officer, Questar and all affiliates except Questar Energy Trading (February 1996); Treasurer, Questar and affiliates except Questar Energy Trading (at various dates beginning in May 1984); Director, Questar E&P (May 1996) and Consonus (October 1999).
Connie C. Holbrook 54 Senior Vice President (March 2001); Vice President (October 1984 to March 2001); Corporate Secretary (October 1984); General Counsel (April 1999); Corporate Secretary, Questar Gas and other affiliates except Questar Energy Trading (at various dates beginning in March 1982); Director, Consonus (October 1999).
Glenn H. Robinson 50 President and Chief Executive Officer and Director, Questar InfoComm (August 2000); Vice President and Chief Information Officer (August 2000); Vice President and Controller, QRS (January 1999 to August 2000), Questar Gas (April 1991 to August 2000), and Questar Pipeline (September 1996 to August 2000);
There is no "family relationship" between any of the listed officers or between any of them and the Company's directors. The executive officers serve at the pleasure of the Board of Directors. There is no arrangement or understanding under which the officers were selected. Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is presented in the Company's definitive Proxy Statement under the section entitled "Section 16(a) Compliance" and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information requested in this item is presented in Questar's definitive Proxy Statement for the Company's 2001 annual meeting, under the sections entitled "Executive Compensation" and "Election of Directors" and is incorporated herein by reference. The sections of the Proxy Statement labeled "Committee Report on
Executive Compensation" and "Cumulative Total Shareholder Return" are expressly not incorporated into this document.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information requested in this item for certain beneficial owners is presented in Questar's definitive Proxy Statement for the Company's 2001 annual meeting under the section entitled "Security Ownership, Principal Holders" and is incorporated herein by reference. Similar information concerning the securities ownership of directors and executive officers is presented in the definitive Proxy Statement for the Company's 2001 annual meeting under the section entitled "Security Ownership, Directors and Executive Officers" and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information requested in this item for related transactions involving the Company's directors and executive officers is presented in the definitive Proxy Statement for the Questar's 2000 annual meeting under the section entitled "Election of Directors."
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.
(a)(3) Exhibits. The following is a list of exhibits required to be filed as a part of this report in Item 14(c).
Exhibit No. Description
2.* Plan and Agreement of Merger dated as of December 16, 1986, by and among the Company, Questar Systems Corporation, and Universal Resources Corporation. (Exhibit No. (2) to Current Report on Form 8-K dated December 16, 1986.)
3.1.* Restated Articles of Incorporation as amended effective May 19, 1998. (Exhibit No. 3.1. to Form 10-Q Report for Quarter ended June 30, 1998.)
3.2.* Bylaws (as amended effective August 11, 1998). (Exhibit No. 3.2. to Form 10-Q Report for Quarter ended June 30, 1998.)
4.1.*1 Rights Agreement dated as of February 13, 1996, between the Company and Chemical Mellon Shareholder Services L.L.C. pertaining to the Company's Shareholder Rights Plan. (Exhibit No. 4. to Current Report on Form 8-K dated February 13, 1996.)
4.2.* Questar Dividend Reinvestment and Stock Purchase Plan. (Exhibit No. 4. to Current Report on Form 8-K dated February 8, 2000.)
10.1.* Stipulation and Agreement, dated October 14, 1981, executed by Mountain Fuel; Wexpro; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Mountain Fuel Supply Company's Form 10-K Annual Report for 1981.)
10.2.2 Questar Corporation Annual Management Incentive Plan, as amended and restated effective February 13, 2001.
10.3.*2 Questar Corporation Executive Incentive Retirement Plan, as amended and restated effective May 19, 1998. (Exhibit No. 10.2. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.4.2 Questar Corporation Long-Term Stock Incentive Plan, as amended and restated effective March 1, 2001 (subject to the receipt of shareholder approval.)
10.5.*2 Questar Corporation Executive Severance Compensation Plan, as amended and restated effective May 19, 1998. (Exhibit No. 10.3. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.6.2 Questar Corporation Deferred Compensation Plan for Directors, as amended and restated effective October 26, 2000.
10.7.*2 Questar Corporation Supplemental Executive Retirement Plan, as amended and restated effective June 1, 1998. (Exhibit No. 10.6. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.8.*2 Questar Corporation Stock Option Plan for Directors, as amended and restated effective October 29, 1998. (Exhibit No. 10.10. to Form 10-Q Report for Quarter Ended September 30, 1998.)
10.9.*2 Form of Individual Indemnification Agreement dated February 9, 1993 between Questar Corporation and Directors. (Exhibit No. 10.11. to Form 10-K Annual Report for 1992.)
10.10.*2 Questar Corporation Deferred Share Plan, as amended and restated effective May 19, 1998. (Exhibit No. 10.7. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.11.2 Questar Corporation Deferred Compensation Plan, as amended and restated effective October 26, 2000.
10.12.*2 Questar Corporation Directors' Stock Plan as approved May 21, 1996. (Exhibit No. 10.15. to Form 10-Q Report for Quarter ended June 30, 1996.)
10.13.*2 Questar Corporation Deferred Share Make-Up Plan. (Exhibit No. 10.8. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.14.*2 Questar Corporation Special Situation Retirement Plan. (Exhibit No. 10.10. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.15. Employment Agreement between Questar Corporation and Keith O. Rattie effective February 1, 2001.
21. Subsidiary Information.
23. Consent of Independent Auditors.
24. Power of Attorney.
99.1. Undertakings for Registration Statements on Form S-3 (No. 33-48168) and on Form S-8 (Nos. 33-4436, 33-15149, 33-40800, 33-40801, 33-48169, 333-04913, and 333-04951). ________________________
*Exhibits so marked have been filed with the Securities and Exchange Commission as part of the indicated filing and are incorporated herein by reference.
1The name of the Rights Agent has been changed to USBank National Association.
2Exhibit so marked is management contract or compensation plan or arrangement.
