ITEM 1. BUSINESS.
Questar Gas distributes natural gas as a public utility in Utah, southwestern Wyoming and a small portion of southeastern Idaho. As of December 31, 2005, Questar Gas was serving 824,447 sales and transportation customers. Questar Gas is the only non-municipal gas-distribution utility in Utah, where over 96% of its customers are located. The Public Service Commission of Utah (PSCU), the Public Service Commission of Wyoming (PSCW) and the Public Utility Commission of Idaho have granted Questar Gas the necessary regulatory approvals to serve these areas. Questar Gas also has long-term franchises granted by communities and counties within its service area.
Questar Gas growth is tied to the economic growth of Utah and southwestern Wyoming. It has over 90% of the load for residential space heating and water heating in its service territory. During 2005, Questar Gas added a record 30,330 customers, a 3.8% increase.
Questar Gas faces the same risks as other local distribution companies. These risks include revenue variations based on seasonal changes in demand, sufficient gas supplies, declining residential usage per customer, adequate distribution facilities and adverse regulatory decisions. Questar Gas sales to residential and commercial customers are seasonal, with a substantial portion of such sales made during the heating season. The typical residential customer in Utah (defined as a customer using 115 dth per year) consumes over 77% of total gas requirements in the coldest six months of the year. Questar Gas, however, has a weather-normalization mechanism for its general-service customers. This mechanism adjusts the non-gas portion of a customer’s monthly bill as the actual heating-degree days in the billing cycle are warmer or colder than normal. This mechanism reduces dramatic fluctuations in any given customer’s monthly bill from year to year and reduces fluctuations in Questar Gas gross margin.
Questar Gas minimizes gas supply risks by owning natural gas reserves. During 2005, Questar Gas satisfied 41% of its system requirements with the cost-of-service gas and associated royalty-interest volumes. Wexpro Company (Wexpro), an affiliate, produces the gas from these properties, which is then gathered by Questar Gas Management (Gas Management), and transported by Questar Pipeline Company (Questar Pipeline). Questar Gas had estimated proved cost-of-service natural gas reserves of 497.3 Bcf as of year-end 2005 compared to 531.1 Bcf a year earlier. Questar Gas also has a balanced and diversified portfolio of gas-supply contracts for volumes produced in Wyoming, Colorado, and Utah. Questar Gas has regulatory approval to include costs associated with hedging activities in its balancing account for pass-through treatment.
Questar Gas has designed its distribution system and annual gas-supply plan to handle design-day demand requirements. It periodically updates its design-day demand, the volume of gas that firm customers could use during extremely cold weather. For the 2005-06 heating season, Questar Gas used a design-day demand of 1,106 Mdth for firm customers.
Questar Gas has long-term contracts with Questar Pipeline for transportation and storage capacity at Clay Basin and three peak-day storage facilities. Questar Gas also has contracts to take deliveries at several locations from the Kern River Pipeline.
Regulation
As a public utility, Questar Gas is subject to the jurisdiction of the PSCU and PSCW. Natural gas sales and transportation services are made under rate schedules approved by the two regulatory commissions. Questar Gas is authorized to earn a return on equity of 11.2% in Utah and 11.83% in Wyoming. Both the PSCU and PSCW permit Questar Gas to recover gas costs through a balancing-account procedure and to reflect natural gas-price changes on a periodic, generally semi-annual basis. Questar Gas has also received permission from the PSCU and PCSW to reflect in its gas costs specified costs associated with hedging contracts.
See Note 2 of the consolidated financial statements included in Item 8 of Part II in this Annual Report for a discussion of gas-processing cost coverage.
Questar Gas has significant relationships with affiliates that have allowed it to lower its costs and improve efficiency. These affiliate relationships, however, are subject to oversight by regulatory commissions for evidence of subsidization and above-market payments.
Questar Gas is subject to the requirements of the Pipeline Safety Improvement Act. Questar Gas estimates that it will cost $4.0 to $5.0 million per year to comply with the Act, not including costs of pipeline replacement if necessary. The PSCU has allowed Questar Gas to record a regulatory asset for these incremental operating costs incurred to comply with this Act until the next rate case or 2007, whichever is sooner.
Competition
Questar Gas is a public utility and currently has no direct competition from other distributors of natural gas for residential and commercial customers. It has historically enjoyed a favorable price comparison with other energy sources used by residential and commercial customers except coal and occasionally fuel oil. It provides transportation service to industrial customers that can buy volumes of gas directly from others. Questar Gas earns lower margins on this transportation service than firm-sales service and could lose customers to Kern River.
Environmental Matters
See Legal Proceedings in Item 3 of Part I of this Annual Report for discussion of the Company’s environmental matters.
Employees
At January 1, 2006, the Company had 1,170 employees. All employees are located in the United States. None of the employees are represented under a collective bargaining agreement.
ITEM 1A.
ITEM 1A. RISK FACTORS.
Investors should read carefully the following factors as well as the cautionary statements referred to in “Forward-Looking Statements” herein. If any of the risks and uncertainties described below or elsewhere in this Annual Report actually occur, the Company’s business, financial condition or results of operation could be materially adversely affected.
Gas and oil reserve estimates are imprecise and subject to revision. Questar Gas proved natural gas and oil reserve estimates are prepared annually by Wexpro’s reservoir engineers. Gas and oil reserve estimates are subject to numerous uncertainties inherent in estimating quantities of proved reserves, projecting future rates of production and timing of development expenditures. The accuracy of these estimates depends on the quality of available data and on engineering and geological interpretation and judgment. Reserve estimates are imprecise and will change as additional information becomes available. Estimates of economically recoverable reserves and future net cash flows prepared by different engineers, or by the same engineers at different times may vary significantly. Results of subsequent drilling, testing and production may cause either upward or downward revisions of previous estimates. In addition, the estimation process also involves economic assumptions relating to commodity prices, production costs, severance and other taxes, capital expenditures and remedial costs. Actual results most likely will vary from the estimates.
Questar Gas is subject to complex regulations on many levels. The Company is subject to federal, state and local environmental, health and safety laws and regulations. Environmental laws and regulations are complex, change frequently and tend to become more onerous over time. In addition to the costs of compliance, substantial costs may be incurred to take corrective actions at both owned and previously owned facilities. Accidental spills and leaks requiring cleanup may occur in the ordinary course of business. As standards change, the Company may incur significant costs in cases where past operations followed practices that were considered acceptable at the time but that now require remedial work to meet current standards. Failure to comply with these laws and regulations may result in fines, significant costs for remedial activities, or injunctions.
Questar Gas must comply with numerous and complex regulations governing activities on federal and state lands in the Rocky Mountain region, notably the National Environmental Policy Act, the Endangered Species Act, and the National Historic Preservation Act. Federal and state agencies frequently impose conditions on the Company’s activities. These restrictions tend to become more stringent over time.
Questar Gas incurs significant costs to comply with federal pipeline-safety regulations. The Company may also be affected by possible future regulations requiring the tracking, reporting and reduction of greenhouse-gas emissions.