(b) The Company did not file any Current Reports on Form 8-K during the last quarter of 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 CORPORATION
SALT LAKE CITY, UTAH
FORM 10-K -- ITEM 14 (a) (1) AND (2)
QUESTAR CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of Questar Corporation and subsidiaries are included in Item 8:
Consolidated statements of income--Years ended December 31, 2000, 1999 and 1998
Consolidated balance sheets--December 31, 2000 and 1999
Consolidated statements of common shareholders' equity--Years ended December 31, 2000, 1999 and 1998
Consolidated statements of cash flows--Years ended December 31, 2000, 1999 and 1998
Notes to consolidated financial statements
Financial statement schedules, for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable, and therefore have been omitted.
Report of Independent Auditors
Shareholders and Board of Directors Questar Corporation
We have audited the accompanying consolidated balance sheets of Questar Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income and common shareholders' equity and cash flows for each of 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 consolidated financial position of Questar Corporation and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their 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 CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements
QUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
See notes to consolidated financial statements
QUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
See notes to consolidated financial statements
QUESTAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements
QUESTAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Accounting Policies
Principles of Consolidation: The consolidated financial statements contain the accounts of Questar Corporation and subsidiaries (Questar or the Company). Questar is a diversified natural gas company with two principal lines of business: nonregulated and regulated. The Company's nonregulated activities of gas and oil exploration and production, gas gathering and processing, and energy marketing are conducted by Questar Market Resources, Inc. and subsidiaries (Market Resources). The Company's regulated activities of natural gas distribution, transmission and storage operations are conducted by Questar Regulated Services Co. and subsidiaries (Regulated Services). Natural gas-distribution activities are conducted by Questar Gas. Questar Pipeline provides natural gas transmission and storage services. Regulated Services also includes Questar Energy Services which conducts retail-energy services. Corporate and other operations include information-technology and telecommunication services and corporate activities. All significant intercompany accounts and transactions have been eliminated in consolidation.
Investments in Unconsolidated Affiliates: Questar uses the equity method to account for investments in affiliates in which it does not have control. Principal affiliates and percentage ownership include: Overthrust Pipeline Company (72%), TransColorado Gas Transmission Company (50%), Canyon Creek Compression Company (15%) and Blacks Fork Gas Processing Company (50%). Generally, the Company's investment in these affiliates equals the underlying equity in net assets, except for TransColorado where the investment was written down. The Company experienced an other-than-temporary decline in its partnership investment in TransColorado caused by low volumes resulting from unfavorable regional transportation economics.
Regulation: Questar Gas is regulated by the Public Service Commission of Utah (PSCU) and the Public Service Commission of Wyoming (PSCW). While Questar Gas also serves a small area of southeastern Idaho, the Public Utilities Commission of Idaho has deferred to the PSCU for rate oversight of this area. Questar Pipeline is regulated by the Federal Energy Regulatory Commission (FERC). These regulatory agencies establish rates for the storage, transportation and sale of natural gas. The regulatory agencies also regulate, among other things, the extension and enlargement or abandonment of jurisdictional natural gas facilities. Regulation is intended to permit the recovery, through rates, of the cost of service, including a return on investment.
The financial statements of rate-regulated businesses are presented in accordance with regulatory requirements. Methods of allocating costs to time periods, in order to match revenues and expenses, may differ from those of other businesses because of cost-allocation methods used in establishing rates.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent liabilities reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition: Revenues are recognized in the period that services are provided or products are delivered. Questar Gas records gas-distribution revenues for gas delivered to residential and commercial customers but not billed at the end of the accounting period. Rate-regulated companies periodically collect revenues subject to possible refunds pending final orders from regulatory agencies. These companies establish appropriate reserves for revenues collected subject to refund. The Company's exploration and production operations use the sales method of accounting for gas revenues, whereby revenue is recognized on all gas sold to purchasers. A liability is recorded to the extent that the Company has an imbalance in excess of its share of remaining reserves in an underlying property. The Company's net gas imbalances at December 31, 2000 and 1999 were not significant.
Purchased-Gas Adjustments: Questar Gas accounts for purchased-gas costs in accordance with procedures authorized by the PSCU and PSCW under which purchased-gas costs that are different from those provided for in present rates are accumulated and recovered or credited through future rate changes.
Cash and 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.
Securities Available for Sale: The value of securities available for sale approximates fair value at the balance sheet date based on published share prices. Based on market value at the balance sheet date, the Company records unrealized gains or losses, net of income taxes, as a separate component of other comprehensive income in shareholders' equity. Gains or losses resulting from the sale of securities are included in the determination of income as incurred.
Property, Plant and Equipment: Property, plant and equipment is stated at cost. The Company uses the full-cost accounting method for a majority of its gas and oil exploration and development activities. However, as ordered by the PSCU, the successful-efforts method of accounting is utilized with respect to costs associated with certain "cost- of-service" oil and gas properties managed and developed by Wexpro and regulated for ratemaking purposes. Cost- of service oil and gas properties are those properties for which the operations and return on investment are regulated by the Wexpro settlement agreement (see Note 9). In accordance with the settlement agreement, production from the gas properties operated by Wexpro is delivered to Questar Gas at Wexpro's cost of providing this service. That cost includes a return on Wexpro's investment. Oil produced from the cost-of-service properties is sold at market prices. Proceeds are credited, pursuant to the terms of the settlement agreement, allowing Questar Gas to share in the proceeds for the purpose of reducing natural gas rates.
Under the full-cost method, all costs associated with the acquisition, exploration and development of oil and gas reserves, including certain directly related internal-employee costs, are capitalized. Such amounts include the cost of drilling and equipping productive wells, dry-hole costs, lease-acquisition costs, delay rentals, and costs related to such activities. The internal costs capitalized are directly attributable to acquisition, exploration, and development activities and do not include costs related to production, general corporate overhead or similar activities. Exclusive of field-level costs, the Company capitalized $3.6 million, $3 million and $2.6 million of internal costs in 2000, 1999 and 1998, respectively. Costs associated with production and general corporate activities are expensed in the period incurred. Sales of oil and gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves.
The Company limits, on a country-by-country cost-center basis, the capitalized costs of oil and gas properties, net of accumulated amortization and related deferred taxes, to the full-cost ceiling. The full-cost ceiling comprises the present value of estimated future net revenues from proved oil and gas reserves plus the cost of unproved properties not being amortized, all adjusted for the effect of related income taxes. The present value calculation is based upon current economic and operating conditions and estimated future development expenditures, discounted at 10%. If capitalized costs exceed the full-cost ceiling, the excess is expensed. In 1998, the Company recorded a $34 million write-down of oil and gas properties pursuant to the ceiling limitation required by the full-cost accounting method.
Capitalized costs are amortized, on a country-by-country cost-center basis, by an energy equivalent unit-of- production method based upon production and estimates of proved gas and oil reserves. The Company presently has two cost centers: the United States and Canada. Amortizable costs include developmental drilling in progress as well as estimates of future development costs of proved reserves, but exclude the costs of certain unproved oil and gas properties until the properties are evaluated. The estimated costs of future site restoration, dismantlement, and abandonment of producing properties are expected to be offset by the estimated salvage value of the lease and well equipment.
The aggregate costs of unproved properties not being amortized are assessed at least annually for possible impairments or reduction in value. Significant properties are assessed individually. If a reduction in value has occurred, costs being amortized are increased. Of the $76.2 million of net unproved property costs at excluded from the amortizable base at December 31, 2000, $22.9 million, $10.4 million, and $20.5 million were incurred in 2000, 1999 and 1998, respectively. Based on anticipated future exploration and development activities, the Company expects the majority of the costs of unproved properties currently excluded to be evaluated and included in the amortization calculation within the next five years.
The Company uses the successful-efforts method of accounting for costs associated with the development of cost- of-service oil and gas properties. The cost to drill and equip development wells, successful or unsuccessful, and construct appurtenant facilities are capitalized. Geological and geophysical costs are expensed as incurred.
Capitalized costs are amortized on an individual field basis using the unit-of-production method based upon proved developed oil and gas reserves attributable to the field. Costs of future site restoration, dismantlement, and abandonment for producing properties are accrued as part of depreciation and amortization expense for tangible equipment by assuming no salvage value in the calculation of the unit-of-production rate. The following table contains the detail of Market Resources' property, plant and equipment at December 31.
For the remaining Company properties, the provision for depreciation and amortization is based upon rates that will systematically charge the costs of assets against income over the estimated useful lives of those assets. The investment in natural gas distribution, transmission, storage, gathering and processing property, plant and equipment is charged to expense using the straight-line method. The costs of gas wells and related production facilities are charged to expense using the unit-of-production method. Average depreciation and amortization rates used in the 12 months ended December 31 were as follows:
Goodwill: Goodwill is amortized on the straight-line method principally over 10 years. Goodwill amortization expense was $1.7 million in 2000 and the accumulated amortization balance was $1.8 million at December 31, 2000.
Capitalized Interest and Allowance for Funds Used During Construction: Questar's regulated subsidiaries capitalize the cost of capital employed during the construction period of plant and equipment in accordance with FERC guidelines. 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 Company's nonregulated subsidiaries capitalize interest costs during construction of assets when it is applicable. Interest costs related to full cost oil and gas activities are expensed in the period incurred. Under provisions of the Wexpro settlement agreement, the Company capitalizes AFUDC on cost-of-service construction projects and records the amount in other income. Debt expense was reduced by $4,224,000 in 2000, $3,035,000 in 1999 and $1,421,000 in 1998. AFUDC included in interest and other income amounted to $4,476,000 in 2000, $2,017,000 in 1999 and $1,426,000 in 1998.
Reacquisition of Debt: Gains and losses on the reacquisition of debt by rate-regulated affiliates are deferred and amortized as debt expense over the would-be remaining life of the retired debt or the life of the replacement debt in order to match regulatory treatment.
Foreign Currency Translation: The Company conducts gas and oil exploration and production activities in western Canada. The local currency is the functional currency of the Company's foreign operations. Translation from the functional currency to U. S. dollars is performed for balance-sheet accounts using the exchange rate in effect at the balance-sheet date. Revenue and expense accounts are translated using an average exchange rate. Adjustments resulting from such translations are reported as a separate component of other comprehensive income in shareholders' equity. Deferred income taxes have been provided on translation adjustments because the earnings are not considered to be permanently invested.
Hedging Policy: The Company has established policies and procedures for managing market risks through the use of commodity-based derivative arrangements. A primary objective of these hedging transactions is to protect the Company's commodity sales from adverse changes in energy prices. The volume of production hedged and the mix of derivative instruments employed are regularly evaluated and adjusted by management in response to changing market conditions and reviewed periodically by the Board of Directors. Additionally, under the terms of Market Resources' revolving credit facility, not more than 75% of Market Resources' production quantities can be committed to hedging arrangements. The Company does not enter into derivative arrangements for speculative purposes.
Energy-Price Risk Management: Market Resources enters into swaps, futures contracts or options agreements to hedge exposure to price fluctuations in connection with marketing of the Company's natural gas and oil production, and to secure a known margin for the purchase and resale of gas, oil and electricity in marketing activities. It is expected that there is a high degree of correlation between the changes in market value of such contracts and the market price ultimately received on the hedged physical transactions. The timing of production and of the hedge contracts is closely matched. Hedge prices are established in the areas of Market Resources' production operations. The Company settles most contracts in cash and recognizes the gains and losses on hedge transactions during the same time period as the related physical transactions. Cash flows from the hedge contracts are reported in the same category as cash flows from the hedged assets. Contracts which do not have high correlation with the related physical transactions are marked-to-market and recognized in the current-period income.
Interest-Rate Risk Management: The Company borrows funds under both fixed and variable interest rate arrangements. Variable-rate agreements expose the Company to market risk related to changes in interest rates.
Credit Risk: The Company's primary market areas are the Rocky Mountain regions of the United States and Canada and the Midcontinent region of the United States. Exposure to credit risk may be impacted by the concentration of customers in these regions due to changes in economic or other conditions. Customers include individuals and numerous industries that may be affected differently by changing conditions. Management believes that its credit-review procedures, loss reserves, customer deposits and collection procedures have adequately provided for usual and customary credit-related losses. Commodity-based hedging arrangements also expose the Company to credit risk. The Company monitors the creditworthiness of its counterparties, which generally are major financial institutions, and believes that losses from non-performance are unlikely to occur.