Questar Gas operations involve numerous risks that might result in accidents and other operating risks and costs. There are inherent in Questar Gas operations a variety of hazards and operating risks, such as fires, earthquakes, leaks, explosions and mechanical problems that could cause substantial financial losses. In addition, these risks could result in loss of human life, significant damage to property, environmental pollution, impairment of operations and substantial losses. In accordance with customary industry practice, the Company maintains insurance against some, but not all, of these risks and losses. The location of pipelines near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks. Certain segments of the Company’s pipelines run through such areas. In spite of the Company’s precautions, an event could cause considerable harm to people or property, and could have a material adverse effect on the financial position and results of operations, particularly if the event is not fully covered by insurance. Accidents or other operating risks could further result in loss of service available to the Company’s customers. Such circumstances could adversely impact the Company’s ability to meet contractual obligations and retain customers.
State agencies regulate the distribution of natural gas. Questar Gas natural gas-distribution business is regulated by the PSCU and the PSCW. These commissions set rates for distribution services and establish policies and procedures for services, accounting, purchase, sale and other activities. PSCU and PSCW policies may adversely affect Questar Gas profitability.
Questar is dependent on bank credit facilities and continued access to capital markets to successfully execute its operating strategies. The Company relies on bank borrowing and access to public capital markets to finance a material portion of its operating strategies. Also, Questar relies on access to short-term commercial paper markets. The Company is dependent on these capital sources to provide capital to add customers and make system improvements. The availability and cost of these credit sources is cyclical, and these capital sources may not remain available or the Company may not be able to obtain money at a reasonable cost in the future. The Company’s bank loan carries a floating interest rate. From time to time the Company may use interest rate derivatives to fix the rate on a portion of its variable rate debt. The interest rates on bank loans are tied to debt credit ratings of Questar and its subsidiaries published by Standard & Poor’s and Moody’s. A downgrade of credit ratings could increase the interest cost of debt and decrease future availability of money from banks and other sources. Management believes it is important to maintain investment grade credit ratings to conduct the Company’s businesses, but may not be able to keep investment grade ratings.
General economic and other conditions impact Questar Gas results. Questar Gas results may also be negatively affected by: changes in general economic conditions; changes in regulation; creditworthiness of counterparties; rate of inflation and interest rates; assumptions used in business combinations; weather and natural disasters; changes in customers’ credit ratings; competition from other forms of energy, effects of accounting policies issued periodically by accounting standard-setting bodies; terrorist attacks or acts of war; changes in business or financial condition; changes in credit ratings; and availability of financing for Questar Gas.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
ITEM 2. PROPERTIES.
Questar Gas distributes gas to customers in the major populated area of Utah, commonly referred to as the Wasatch Front, including the metropolitan Salt Lake area, Provo, Park City, Ogden, and Logan. It also serves customers throughout the state, including the cities of Price, Roosevelt, Vernal, Moab, Monticello, Fillmore, Cedar City and St. George. Questar Gas supplies natural gas to the southwestern Wyoming communities of Rock Springs, Green River, Evanston, Kemmerer and Diamondville and the southeastern Idaho community of Preston. To supply these communities Questar Gas owns and operates distribution systems and has a total of 24,709 miles of street mains, service lines and interconnecting pipelines. Questar Gas has a major operations center in Salt Lake City, Utah, and has operations centers, field offices and service-center facilities through other parts of its service area.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Questar Gas is involved in a variety of pending legal disputes involving commercial litigation arising in the ordinary course of business, including, but not limited to, royalty claims, contract claims and environmental claims. While the ultimate outcome and impact on Questar Gas cannot be predicted with certainty, management believes that the outcome of these cases will not have a material adverse effect on financial position, operating results or liquidity. Questar Gas regulatory proceedings involving coverage for certain processing costs are described in Item 8 of Part II of this Annual Report.
Grynberg. Questar affiliates, including Questar Gas, are involved in various pending lawsuits filed by Jack Grynberg, an independent producer. The only active case, United States ex rel. Grynberg v. Questar Corp., Civil No. 99-MD-1604, consolidated as In re Natural Gas Royalties Qui Tam Litigation, Consolidated Case MDL No. 1293 (D. Wyo.) involves qui tam claims filed by Grynberg under the federal False Claims Act and is substantially similar to the other cases filed against pipelines and their affiliates that have been consolidated for discovery and pre-trial motions in Wyoming’s federal district court. The cases involve allegations of industry-wide mismeasurement of natural gas quantities on which royalty payments are due the federal government
The defendants filed a motion contending that the court has no jurisdiction over the case because Grynberg cannot satisfy the statutory requirements for jurisdiction. The defendants argued Grynberg’s allegations were publicly disclosed prior to the filing of his complaint and Grynberg is not the “original source” of the information on which the allegations are based. The Special Master appointed in the case issued a Report and Recommendation to the district court recommending dismissal of the Questar defendants, except for one small entity acquired by Questar Gas after these cases were filed. The district court heard arguments on whether to adopt the Special Master’s Report on December 9, 2005. The district court has not issued a decision. Management is unable to determine a reasonable range of loss, if any, related to this matter.
Environmental Matters
Questar Gas is listed as a responsible party at sites involving hazardous wastes.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company, as a wholly owned subsidiary of a reporting company under the Act, is entitled to omit the information in this Item.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the Company’s outstanding shares of common stock, $2.50 par value, are owned by Questar. Information concerning the dividends paid on such stock and the ability to pay dividends is reported in the Statements of Common Shareholder’s Equity and the Notes to the Financial Statements included in Item 8 of Part II of this Annual Report.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The Company, as a wholly owned subsidiary of a reporting company under the Act, is entitled to omit information requested in this Item.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
SUMMARY
Questar Gas net income increased 14% to $36.0 million in 2005 versus $31.5 million in 2004, and increased 56% in 2004 from $20.2 million 2003. Higher 2005 revenues resulted from a record addition of 30,330 customers. Questar Gas 2005 net income increased $3.0 million with the PSCU approval of a gas-processing settlement agreement. The 2003 results were negatively impacted by a $15.5 million after-tax charge for refund of disputed gas-processing costs, of which $11.9 million related to periods prior to 2003. The cumulative effect of implementing SFAS 143 reduced Questar Gas 2003 earnings by $334,000.
RESULTS OF OPERATION
Following is a summary of Questar Gas financial and operating results:
Margin Analysis
Questar Gas margin (revenues less gas costs) increased $14.3 million in 2005 compared with 2004, and $1.6 million in 2004 compared with 2003. Following is a summary of major changes in Questar Gas margin for 2005 compared to 2004 and 2004 compared to 2003:
Residential and commercial sales volumes increased 4% in 2005 compared with 2004 as increased customers and increased usage per customer offset the impact of warmer weather. At December 31, 2005, Questar Gas was serving 824,447 customers, a 3.8% increase over the prior year. Housing construction in Utah remained strong, driven by population growth and continuing low mortgage-interest rates. Usage per customer, adjusted for normal temperatures, was down 1% in 2005 compared with 2004 and down 3% in 2004 compared with 2003. Over the long term, usage per customer has been decreasing due to more efficient appliances and homes and customer response to higher prices.