Income Taxes: Questar files income tax reports on a consolidated basis in accordance with the Internal Revenue Code and associated regulations. Questar's subsidiaries account for income taxes on a separate-return basis. Rate- regulated operations record cumulative increases in deferred taxes as income taxes recoverable from customers. Questar Gas and Questar Pipeline have adopted procedures with their regulatory commissions to include under-provided deferred taxes in customer rates on a systematic basis. Questar Gas and Questar Pipeline use the deferral method to account for investment tax credits as required by regulatory commissions.
Earnings Per Share: The Company presents basic and diluted earnings per share (EPS) on the income statement. Basic EPS are computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the accounting period. Diluted EPS includes the potential dilution from exercising stock options, which is the reason for the difference between the number of basic and diluted average shares outstanding.
Comprehensive Income: Comprehensive income is the sum of net income as reported in the Consolidated Statement of Income and other comprehensive income transactions reported in the Consolidated Statement of Shareholders' Equity. Other comprehensive income transactions that currently apply to Questar result from changes in the market value of securities held for sale and changes in holding value resulting from foreign currency translation adjustments. These transactions are not the culmination of the earnings process, but result from periodically adjusting historical balances to fair value. Income is realized when the securities available for sale are sold. Income taxes associated with realized gains from selling securities available for sale, which were included in other comprehensive income in prior years, were $10.2 million in 2000, $23.4 million in 1999 and $1.9 million in 1998. Beginning in 2001, other comprehensive income will include mark-to-market adjustments of the Company's qualified energy derivatives. The balances of cumulative other comprehensive income (loss) for the 12 months ended December 31, were as follows:
Business Segments: Questar's line-of-business disclosures are presented based on the way senior management evaluates the performance of its business segments. Certain intersegment sales include intercompany profit.
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 in January 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 depends on whether
such instrument has been designated and qualifies as part of a hedging relationship and, if so, depends on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposure to changes in fair value, cash flows or foreign currencies. If the hedged exposure is a fair-value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of the change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash-flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income in the shareholders' equity section of the balance sheet and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness, as well as the ineffective portion of the gain or loss, is reported in earnings immediately.
As of January 1, 2001, the Company structured a majority of its energy derivative instruments as cash flow hedges. As a result of adopting SFAS 133 in January 2001, the Company expects to record a liability for derivative instruments of approximately $121 million. The offset to this amount, net of income taxes, will be recorded as a loss in other comprehensive income in the shareholders' equity section of the balance sheet. The fair-value calculation does not consider changes in fair value of the corresponding scheduled physical transactions. 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. These contracts are primarily located in the natural gas distribution and transmission activities.
Reclassifications: Certain reclassifications were made to the 1999 and 1998 financial statements to conform with the 2000 presentation.
Note 2 - Debt
Questar has short-term line-of-credit arrangements with several banks under which it may borrow up to $220 million. These lines have interest rates generally below the prime interest rate. Commercial paper borrowings are backed by the short-term line-of-credit arrangements. The details of short-term debt are as follows:
Maturities of long-term debt for the five years following December 31, 2000, in thousands of dollars are as follows:
2001 $8 2002 6,977 2003 16,978 2004 186,980 2005 6,981
Cash paid for interest was $66,833,000 in 2000, $56,019,000 in 1999 and $49,430,000 in 1998.
As of December 31, 2000, Questar Pipeline guaranteed $100 million of long-term debt borrowed by TransColorado Gas Transmission Company. The partnership has borrowed $200 million under a three-year revolving-credit arrangement that will expire unless renewed by October 2001.
Market Resources revolving-credit loan contains covenants specifying a minimum amount of net equity and a maximum ratio of debt to equity. On March 6, 2001, Market Resources issued in a public offering $150 million of 7.5% notes due 2011. Market Resources applied the proceeds of the debt offering to repay a portion of its outstanding floating-rate debt. On February 27, 2001, Questar Pipeline gave notice that it will redeem $30 million of its 9 7/8% debentures on March 30, 2001. The redemption price is equal to 104.67% of the principal amount plus interest from December 1, 2000.
Note 3 - Common Stock
Dividend Reinvestment and Stock Purchase Plan: The Dividend Reinvestment and Stock Purchase Plan (Reinvestment Plan) allows parties interested in owning Questar common stock to reinvest dividends or invest additional funds in common stock. The Company can use unissued shares or purchase shares in the open market in order to meet shareholders' purchase demands. The Reinvestment Plan issued total shares of 322,062, 371,985 and 329,794 in 2000, 1999 and 1998, respectively. At December 31, 2000, 1,920,761 shares were reserved for future issuance.
Employee Investment Plan: The Employee Investment Plan (Plan) allows eligible employees to purchase shares of Questar Corporation common stock or other investments through payroll deduction. Since January 1, 1999, the Company has matched 80% of employees-pretax purchases up to a maximum of 6%. Prior to that date, the Company matched 75% of employees' eligible contributions. The Company's expense equals its matching contribution. Questar's expense and contribution to the Plan amounted to $5,042,000, $4,713,000 and $4,542,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Stock Plans: The Company has a Long-term Stock Incentive Plan for officers and employees and a Stock Option Plan for nonemployee directors (Stock Plans). The number of shares made available for a given year for options or other stock awards under the Long-term Stock Incentive Plan is 1% of the outstanding shares of common stock on the first day of the calendar year. The current plan was amended March 1, 2011, subject to shareholders approval. The option price equals the market price of the stock on the grant date. Stock options for employees have a 10-year life and vest in four equal annual installments beginning six months after grant date. Nonemployee directors may receive shares of common stock instead of cash in payment for directors fees under a separate plan. At December 31, 2000 there were 90,729 shares available for future issuance under this plan.
No compensation expense is recorded for stock options issued to employees or directors because the exercise price equals the market price on the date of issue. If compensation expense had been recorded, it would be based on an estimate of the fair value of stock options granted and would reduce earnings per share by $.03 in 2000 and 1998 and $.02 in 1999. For purposes of the pro-forma expense, the weighted average fair value of the options was amortized over the vesting period. The pro-forma estimates rely upon subjective assumptions and the use of a mathematical model to estimate value, and may not be representative of future results.