Weather, as measured in degree days, was 3% warmer than normal in 2005 compared to 3% colder than normal in 2004 and 7% warmer than normal in 2003. A weather-normalization adjustment on customer bills generally offsets financial impacts of moderate temperature variations.
Industrial deliveries declined 14% in 2005 compared with 2004 and 10% in 2004 compared with 2003 primarily driven by lower power-generation requirements in the current period and customers changing to the residential and commercial rate schedules.
Expenses
Cost of natural gas sold increased 34% in 2005 compared with 2004 and 36% in 2004 compared with 2003 due to higher gas purchases prices and increased volumes. Questar Gas accounts for purchased-gas costs in accordance with procedures authorized by the PSCU and the PSCW. Purchased-gas costs that are different from those provided for in present rates are accumulated and recovered or credited through future rate changes. As of December 31, 2005, Questar Gas had a $39.9 million balance in the purchased-gas adjustment account representing gas costs incurred but not yet recovered from customers. On November 1, 2005, Questar Gas increased Utah rates by 20% to cover higher costs of purchased natural gas. Combined with a 14% increase in June and other changes, customer rates at December 31, 2005 were 42% higher than the prior year. In February 2006, Questar Gas reduced rates by 8% to reflect forecasts of lower gas purchase prices.
Operating, maintenance, general and administrative expenses increased 8% in 2005 compared with 2004 and 4% in 2004 compared with 2003. The increases are due to higher labor and labor overhead costs and bad debt costs.
Depreciation expense increased 9% in 2005 compared with 2004 and 5% in 2004 compared with 2003 due to plant additions, including a customer information system that was placed in service in July 2004 and transfers of information technology assets from affiliates.
Rate-Refund Obligation
See Note 2 to the financial statements included in Item 8 of Part II of this Annual Report for a discussion of the regulatory proceedings involving Questar Gas processing costs.
Regulation
Questar Gas is subject to the requirements of the Pipeline Safety Improvement Act. Questar Gas estimates that it will cost $4.0 to $5.0 million per year to comply with the act, not including costs of pipeline replacement if necessary. The PSCU has allowed Questar Gas to record a regulatory asset for these incremental operating costs incurred to comply with this Act until the next rate case or 2007, whichever is sooner.
INVESTING ACTIVITIES
Following is a summary of Questar Gas capital expenditures for 2005 and 2004 and a forecast for 2006:
During 2005, Questar Gas added 532 miles of main, feeder and service lines to provide service to 30,330 new customers.
CONTRACTUAL CASH OBLIGATIONS AND OTHER COMMITMENTS
Questar Gas enters into a variety of contractual cash obligations and other commitments in the course of ordinary business activities. The following table summarizes the Company’s significant contractual cash obligations as of December 31, 2005:
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS
Questar Gas significant accounting policies are described in Note 1 accompanying the financial statements included in Item 8 of Part II of this Annual Report. The Company’s financial statements are prepared in accordance with U.S. generally accepted accounting principles. The preparation of financial statements requires management to make assumptions and estimates that affect the reported results of operation and financial position. The following accounting policies may involve a higher degree of complexity and judgment on the part of management.
Revenue Recognition
Questar Gas estimates revenues on a calendar basis even though bills are sent to customers on a cycle basis throughout the month. The Company estimates unbilled revenues for the period from the date meters are read to the end of the month, using usage history and weather information. Approximately one-half month of revenues is estimated in any period. The gas costs and other variable costs are recorded on the same basis to ensure proper matching of revenues and expenses.
Questar Gas tariff provides for monthly adjustments to customer charges to approximate the impact of normal temperatures on nongas revenues. Questar Gas estimates the weather-normalization adjustment for the unbilled revenue each month. The weather-normalization adjustment is evaluated each month and reconciled on an annual basis in the summer to agree with the amount billed to customers.
Rate Regulation
Regulatory agencies establish rates for the transportation, distribution 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. Questar Gas follows SFAS 71, “Accounting for the Effects of Certain Types of Regulation,” that requires the recording of regulatory assets and liabilities by companies subject to cost-based regulation. The PSCU and PSCW have accepted the recording of regulatory assets and liabilities.
Recent Accounting Developments
Refer to Note 1 accompanying the financial statements in Item 8 of Part II of this Annual Report for a discussion of recent accounting developments.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Questar Gas primary market risk exposure is from changes in the demand for natural gas. The temperature-adjusted usage per residential customer has decreased due to more energy efficient appliances and homes, and behavior changes in response to higher natural gas prices. This decline in usage per customer has been somewhat offset by the addition of new customers.
Credit Risk
Questar Gas faces risks of bad debt expense from the large number of retail customers. As a public utility, Questar Gas is required to serve all customers. The Company mitigates this credit risk by requiring security deposits as permitted in its tariff, discontinuing service for nonpayment and engaging in collection efforts.
Interest-Rate Risk
Questar Gas held $273.0 million of fixed-rate long-term debt with a fair value of $286.6 million and $295.6 million at December 31, 2005 and 2004, respectively. The fair value of fixed-rate debt fluctuates as interest rates change. In addition, the Company held $50.0 million of variable-rate long-term at December 31, 2005. The Company also borrows funds on a short-term basis with variable interest rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements:
Report of Independent Registered Public Accounting Firm
Statements of Income, three years ended December 31, 2005
Balance Sheets at December 31, 2005 and 2004
Statements of Common Shareholder’s Equity, three years ended
December 31, 2005
Statements of Cash Flows, three years ended December 31, 2005
Notes Accompanying the Financial Statements
Financial Statement Schedules:
For the three years ended December 31, 2005
Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or Notes thereto.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholder
Questar Gas Company
We have audited the accompanying balance sheets of Questar Gas Company as of December 31, 2005 and 2004, and the related statements of income, common shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial schedule listed in the Index at Item 8. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Questar Gas Company at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 3 to the financial statements, Questar Gas Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003.
/s/ Ernst & Young LLP
Salt Lake City, Utah
February 27, 2006
See notes accompanying the financial statements
QUESTAR GAS COMPANY
NOTES ACCOMPANYING THE FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Nature of Business
Questar Gas is a wholly owned subsidiary of Questar. The Company provides retail natural gas distribution in Utah, southwestern Wyoming and a small portion of southeastern Idaho.
Use of Estimates
The financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP) and with the instructions for annual reports on Form 10-K and Regulations S-X and
S-K. The preparation of financial statements and notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Revenue Recognition
Questar Gas records revenues for gas delivered to residential and commercial customers but not billed as of the end of the accounting period. Unbilled gas deliveries are estimated for the period from the date meters are read to the end of the month. Approximately one-half month of revenue is estimated in any period. Gas costs and other variable costs are recorded on the same basis to ensure proper matching of revenues and expenses. Questar Gas tariff allows for monthly adjustments to customer charges to approximate the effect of abnormal weather on nongas revenues. The weather-normalization adjustment significantly reduces the impact of weather on gas distribution earnings.