Transactions involving option shares in the Stock Plans are summarized as follows:
The stock options at December 31, 2000 had a weighted average remaining life of 4.6 years. The fair value of the stock options was determined on the grant date using the Black-Scholes option-valuation model. The calculated fair value of options granted and major assumptions used in the model at the date of grant were as follows:
In addition to stock options, the Company issued restricted shares to officers and employees as part of its payment of bonuses. Compensation expense is recorded when the bonus is earned. Restricted stock vests in two equal, annual installments beginning one year after grant. Stock is issued at the market price on date of grant. Recipients of restricted stock awards are entitled to full voting rights and receipt of dividends.
Shareholder Rights: On February 13, 1996, Questar's Board of Directors declared a stock-right dividend for each outstanding share of common stock. The stock rights were issued March 25, 1996. The rights become exercisable if a person, as defined, acquires 15% or more of the Company's common stock or announces an offer for 15% or more of the common stock. Each right initially represents the right to buy one share of the Company's common stock for $87.50. Once any person acquires 15% or more of the Company's common stock, the rights are automatically modified. Each right not owned by the 15% owner becomes exercisable for the number of shares of Questar's stock that have a market value equal to two times the exercise price of the right. This same result occurs if a 15% owner acquires the Company through a reverse merger when Questar and its stock survive. If the Company is involved in a merger or other business combination at any time after the rights become exercisable, rightsholders will be entitled to buy shares of common stock in the acquiring company having a market value equal to twice the exercise price of each right. The rights may be redeemed by the Company at a price of $.005 per right until 10 days after a person acquires 15% ownership of the common stock. The rights expire March 25, 2006.
Note 4 - Financial Instruments and Risk Management
The carrying value 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: Cash and cash equivalents and short-term loans - the carrying amount approximates fair value; Long-term debt - the carrying amount of variable-rate debt approximates fair value. The fair value of fixed-rate debt is based on quoted market prices, and on the discounted present value of cash flows using the Company's current borrowing rates; Gas and oil price-hedging contracts - the mark-to-market adjustment of contracts is based on market prices as posted on the NYMEX from the last trading day of the year.
The average price of the oil contracts at December 31, 2000, was $18.30 per barrel and was based on the average of fixed amounts in contracts which settle against the NYMEX. All oil contracts relate to Company-owned production where basis adjustments would result in a net to the well price of $17.20 per barrel. The average price of the gas contracts at December 31, 2000 was $3.87 per MMBtu representing the average of contracts with different terms including fixed, various "into the pipe" postings and NYMEX references. Gas-hedging contracts were in place for Market Resources-owned production and gas-marketing transactions. Removing transportation and heat-value adjustments on the hedges of Company-owned gas as of December 31, 2000, would result in a price between $2.90 and $3.15 per Mcf, net back to the well.
Fair value is calculated at a point in time and does not represent the amount the Company would pay to retire the debt securities. In the case of gas and oil price-hedging activities, the fair value calculation does not consider the the fair value of the corresponding scheduled physical transactions (i.e., the correlation between the index price and the price to be realized for the physical delivery of gas or oil production).
Energy-Price Risk Management Market Resources held hedge contracts covering the price exposure for about 50.5 million dth of gas and 1 million barrels of oil at December 31, 2000. A year earlier the contracts covered 72.1 million dth of natural gas and 2.4 million barrels of oil. The hedging contracts exist for a significant share of Questar-owned gas and oil production and for a portion of gas-marketing transactions. The contracts at December 31, 2000, had terms extending through December 2003, with about 91% of those contracts expiring by the end of 2001. A primary objective of energy-price hedging is to protect product sales from adverse changes in energy prices. The Company does not enter into hedging contracts for speculative purposes.
Securities Available for Sale Securities available for sale represent equity instruments traded on national exchanges. The value of these investments is subject to day-to-day market volatility. Common shares of Nextel Communications, XO Communications and ParkerVision represented the Company's primary investments. At December 31, 2000, the Company holdings amounted to 803,000 shares of Nextel, 214,000 shares of ParkerVision and 237,000 shares of XO.
Credit Risk. The Company's primary market areas are the Rocky Mountain regions of the United States and Canada and the Midcontinent region of the United States. Exposure to credit risk may be impacted by the concentration of customers in these regions due to changes in economic or other conditions. Customers include individuals and numerous industries that may be affected differently by changing conditions. Management believes that its credit-review procedures, loss reserves, customer deposits and collection procedures have adequately provided for usual and customary credit-related losses. Commodity-based hedging arrangements also expose the Company to credit risk. The Company monitors the creditworthiness of its counterparties, which generally are major financial institutions, and believes that losses from non-performance are unlikely to occur.
Note 5 - Income Taxes
Details of Questar's income tax expenses and deferred income taxes are provided in the following tables. The components of income taxes were as follows:
The difference between income tax expense reported and the tax computed by applying the statutory federal income tax rate of 35% to income before income taxes is explained as follows:
Significant components of the Company's deferred income taxes were as follows:
Cash paid for income taxes was $54,088,000, $35,244,000 and $35,036,000 in 2000, 1999 and 1998, respectively.
Note 6 - Litigation and Commitments
Bridenstine vs. Kaiser-Francis Oil Company On January 4, 2001, a district court judge in Texas County, Oklahoma, approved the settlement agreement reached by the Questar defendants and Union Pacific Resources Company, predecessor in interest to Questar Exploration & Production (QE&P), as defendants in the Bridenstine case. Under the terms of the settlement, the Company and Union Pacific Resources paid a total of $22.5 million ($16.5 million by the Company) to resolve all of the issues in the litigation. The Questar defendants disputed plaintiffs' claims, but settled the lawsuit to avoid the uncertainty of a jury verdict. Payment of the settlement funds did not have a material adverse effect on the Company's results of operations, financial position, or liquidity.
TransColorado case Questar TransColorado Inc. (QTC) and its partner, KN TransColorado, Inc., (KNTC) in the TransColorado Gas Transmission Company (TransColorado) are involved in a complex lawsuit that is pending in a state district court in Colorado. At the center of the lawsuit is the validity of a contractual right claimed by QTC to put its 50% interest in TransColorado to KNTC during the 12-month period beginning March 31, 2001.