Regulation
Questar Gas is regulated by the Public Service Commission of Utah (PSCU) and the Public Service Commission of Wyoming (PSCW). The Idaho Public Utilities Commission has contracted with the PSCU for rate oversight of Questar Gas operations in a small area of southeastern Idaho. These regulatory agencies establish rates for the sale and transportation of natural gas. The regulatory agencies also regulate, among other things, the extension and enlargement or abandonment of jurisdictional natural gas facilities. Regulation is intended to permit the recovery, through rates, of the cost of service, including a return on investment.
The financial statements of Questar Gas are presented in accordance with regulatory requirements. Methods of allocating costs to time periods, in order to match revenues and expenses, may differ from those of other businesses because of cost allocation methods used in establishing rates.
Purchased-Gas Adjustments
Questar Gas accounts for purchased-gas costs in accordance with procedures authorized by the PSCU and the PSCW. Purchased-gas costs that are different from those provided for in present rates are accumulated and recovered or credited through future rate changes. Questar Gas may hedge a portion of its natural gas supply to mitigate price fluctuations for gas distribution customers. The benefits and the costs of hedging are included in the purchased-gas-adjustment account. The regulatory commissions allow Questar Gas to record periodic mark to market adjustments for commodity price hedging contracts in the purchased-gas-adjustment account. Questar Gas was not a party to hedging transactions as of December 31, 2005 or 2004.
Other Regulatory Assets and Liabilities
In addition to purchased-gas adjustments, rate regulated businesses are permitted to defer recognition of certain costs, which is different from the accounting treatment required of nonrate regulated businesses. See Note 5 to the financial statements for a description and comparison of regulatory assets and liabilities as of December 31, 2005 and 2004.
Cash and Cash Equivalents
Cash equivalents consist principally of repurchase agreements with maturities of three months or less. In almost all cases, the repurchase agreements are highly liquid investments in overnight securities made through commercial bank accounts that result in available funds the next business day.
Property, Plant and Equipment
Property, plant and equipment is stated at historical cost. Maintenance and repair costs are expensed as incurred. Abandonment costs on a majority of long-lived distribution assets have not been capitalized due to a lack of a legal obligation to abandon the assets.
Depreciation and amortization are based upon rates that will systematically charge the costs of assets against income over the estimated useful lives of those assets. Major categories of fixed assets are grouped together for depreciation purposes. Salvage value is not considered when determining depreciation rates under the group method. Gains and losses on asset disposals are recorded as adjustments to accumulated depreciation. Distribution assets are depreciated using the straight line method ranging from 3% to 33% per year. Investment in gas wells is depreciated using the unit of production method. Average depreciation and amortization rates used in the 12 months ended December 31, were as follows.
Distribution plant
3.9%
3.7%
3.7%
Gas wells, per Mcf
$0.11
$0.11
$0.13
Impairment of Long-Lived Assets
Properties are evaluated on a specific asset basis or in groups of similar assets, as applicable. Impairment of an evaluated asset is indicated when a triggering event occurs and the sum of the estimated undiscounted future net cash flows is less than its carrying value. If impairment is indicated, fair value is calculated using a discounted cash flow approach. Cash flow estimates require forecasts and assumptions for many years into the future for a variety of factors, including revenues, operating costs and other factors.
Goodwill
Goodwill represents the excess of the cost over the fair value of net assets of acquired businesses. Goodwill is not amortized, but is tested for impairment at a minimum of once a year or when a triggering event occurs. Annual impairment tests are conducted in the fourth quarter. If a triggering event occurs, the undiscounted net cash flows of the asset or entity to which the goodwill relates are evaluated. Impairment is indicated if undiscounted cash flows are less than the carrying value of the assets. The amount of the impairment is measured using a discounted cash flow model considering future revenues, operating costs, a risk adjusted discount rate and other factors.
Capitalized Interest and Allowance for Funds Used During Construction
The Company capitalizes the cost of capital during the construction period of plant and equipment using a method required by regulatory authorities. Capitalized financing costs, called allowance for funds used during construction (AFUDC), consist of debt and equity portions. The debt portion of AFUDC is recorded as a reduction of interest costs and the equity portion is recorded in other income. Interest expense was reduced by $79,000 in 2005, $134,000 in 2004 and $70,000 in 2003. No amounts of equity AFUDC were recorded in the three years ended December 31, 2005.
Gas Price Hedges
The Company follows the accounting provisions of SFAS 133, as amended, “Accounting for Derivative Instruments and Hedging Activities.” All gas price hedges are recorded at fair value. Changes in fair value, which result in gains or losses, are reported in the purchased-gas adjustment account. The Company did not have hedges outstanding at December 31, 2005 and 2004. The Company has a number of contracts that are derivative instruments that are specifically excluded from the provisions of SFAS 133 because they are normal sales and purchase transactions.
Credit Risk
The Company’s primary market area is located in Utah, southwestern Wyoming and southeastern Idaho. Exposure to credit risk may be impacted by the concentration of customers in this area due to changes in economic or other conditions. Customers include individuals and numerous industries that may be affected differently by changing conditions. Management believes that its credit review procedures, loss reserves, customer deposits and collection procedures have adequately provided for usual and customary credit related losses. Loss reserves are periodically reviewed for adequacy and may be established on a specific case basis. The Company estimates bad debt expense as 1.0% of general service revenues with periodic adjustments. Bad debt expense amounted to $8.6 million, $6.2 million and $3.7 million for the years ended December 31, 2005, 2004 and 2003, respectively. Uncollected accounts are generally written off five months after gas is delivered and interest is no longer accrued. The allowance for bad debt expenses was $4.1 million and $2.9 million at December 31, 2005, and 2004, respectively.
Income Taxes
Questar and its subsidiaries file a consolidated federal income tax return. Questar Gas accounts for income tax expense on a separate return basis and records tax benefits as they are generated. Deferred income taxes have been provided for the temporary timing differences arising between the book and tax carrying amounts of assets and liabilities. These differences create taxable or tax deductible amounts for future periods. Questar Gas uses the deferral method to account for investment tax credits as required by regulatory commissions.
Recent Accounting Developments
In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations - an Interpretation of FASB Statement No. 143” (SFAS 143). FIN 47 clarifies the term conditional asset retirement obligation as used in SFAS 143 and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by FIN 47 are those for which an entity has a legal obligation to perform an asset retirement activity; however, the timing and/or method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The adoption of FIN 47 in 2005 did not have a significant impact on Questar Gas results of operation or financial position.
In June 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections,” a replacement of existing accounting pronouncements. SFAS 154 modifies accounting and reporting requirements when a company voluntarily chooses to change an accounting principle or correct an accounting error. SFAS 154 requires retroactive restatement of prior period financial statements unless it is impractical. Previous accounting guidelines allowed recognition by cumulative effect in the period of the accounting change. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
In July 2005, the FASB issued an exposure draft of a Proposed Interpretation “Accounting for Uncertain Tax Positions,” an Interpretation of FASB Statement 109. The exposure draft seeks to reduce perceived diversity in practice associated with recognition and measurement in the accounting for income taxes. The exposure draft would apply to all tax positions accounted for in accordance with SFAS 109, “Accounting for Income Taxes.” The exposure draft requires that a tax position meet a “probable recognition threshold” for the benefit of the uncertain tax position to be recognized in the financial statements. This threshold is to be met assuming that the tax authorities will examine the uncertain tax position. The exposure draft contains guidance with respect to the measurement of the benefit that is recognized for an uncertain tax position, when that benefit should be derecognized, and other matters. The proposed effective date has been postponed. The Company has not evaluated the potential effect of this proposed change in accounting principle.
Questar has granted and may continue to grant stock based compensation to certain Questar Gas employees. In December 2004, the FASB issued Statement 123 (revised 2004), (SFAS 123R), “Share Based Payment,” which replaces SFAS 123 and supersedes APB Opinion 25. SFAS 123R eliminates the alternative to use APB Opinion 25’s intrinsic value method of accounting that was provided in SFAS 123 as originally issued. Pro forma disclosure will no longer be allowed. The effective date for implementation of SFAS 123R is January 1, 2006. Alternative phase-in methods are allowed under SFAS 123R. Questar intends to use the modified prospective phase-in method that requires recognition of compensation costs for all share based payments granted, modified or settled after the date of implementation as well as for any awards that were granted prior to the implementation date for which the required service has not yet been performed. The Company believes that the modified prospective phase-in method will not have a material effect on the Company’s operating results or financial position.
Reclassifications
Certain reclassifications were made to prior year financial statements to conform with the 2006 presentation of current portion of deferred income taxes and regulatory assets and liabilities.
Note 2 - Rate Regulation
Gas-Processing Dispute
On August 1, 2003, the Utah Supreme Court issued an order reversing an August 2000 decision made by the PSCU concerning certain natural gas-processing costs incurred by Questar Gas to manage the heat content of its gas supply. As a result of the court’s order, Questar Gas recorded a $29 million liability for a potential refund to gas distribution customers. This liability included revenue received for processing costs and interest from June 1999 through September 2004. On August 30, 2004, the PSCU ruled that Questar Gas failed in 1999 to prove that its decision to contract for gas processing with an affiliate was prudent. Questar Gas reduced its rates on September 1, 2004, to eliminate the collection of gas-processing costs and on October 1, 2004, began refunding previously collected costs, plus interest, over a 12-month period.
In response to a Questar Gas petition, the PSCU clarified that its order did not preclude recovery of ongoing and certain past processing costs. Questar Gas requested ongoing rate coverage for gas processing costs in its pass-through filings. On January 31, 2005, Questar Gas filed a rate request with the PSCU to recover $5.7 million per year of gas processing costs through its gas-balance account. The $5.7 million is Utah’s share of the estimated $6 million annual cost of operating the gas processing plant. The Wyoming share has been recovered in rates.
In October 2005, Questar Gas, the Utah Division of Public Utilities and the Committee of Consumer Services submitted a stipulation to the PSCU to resolve issues related to cost recovery of carbon dioxide processing activities. The PSCU held a hearing on October 20, 2005, and issued an order on January 6, 2006 approving the stipulation beginning on February 1, 2005. The stipulation provides for the recovery of 90% of the non fuel cost of service for processing and 100% of the fuel costs up to 360 Mdth per year. Half of the third-party processing revenues are shared with customers after the first $0.4 million. In the fourth quarter of 2005 Questar Gas reduced expenses for recovery of gas costs by $4.9 million for the period from February 1, 2005 to December 31, 2005. A request to the PSCU for rehearing of this issue was denied. The two individuals who filed this request have indicated they may appeal the issue to the Utah Supreme Court.
State Rate Regulation
Questar Gas files periodic applications with the PSCU and PSCW requesting permission to reflect annualized gas cost increases or decreases in its rates. Gas costs are passed on to customers on a dollar for dollar basis with no markup.
Note 3 - Asset Retirement Obligations (ARO)
On January 1, 2003, Questar Gas adopted SFAS 143 “Accounting for Asset Retirement Obligations.” SFAS 143 addresses the financial accounting and reporting of the fair value of legal obligations associated with the retirement of tangible long-lived assets. The provisions of SFAS 143 do not apply to a majority of the Company’s long-lived distribution system assets due to a lack of a legal obligation to retire the assets. Changes in asset retirement obligations for the 12 months ended December 31, were as follows:
The accounting treatment of reclamation activities associated with ARO for properties administered under the Wexpro Agreement is spelled out in a guideline letter between Wexpro and the Utah Division of Public Utilities and the staff of the PSCW. Pursuant to the stipulation, Wexpro collects and deposits in trust certain funds related to estimated ARO costs. The funds are used to satisfy retirement obligations as the properties are abandoned. At December 31, 2005, $3.7 million was held in this trust invested in a short-term bond index fund.
Note 4 - Questar Regulated Services Merger
Questar Gas prior parent company, Questar Regulated Services Company (Regulated Services), merged effective March 31, 2005 with Questar Gas. Questar Gas was the surviving company. Regulated Services was a holding company that provided management, engineering and accounting services for its wholly owned subsidiaries, Questar Pipeline and Questar Gas. Regulated Services was a wholly owned subsidiary of Questar. Questar Pipeline and Questar Gas became wholly owned subsidiaries of Questar as a result of the merger.
Note 5 - Regulatory Assets and Liabilities
Questar Gas has other regulatory assets and liabilities in addition to purchased-gas adjustments described in Note 1 of the financial statements included in Item 8 in Part II of this Annual Report. The Company recovers these costs but does not generally receive a return on these assets. Questar Gas has a regulatory asset representing a retroactive charge for the abandonment costs associated with gas wells operated on its behalf by Wexpro. The regulatory asset will be reduced over the next 15 years following an amortization schedule or as cash is paid to plug and abandon wells.
Gains and losses on the reacquisition of debt by rate regulated companies are deferred and amortized as interest expense over the would be remaining life of the retired debt. The reacquired debt costs had a weighted average life of approximately 13 years as of December 31, 2005. The cost of the early retirement windows offered to employees of rate regulated subsidiaries was deferred and amortized over a five-year period, which concluded in 2005. The Company is allowed to recover certain deferred taxes from customers. Production taxes on cost-of-service gas production are recorded when the gas is produced and recovered from customers when taxes are paid, generally within 12 months.
The PSCU has allowed Questar Gas to defer incremental operating costs of meeting the requirements of the Pipeline Safety Improvement Act as a regulatory asset. This asset will be amortized in the next rate case or 2007, whichever is sooner.
Regulatory liabilities are included with Other Long-Term Liabilities in the Balance Sheets. A list of regulatory assets and liabilities follows:
Note 6 - Debt
Questar makes loans to Questar Gas under a short-term borrowing arrangement. Short-term notes payable to Questar totaled $77.4 million at December 31, 2005 with an interest rate of 4.42% and $95.2 million at December 31, 2004 with an interest rate of 2.42%.