KNTC originally filed a lawsuit in June of 2000 alleging that Questar Pipeline and its affiliates breached their fiduciary duties to TransColorado and KNTC by developing a plan to construct and operate a new pipeline that would compete with TransColorado, rendering TransColorado economically unviable. KNTC is seeking damages in excess of $150 million plus punitive damages; a declaratory judgment that KNTC's obligation to purchase QTC's interest in the project be declared void and unenforceable; and a dissolution of the partnership under Colorado
law. QTC and its affiliates subsequently filed a counterclaim and third-party complaint against KNTC and named affiliates, including Kinder Morgan, Inc., seeking a declaratory judgment
that its contractual right to exercise the put is binding and enforceable and damages of at least $185 million.
The trial judge denied the motion filed by the Questar defendants to stay the proceedings and remove some issues to be considered by the FERC. The parties have entered into a standstill agreement that preserves the claims made by Questar and by KNTC pending the resolution of the litigation. On December 31, 2000, QTC gave notice of its election to exercise its contractual right to sell its 50% interest in TransColorado to KNTC. The parties have agreed to hire an outside party to operate the TransColorado pipeline during the pending litigation. The trial is scheduled for February of 2002.
Grynberg lawsuits Questar affiliates are named defendants in a lawsuit filed by independent gas producer Jack J. Grynberg under the Federal False Claims Act. This case and the 75 substantially similar cases filed by Grynberg against pipelines and their affiliates have been consolidated for discovery and pre-trial rulings in Wyoming federal district court. The cases involve allegations of industry wide mismeasurement and undervaluation of gas on which royalty payments are due the federal government. The complaint seeks treble damages and imposition of civil penalties. The Wyoming district court judge has not ruled on the defendants' motion to dismiss.
Grynberg has filed a case against Questar Pipeline, Questar Energy Trading and Questar Gas Management in Utah state district court, alleging mismeasurement of gas volumes attributable to his working ownership interest in a specified property in southwestern Wyoming. Grynberg alleges breach of contract, negligent misrepresentation, fraud, breach of fiduciary duty, etc. On March 8, 2001, the trial judge granted defendants' motion to dismiss a case by Grynberg.
It is too early to estimate the outcome of the other cases filed by Grynberg against Questar affiliates.
There are various other legal proceedings against Questar and its subsidiaries. While it is not currently possible to predict or determine the outcomes of these proceedings, it is the opinion of management that the outcomes will not have a materially adverse effect on the Company's results of operations, financial position or liquidity.
Commitments 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.
Questar Energy Trading has contracted for firm-transportation services with various pipelines to transport 76.2 Mdths per day of gas. The contracts extend for the next six years and have an annual cost of approximately $3 million. Due to market conditions and competition, it is possible that Questar Energy Trading may be unable to sell enough gas to fully utilize the contracted capacity.
Questar sold its headquarters building under a sale and lease-back arrangement in November 1998. The operating agreement commits the Company to occupy the building for the next 11 years with an option for renewal. The minimum future payments under the terms of long-term operating leases for the Company's primary office locations, including its headquarters building, for the five years following December 31, 2000, are as follows:
(In Thousands) 2001 $4,507 2002 4,314 2003 4,155 2004 3,677 2005 3,633 Thereafter 37,121
Total minimum future rental payments have not been reduced for sublease rental receipts of $187,000, and $24,000, which are expected to be received in the years ended December 31, 2001, and 2002, respectively. Total rental expense amounted to $4,402,000 in 2000, $4,321,000 in 1999 and $563,000 in 1998. Sublease rental receipts were $96,000 in 2000 and $94,000 in 1999.
Note 7 - Rate Regulation and Other Matters
State rate regulation 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.
Federal rate regulation The Federal Energy Regulatory Commission (FERC) issued a final order granting a certificate of public convenience and necessity to Questar's Southern Trails Pipeline. The FERC's July 28, 2000, ruling came after the agency became satisfied that the pipeline was in the public convenience and necessity and could be completed in an environmentally sound manner. The California State Lands Commission has formally certified the Environmental Impact Report for the Southern Trails Pipeline. Questar Pipeline is actively working on right-of-way issues and exploring marketing opportunities to subscribe Southern Trail's pipeline capacity.
Questar Pipeline has received a preliminary determination from the FERC to construct a 75-mile natural gas pipeline from the Price area in eastern Utah to a proposed interconnect with Kern River Gas Transmission Co. near Elberta, Utah. A final order is contingent upon completion of an environmental impact statement. The proposed expansion of Questar Pipeline's interstate system will parallel an existing Questar pipeline for 57 miles from Price to Payson, Utah. The $80 million project, referred to as Main Line 104, will be 24 inches in diameter, with a maximum operating pressure of 1,400 pounds per square inch.
Note 8 - Employee Benefits
Pension Plan: The Company has a defined-benefit pension plan covering the majority of its employees. Benefits are generally based on the employee's age at retirement, years of service and highest earnings in a consecutive 72 pay-period interval during the ten years preceding retirement. The Company's policy is to make contributions to the plan at least sufficient to meet the minimum funding requirements of the Internal Revenue Code. Plan assets consist principally of equity securities and corporate and U.S. government debt obligations.
The Company offered early retirement windows to specific groups of employees in 2000, 1999 and 1998. Questar's 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.
Questar InfoComm, which conducts telecommunications and information-technology services, announced an early retirement program effective November 1, 1999. Fifty employees elected to retire and the $2.9 million cost was expensed in 1999.
A summary of pension expense is as follows:
Postretirement Benefits Other Than Pensions: Postretirement health-care benefits and life insurance are provided only to employees hired before January 1, 1997. The Company pays a portion of the costs of health-care benefits, as determined by an employee's years of service, and limited to 170% of the 1992 contribution. The Company's policy is to fund amounts allowable for tax deduction under the Internal Revenue Code. Plan assets consist of equity securities and corporate and U.S. government debt obligations. The Company is amortizing its transition obligation over a 20-year period, which began in 1992.