Questar Gas long-term debt consists of $273 million of medium-term notes with interest rates ranging from 5.02% to 7.58% due 2007 to 2018 and a $50 million bank term loan at 4.92% due 2010. Long-term debt maturities are $10.0 million in 2007, $43.0 million in 2008, $50.0 million in 2010 and $220 million after 2010. All notes are unsecured obligations and rank equally with all other unsecured liabilities. At December 31, 2005, Questar Gas could pay dividends of $342 million without violating the terms of its debt covenants.
On December 15, 2005, Questar Gas borrowed $50 million from a bank under a five-year term loan agreement. The loan’s interest rate varies periodically with changes in short-term interest rates available in the credit markets. On June 21, 2004, Questar Gas called $17 million in medium-term notes that carried an interest rate of 8.12%. A call premium of $0.7 million is being amortized over the remaining life of the original notes in accordance with regulatory treatment.
Cash paid for interest was $19.1 million in 2005, $19.5 million in 2004 and $20.8 million in 2003.
Note 7 - Financial Instruments and Risk Management
The carrying value and estimated fair values of the Company’s financial instruments were as follows:
Financial liabilities
Notes payable to Questar
$ 77,400
$ 77,400
$ 95,200
$ 95,200
Long-term debt
323,000
336,564
273,000
295,607
The Company used the following methods and assumptions in estimating fair values.
Cash and cash equivalents and short-term debt - the carrying amount approximates fair value.
Long-term debt -the fair value of fixed-rate debt is based on the discounted present value of cash flows using the Company’s current borrowing rates. The carrying amount of variable-rate debt approximates fair value.
Note 8 - Income Taxes
The components of income taxes for Questar Gas were as follows:
The difference between the statutory federal income tax rate and the Company’s effective income tax rate is explained as follows:
Significant components of the Company’s deferred income taxes were as follows:
Questar Gas paid cash for income taxes of $13.7 million in 2005 and $1.2 million in 2003 and received a $2.9 million refund in 2004.
Note 9 - Commitments and Contingencies
Questar Gas is involved in a variety of pending legal disputes involving commercial litigation arising in the ordinary course of business, including, but not limited to, royalty claims, contract claims and environmental claims. While the ultimate outcome and impact on Questar Gas cannot be predicted with certainty, management believes that the outcome of these cases will not have a material adverse effect on financial position, operating results or liquidity.
Commitments
Historically, 40 to 50% of Questar Gas’s gas supply portfolio has been provided from company owned gas reserves at the cost of service. The remainder of the gas supply has been purchased from more than 15 suppliers under approximately 38 gas supply contracts using index-based or fixed pricing. Questar Gas has commitments to purchase gas of $264.7 million in 2006, $77.4 million in 2007, $38.7 million in 2008, and $27.0 million in 2009. Generally, at the conclusion of the heating season and after a bid process, new agreements for the next heating season are put in place. Questar Gas bought natural gas under purchase agreements amounting to $447 million, $336 million and $180 million in 2005, 2004 and 2003, respectively. In addition, Questar Gas makes use of various storage arrangements to meet peak gas demand during certain times of the heating season.
Questar Gas has third-party transportation commitments requiring yearly payments of $4.3 million through 2018.
Questar Gas has contracted for transportation and storage services with Questar Pipeline. Annual payments and the years covered are as follows:
(in millions)
$71.3
70.9
69.4
68.7
68.7
After 2010
457.4
Note 10 - Employee Benefits
Pension Plan
Questar Gas employees are covered by Questar’s defined benefit pension plan. Benefits are generally based on the employee’s age at retirement, years of service and highest earnings in a consecutive 72 pay period interval during the ten years preceding retirement. Questar is subject to and complies with minimum required and maximum allowed annual contribution levels mandated by the Employee Retirement Income Security Act and by the Internal Revenue Code. Subject to the above limitations, Questar intends to fund the qualified retirement plan approximately equal to the yearly expense. Plan assets consist principally of equity securities and corporate and U.S. government debt obligations. The Company relies on a third-party consultant to calculate the pension plan projected benefit obligation. Pension expense was $11.2 million in 2005, $5.9 million in 2004 and $6.0 million in 2003. Regulated Services transferred pension and postretirement medical benefit obligations to Questar gas as a result of the reverse merger.
Questar Gas portion of plan assets and benefit obligations can not be determined because the plan assets are not segregated or restricted to meet the Company’s pension obligations. If the Company were to withdraw from the pension plan, the pension obligation for the Company’s employees would be retained by the pension plan. At December 31, 2005 and 2004 Questar’s accumulated benefit obligation exceeded the fair value of plan assets.
Postretirement Benefits Other Than Pensions
Eligible Questar Gas employees participate in Questar’s postretirement benefits other than pensions plan. 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, based on an employee’s years of service, and limited to 170% of the 1992 contribution. The Company intends to fund as necessary to comply with regulatory orders for recovery of these expenses. Plan assets consist of equity securities and corporate and United States government debt obligations. The Company amortizes its transition obligation over a 20-year period, which began in 1992. A third-party consultant calculates the projected benefit obligation. Postretirement benefits other than pensions cost $2.8 million in 2005, $1.1 million in 2004 and $1.6 million in 2003.
The Company’s portion of plan assets and benefit obligations related to postretirement medical and life insurance benefits can not be determined because the plan assets are not segregated or restricted to meet the Company’s obligations. At December 31, 2005 and 2004 Questar’s accumulated benefit obligation exceeded the fair value of plan assets.
Postemployment Benefits
Eligible Questar Gas employees participate in Questar’s long-term disability plan. The Company recognizes the net present value of the liability for postemployment benefits, such as long-term disability benefits and health care and life insurance costs, when employees become eligible for such benefits. Postemployment benefits are paid to former employees after employment has been terminated but before retirement benefits are paid. The Company accrues both current and future costs. Questar Gas postemployment liability at December 31 was $0.9 million and $0.2 million in 2005 and 2004, respectively.
Employee Investment Plan
Questar Gas participates in Questar’s Employee Investment Plan, which allows eligible employees to purchase shares of Questar Corporation common stock or other investments through payroll deduction. The Company matches 80% of employees’ pretax purchases up to a maximum of 6% of their qualifying earnings. In addition, each year the Company makes a nonmatching contribution of $200 to each eligible employee. The Company’s expense equals its matching contribution and amounted to $3.1, $1.6 and $1.6 million for the years ended December 31, 2005, 2004 and 2003, respectively.
Note 11 - Related Party Transactions
In 2005, Questar Gas provided administrative, technical, accounting, legal, data processing, communication services and regulatory support to Questar Pipeline at a cost of $20.5 million. Prior to January 1, 2005, Regulated Services provided administrative, technical, legal and accounting support to Questar Gas. The cost of this support was $35.9 million in 2004 and $33.6 million in 2003. Questar Gas also provided services amounting to $5.8 million to other affiliated companies in 2005. The majority of these costs are allocated and included in operating and maintenance expenses. The allocation methods are based on the nature of the charges. Management believes that the allocation methods are reasonable.
Questar Gas has reserved transportation capacity on Questar Pipeline for 951,000 dth per day including 50,000 dth per day of winter peaking service. Questar Gas periodically releases excess capacity and receives a credit from Questar Pipeline for the released capacity revenues and a portion of Questar Pipeline’s interruptible transportation revenues. Questar Gas paid for transportation, storage and processing services provided by Questar Pipeline and a subsidiary amounting to $76.7 million in 2005, $80.3 million in 2004 and $75.6 million in 2003, which included demand charges. The costs of these services were included in cost of gas sold.
Wexpro, an affiliated company, manages and develops certain properties owned by Questar Gas under the terms of the Wexpro Agreement. The Company receives a portion of Wexpro’s income from oil operations after recovery of Wexpro’s operating expenses and a return on investment. This amount, which is included in revenues and reduces amounts billed to gas distribution customers, was $6.1 million in 2005, $4.7 million in 2004 and $2.2 million in 2003. The amounts that Questar Gas paid Wexpro for the operation of gas properties owned by Questar Gas were $132.0 million in 2005, $115.4 million in 2004 and $101.6 million in 2003. Questar Gas reports these amounts in cost of gas sold.
Also included in cost of gas sold are amounts paid to Questar Gas Management, an affiliate, for gathering of Company owned gas and purchased gas. These costs amounted to $13.1 million in 2005, $11.6 million in 2004 and $10.7 million in 2003. The Company purchased gas from other affiliates amounting to $13.9 million in 2005, $4.4 million in 2004 and $5.2 million in 2003.
Questar Gas has a lease with an affiliate for space in an office building located in Salt Lake City, Utah. Rent expense was $1.4 million in 2005, 2004 and 2003. The lease payment will be $2.2 million in 2006, $2.4 million in 2007, $2.5 million in 2008 and $2.6 million in 2009 and 2010.
An affiliated company, Questar InfoComm Inc., provided data processing and communication services (IT) to Questar Gas. The Company paid Questar InfoComm $0.5 million in 2005, $5.5 million in 2004 and $12.1 million in 2003 for these services. The Company also paid Questar InfoComm for software development of $1.7 million and $3.1 million in 2004 and 2003, respectively. Questar Gas capitalizes these costs.
Questar charged Questar Gas for certain administrative functions amounting to $8.8 million in 2005, $6.9 million in 2004 including $0.8 million for IT charges and $5.1 million in 2003. These costs are included in operating and maintenance expenses and are allocated based on each affiliated company’s proportional share of revenues less product costs; property, plant and equipment; and labor costs. Management believes that the allocation method is reasonable.
Questar Gas borrowed cash from Questar and incurred interest expense of $1.7 million in 2005, $0.7 million in 2004 and $0.1 million in 2003.
Note 12 - Supplemental Gas and Oil Information (Unaudited)
The following information is provided with respect to Questar Gas’s estimated natural gas reserves, which are managed, developed and delivered by Wexpro at cost of service pursuant to the Wexpro Agreement, and Wexpro’s proved oil reserves. Gas delivered by Wexpro is used to supply 40 to 50% of the Company’s customer needs at cost-of-service prices. Net income from Wexpro’s oil properties remaining after recovery of expenses and Wexpro’s contractual return on investment under the Wexpro Agreement is divided between Wexpro and Questar Gas. Questar Gas’s portion of the net income from oil properties reduces gas supply costs. Questar Gas has not incurred any cost for gas and oil producing activities for the three years ended December 31, 2005. Information on the standardized measure of future net cash flows has not been included because the operations of and return on investment for the properties are regulated by the Wexpro Agreement. See Note 11 for amounts paid by Questar Gas to Wexpro pursuant to the Wexpro Agreement.
Since the gas reserves operated by Wexpro are delivered to Questar Gas at cost of service, SEC guidelines with respect to standard economic assumptions are not applicable. The SEC anticipated this potential difficulty and provides that companies may give appropriate recognition to differences arising because of the effect of the ratemaking process. Accordingly, Wexpro uses a minimum producing rate or maximum well life limit to determine the ultimate quantity of reserves attributable to each well.
The following estimates were made by Wexpro’s reservoir engineers:
(a)For the year ended December 31, 2004, the Company reported a net increase of 105.0 Bcfe of proved reserves at Pinedale. The net increase was comprised of 120.1 Bcfe of additions categorized as extensions and discoveries of proved reserves less 1.8 Bcfe of revisions related to removal of certain previously booked proved undeveloped locations as a result of the increased density, further reduced by 11.4 Bcfe of production. The majority of the net increase in proved reserves at Pinedale was due to the Wyoming Oil and Gas Conservation Commission’s approval of 20-acre density development and the associated 20-acre proved undeveloped locations. The Company now realizes it inappropriately categorized these reserve additions in its 2004 Form 10-K as “extensions and discoveries.” After a review of the SFAS 69 standard, the Company believes that additions to proved reserves associated with increased density at Pinedale should have been categorized as “revisions” rather than as “extensions and discoveries.” Accordingly, the table has been revised for 2004 to reflect the appropriate classification. Because of ongoing development of the property, the Company will disclose future revisions to proved reserves associated with Pinedale increased density drilling separately.
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 disagreement with them concerning accounting matters and financial statement disclosures within the last 24 months.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures.
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by the report (the Evaluation Date). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company, including its consolidated subsidiaries, required to be included in the Company’s reports filed or submitted under the Exchange Act. The Company’s Chief Executive Officer and Chief Financial Officer also concluded that the controls and procedures were effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management including its principal executive and financial officers or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls.
Since the Evaluation Date, there have not been any changes in the Company’s internal controls or other factors during the most recent fiscal quarter that could materially affect such controls.
ITEM 9B.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Ernst & Young, LLP, serves as the independent registered public accounting firm for Questar and its subsidiaries including the Company. The following table lists the fees billed by Ernst &Young to Questar for services and the fees billed directly to the Company or allocated to the Company as a member of Questar’s consolidated group.
Audit Fees:
$1,139,194
$1,271,038
Questar Gas Portion
326,466
335,115
Audit related Fees
48,500
46,000
Questar Gas Portion
16,388
13,019
Tax Fees
9,008
8,937
Questar Gas Portion
3,084
2,459
All Other Fees
-
-
Questar Gas Portion
-
-
12004 audit fees include $3,577 of audit expenses and $5,212 of tax fees paid after filing the 2005 Proxy Statement.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Financial statements and financial statement schedules filed as part of this report are listed in the index included in Item 8.
(b) Exhibits. The following is a list of exhibits required to be filed as a part of this report in Item 15(b).
Exhibit No.
Description
3.1.*
Restated Consolidated Articles of Incorporation dated August 15, 1980. (Exhibit No. 4(a) to Registration Statement No. 2-70087, filed December 1, 1980.)
3.2.*
Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1982. (Exhibit No. 3(b) to Form 10-K Annual Report for 1982.)