Regulated Services accounts for approximately 50% of the postretirement benefit costs. The impact of postretirement benefit costs on Questar's future net income will be mitigated by the ability to recover these costs from customers. The regulatory agencies allow Questar Gas and Questar Pipeline to recover future costs if the amounts are funded in external trusts.
A summary of the expense of postretirement benefits other than pensions follows:
A 1% increase in the health-care inflation rate would increase the service cost and interest cost by $290,000 and the accumulated postretirement benefit obligation by $3.3 million. A 1% decrease in the health-care inflation rate would decrease the service cost and interest cost by $210,000 and the accumulated postretirement benefit obligation by $2.8 million. The status of the postretirement benefit programs was as follows:
Postretirement Benefits Other Than Pensions
Postemployment Benefits: The Company recognizes the net present value of the liability for postemployment benefits, such as long-term disability benefits and health-care and life-insurance costs, when employees become eligible for such benefits. Postemployment benefits are paid to former employees after employment has been terminated but before retirement benefits are paid. The Company accrues both current and future costs. In 2000, 14 former employees of Questar Regulated Services and recipients of postemployment benefits accepted early retirement benefits. Questar's postemployment liability at December 31, 2000, 1999 and 1998 was $1,381,000, $2,347,000 and $2,452,000, respectively.
Note 9 - Wexpro Settlement Agreement
Wexpro's operations are subject to the terms of the Wexpro settlement agreement. The agreement was effective August 1, 1981, and sets forth the rights of Questar Gas's utility operations to share in the results of Wexpro's operations. The agreement was approved by the PSCU and PSCW in 1981 and affirmed by the Supreme Court of Utah in 1983. Major provisions of the settlement agreement are as follows:
a. Wexpro continues to hold and operate all oil-producing properties previously transferred from Questar Gas's nonutility accounts. The oil production from these properties is sold at market prices, with the revenues used to recover operating expenses and to give Wexpro a return on its investment. The after-tax rate of return is adjusted annually and is approximately 13.64%. Any net income remaining after recovery of expenses and Wexpro's return on investment is divided between Wexpro and Questar Gas, with Wexpro retaining 46%.
b. Wexpro conducts developmental oil drilling on productive oil properties and bears any costs of dry holes. Oil discovered from these properties is sold at market prices, with the revenues used to recover operating expenses and to give Wexpro a return on its investment in successful wells. The after-tax rate of return is adjusted annually and is approximately 18.64%. Any net income remaining after recovery of expenses and Wexpro's return on investment is divided between Wexpro and Questar Gas, with Wexpro retaining 46%.
c. Amounts received by Questar Gas from the sharing of Wexpro's oil income are used to reduce natural-gas costs to utility customers.
d. Wexpro conducts developmental gas drilling on productive gas properties and bears any costs of dry holes. Natural gas produced from successful drilling is owned by Questar Gas. Wexpro is reimbursed for the costs of producing the gas plus a return on its investment in successful wells. The after-tax return allowed Wexpro is approximately 21.64%.
e. Wexpro operates natural-gas properties owned by Questar Gas. Wexpro is reimbursed for its costs of operating these properties, including a rate of return on any investment it makes. This after-tax rate of return is approximately 13.64%.
Note 10 - Operations by Line of Business Following is a summary of operations by line of business for the Year Ended December 31.
Questar Market Resources has subsidiaries that conducts gas and oil exploration and production activities in western Canada. Canadian operations reported revenues, measured in U. S. dollars, totaling $38.1 million, $12.3 million and $10.5 million for the 12 months ended December 31, 2000, 1999, and 1998, respectively. Total assets at December 31, stated in U. S. dollars, amounted to $120 million, $40.3 million and $36.9 million in 2000, 1999 and 1998, respectively.
Note 11 - Quarterly Financial and Stock Price Information (Unaudited) Following is a summary of quarterly financial and stock price data.
Note 12 - Supplemental Oil and Gas Information (Unaudited)
The Company uses the full-cost accounting method for the majority of its oil and gas exploration and development activities. However, as ordered by the Public Service Commission of Utah, the successful efforts method of accounting is utilized with respect to costs associated with certain cost- of-service oil and gas properties managed and developed by Wexpro and regulated for ratemaking purposes. Cost-of-service oil and gas properties are those properties for which the operations and return on investment are regulated by the Wexpro settlement agreement (See Note 9).
Oil and Gas Exploration and Development Activities: The following information is provided with respect to Questar's oil and gas exploration and development activities, located in the United States and Canada.
Capitalized Costs
The aggregate amounts of costs capitalized for oil and gas exploration and development activities and the related amounts of accumulated depreciation and amortization follow:
Costs Incurred
The following costs were incurred in oil and gas exploration and development activities:
Results of Operations
Following are the results of operations of Market Resources' oil and gas exploration and development activities, before corporate overhead and interest expenses. The Company recorded write-downs of its full-cost oil and gas properties in accordance with the limitation of its full-cost ceiling in 1998.
Note A - Income tax expenses have been reduced by nonconventional fuel tax credits of $4,655,000 in 2000, $5,282,000 in 1999 and $5,736,000 in 1998.
Estimated Quantities of Proved Oil and Gas Reserves
Estimates of the reserves located in the United States were made by Ryder Scott Company, H. J. Gruy and Associates, Inc., Netherland, Sewell & Associates, and Malkewicz Hueni Associates, Inc., independent reservoir engineers. Estimated Canadian reserves were prepared by Gilbert Laustsen Jung Associates Ltd. and Sproule Associates Ltd. Reserve estimates are based on a complex and highly interpretive process that is subject to continuous revision as additional production and development-drilling information becomes available. The quantities reported below are based on existing economic and operating conditions at December 31. All oil and gas reserves reported were located in the United States and Canada. The Company does not have any long-term supply contracts with foreign governments or reserves of equity investees.
Standardized Measure of Future Net Cash Flows Relating to Proved Reserves
Future net cash flows were calculated at December 31 using year-end prices and known contract-price changes. The year-end prices do not include any impact of hedging activities. Year-end production costs, development costs and appropriate statutory income tax rates, with consideration of future tax rates already legislated, were used to compute the future net cash flows. All cash flows were discounted at 10% to reflect the time value of cash flows, without regard to the risk of specific properties.
The assumptions used to derive the standardized measure of future net cash flows are those required by accounting standards and do not necessarily reflect the Company's expectations. The usefulness of the standardized measure of future net cash flows is impaired because of the reliance on reserve estimates and production schedules that are inherently imprecise.
Cost-of-Service Activities
The following information is provided with respect to cost-of-service oil and gas properties managed and developed by Wexpro and regulated by the Wexpro settlement agreement. Information on the standardized measure of future net cash flows has not been included for cost-of-service activities because the operations of and return on investment for such properties are regulated by the Wexpro settlement agreement.
Capitalized Costs
Capitalized costs for cost-of-service oil and gas properties net of the related accumulated depreciation and amortization were as follows:
Costs Incurred
Costs incurred by Wexpro for cost of service oil and gas producing activities were $32,066,000 in 2000, $21,273,000 in 1999 and $26,956,000 in 1998.
Results of Operations
Following are the results of operations of the Company's cost-of-service gas and oil development activities before corporate overhead and interest expenses.
Note A - Represents revenues received from Questar Gas pursuant to Wexpro Settlement Agreement.
Estimated Quantities of Proved Oil and Gas Reserves
The following estimates were made by the Company's reservoir engineers. No estimates are available for cost of service proved-undeveloped reserves that may exist.
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 23th day of March, 2001.
QUESTAR CORPORATION (Registrant)
By /s/ R. D. Cash R. D. Cash Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ R. D. Cash Chairman and Chief R. D. Cash Executive Officer (Principal Executive Officer)
/s/ S. E. Parks Senior Vice President, Treasurer and Chief S. E. Parks Financial Officer (Principal Financial and Accounting Officer)
*R. D. Cash Director *K. O. Rattie Director *Teresa Beck Director *Patrick J. Early Director *W. W. Hawkins Director *Robert E. Kadlec Director *Dixie L. Leavitt Director *Gary G. Michael Director *G. L. Nordloh Director *Scott S. Parker Director *D. N. Rose Director *Harris H. Simmons Director
March 23, 2001 *By /s/ R. D. Cash Date R. D. Cash, Attorney in Fact
EXHIBIT INDEX
Exhibit Number Description
2.* Plan and Agreement of Merger dated as of December 16, 1986, by and among the Company, Questar Systems Corporation, and Universal Resources Corporation. (Exhibit No. (2) to Current Report on Form 8-K dated December 16, 1986.)
3.1.* Restated Articles of Incorporation as amended effective May 19, 1998. (Exhibit No. 3.1. to Form 10-Q Report for Quarter ended June 30, 1998.)
3.2.* Bylaws (as amended effective August 11, 1998). (Exhibit No. 3.2. to Form 10-Q Report for Quarter ended June 30, 1998.)
4.1.*1 Rights Agreement dated as of February 13, 1996, between the Company and Chemical Mellon Shareholder Services L.L.C. pertaining to the Company's Shareholder Rights Plan. (Exhibit No. 4. to Current Report on Form 8-K dated February 13, 1996.)
4.2.* Questar Dividend Reinvestment and Stock Purchase Plan. (Exhibit No. 4. to Current Report on Form 8-K dated February 8, 2000.)
10.1.* Stipulation and Agreement, dated October 14, 1981, executed by Mountain Fuel; Wexpro; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Mountain Fuel Supply Company's Form 10-K Annual Report for 1981.)
10.2.2 Questar Corporation Annual Management Incentive Plan, as amended and restated effective February 13, 2001.
10.3.*2 Questar Corporation Executive Incentive Retirement Plan, as amended and restated effective May 19, 1998. (Exhibit No. 10.2. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.4.2 Questar Corporation Long-Term Stock Incentive Plan, as amended and restated effective March 1, 2001 (subject to the receipt of shareholder approval.)
10.5.*2 Questar Corporation Executive Severance Compensation Plan, as amended and restated effective May 19, 1998. (Exhibit No. 10.3. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.6.2 Questar Corporation Deferred Compensation Plan for Directors, as amended and restated effective October 26, 2000.
10.7.*2 Questar Corporation Supplemental Executive Retirement Plan, as amended and restated effective June 1, 1998. (Exhibit No. 10.6. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.8.*2 Questar Corporation Stock Option Plan for Directors, as amended and restated effective October 29, 1998. (Exhibit No. 10.10. to Form 10-Q Report for Quarter Ended September 30, 1998.)
10.9.*2 Form of Individual Indemnification Agreement dated February 9, 1993 between Questar Corporation and Directors. (Exhibit No. 10.11. to Form 10-K Annual Report for 1992.)
10.10.*2 Questar Corporation Deferred Share Plan, as amended and restated effective May 19, 1998. (Exhibit No. 10.7. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.11.2 Questar Corporation Deferred Compensation Plan, as amended and restated effective October 26, 2000.
10.12.*2 Questar Corporation Directors' Stock Plan as approved May 21, 1996. (Exhibit No. 10.15. to Form 10-Q Report for Quarter ended June 30, 1996.)
10.13.*2 Questar Corporation Deferred Share Make-Up Plan. (Exhibit No. 10.8. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.14.*2 Questar Corporation Special Situation Retirement Plan. (Exhibit No. 10.10. to Form 10-Q Report for Quarter Ended June 30, 1998.)
10.15. Employment Agreement between Questar Corporation and Keith O. Rattie effective February 1, 2001.
21. Subsidiary Information.
23. Consent of Independent Auditors.
24. Power of Attorney.
99.1. Undertakings for Registration Statements on Form S-3 (No. 33-48168) and on Form S-8 (Nos. 33-4436, 33-15149, 33-40800, 33-40801, 33-48169, 333-04913, and 333-04951). ________________________ *Exhibits so marked have been filed with the Securities and Exchange Commission as part of the indicated filing and are incorporated herein by reference.
1The name of the Rights Agent has been changed to USBank National Association.
2Exhibit so marked is management contract or compensation plan or arrangement.
(b) The Company did not file any Current Reports on Form 8-K during the last quarter of 2000.