3.3.*
Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 10, 1983. (Included in Exhibit No. 4.1. to Registration Statement No. 2-84713, filed June 23, 1983.)
3.4.*
Certificate of Amendment to Restated Consolidated Articles of Incorporation dated August 16, 1983. (Exhibit No. 3(a) to Form 8 Report amending the Company’s Form 10-Q Report for Quarter Ended September 30, 1983.)
3.5.*
Certificate of Amendment to Restated Consolidated Articles of Incorporation dated October 26, 1984. (Exhibit No. 3.5. to Form 10-K Annual Report for 1984.)
3.6.*
Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1985. (Exhibit No. 3.1. to Form 10-Q Report for Quarter Ended June 30, 1985.)
3.7.*
Articles of Amendment to Restated Consolidated Articles of Incorporation dated February 10, 1988. (Exhibit No. 3.7. to Form 10-K Annual Report for 1987.)
3.8.*
Articles of Amendment to Restated Consolidated Articles of Incorporation dated December 31, 1997. (Exhibit No. 3.7. to Form 8-K Current Report for December 31, 1997.)
3.9.*
Bylaws (as amended effective February 13, 2001). (Exhibit No. 3.9. to Form 10-K Annual Report for 2000.)
4.*1
Indenture dated as of May 1, 1992, between the Company and Citibank, as trustee, for the Company’s Debt Securities. (Exhibit No. 4. to Form 10-Q Report for Quarter Ended June 30, 1992.)
10.1.*
Stipulations and Agreement, dated October 14, 1981, executed by the Company; Wexpro Company; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Form 10-K Annual Report for 1981.)
10.2*
Gas Gathering Agreement between the Company and Questar Pipeline Company effective September 1, 1993. (This agreement has been transferred from Questar Pipeline to Questar Gas Management Company.) (Exhibit No. 10.11. to Form 10-K Annual Report for 1994.)
10.3.*
Amendment to Gas Gathering Agreement between the Company and Questar Gas Management Company effective September 1, 1997. (Exhibit No. 10.12. to Form 10-K Annual Report for 1997.)
24.
Power of Attorney.
31.1.
Certification signed by Alan K. Allred, Questar Gas Company President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2.
Certification signed by S. E. Parks, Questar Gas Company Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.
Certification signed by Alan K. Allred and S. E. Parks, Questar Gas Company President and Chief Executive Officer and Vice President and Chief Financial Officer, respectively, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*Exhibits so marked have been filed with the Securities and Exchange Commission as part of the referenced filing and are incorporated herein by reference.
1Wells Fargo Bank, N.A. serves as the successor trustee.
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 21st day of March, 2006.
QUESTAR GAS COMPANY
(Registrant)
By /s/A. K. Allred
A. K. Allred
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/A. K. Allred
Chief Executive Officer;
A. K. Allred
Director
(Principal Executive Officer)
/s/S. E. Parks
Vice President and Chief
S. E. Parks
Financial Officer
(Principal Financial Officer)
/s/D. M. Curtis
Vice President and Controller
D. M. Curtis
(Principal Accounting Officer)
*Keith O. Rattie
Chairman of the Board; Director
*A. K. Allred
Director
*Teresa Beck
Director
*W. W. Hawkins
Director
*Robert E. Kadlec
Director
*Gary G. Michael
Director
*Harris H. Simmons
Director
March 21, 2006
*By /s/ A. K. Allred
Date
A. K. Allred, Attorney in Fact
Exhibits List
Exhibit No.
Description
3.1.*
Restated Consolidated Articles of Incorporation dated August 15, 1980. (Exhibit No. 4(a) to Registration Statement No. 2-70087, filed December 1, 1980.)
3.2.*
Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1982. (Exhibit No. 3(b) to Form 10-K Annual Report for 1982.)
3.3.*
Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 10, 1983. (Included in Exhibit No. 4.1. to Registration Statement No. 2-84713, filed June 23, 1983.)
3.4.*
Certificate of Amendment to Restated Consolidated Articles of Incorporation dated August 16, 1983. (Exhibit No. 3(a) to Form 8 Report amending the Company’s Form 10-Q Report for Quarter Ended September 30, 1983.)
3.5.*
Certificate of Amendment to Restated Consolidated Articles of Incorporation dated October 26, 1984. (Exhibit No. 3.5. to Form 10-K Annual Report for 1984.)
3.6.*
Certificate of Amendment to Restated Consolidated Articles of Incorporation dated May 13, 1985. (Exhibit No. 3.1. to Form 10-Q Report for Quarter Ended June 30, 1985.)
3.7.*
Articles of Amendment to Restated Consolidated Articles of Incorporation dated February 10, 1988. (Exhibit No. 3.7. to Form 10-K Annual Report for 1987.)
3.8.*
Articles of Amendment to Restated Consolidated Articles of Incorporation dated December 31, 1997. (Exhibit No. 3.7. to Form 8-K Current Report for December 31, 1997.)
3.9.*
Bylaws (as amended effective February 13, 2001). (Exhibit No. 3.9. to Form 10-K Annual Report for 2000.)
4.*1
Indenture dated as of May 1, 1992, between the Company and Citibank, as trustee, for the Company’s Debt Securities. (Exhibit No. 4. to Form 10-Q Report for Quarter Ended June 30, 1992.)
10.1.*
Stipulations and Agreement, dated October 14, 1981, executed by the Company; Wexpro Company; the Utah Department of Business Regulations, Division of Public Utilities; the Utah Committee of Consumer Services; and the staff of the Public Service Commission of Wyoming. (Exhibit No. 10(a) to Form 10-K Annual Report for 1981.)
10.2*
Gas Gathering Agreement between the Company and Questar Pipeline Company effective September 1, 1993. (This agreement has been transferred from Questar Pipeline to Questar Gas Management Company.) (Exhibit No. 10.11. to Form 10-K Annual Report for 1994.)
10.3.*
Amendment to Gas Gathering Agreement between the Company and Questar Gas Management Company effective September 1, 1997. (Exhibit No. 10.12. to Form 10-K Annual Report for 1997.)
24.
Power of Attorney.
31.1.
Certification signed by Alan K. Allred, Questar Gas Company President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2.
Certification signed by S. E. Parks, Questar Gas Company Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.
Certification signed by Alan K. Allred and S. E. Parks, Questar Gas Company President and Chief Executive Officer and Vice President and Chief Financial Officer, respectively, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*Exhibits so marked have been filed with the Securities and Exchange Commission as part of the referenced filing and are incorporated herein by reference.
1Wells Fargo Bank, N.A. serves as the successor trustee.
Exhibit 24.
POWER OF ATTORNEY
We, the undersigned directors of Questar Gas Company, hereby severally constitute A. K. Allred and S. E. Parks, and each of them acting alone, our true and lawful attorneys, with full power to them and each of them to sign for us, and in our names in the capacities indicated below, the Annual Report on Form 10-K for 2005 and any and all amendments to be filed with the Securities and Exchange Commission by Questar Gas Company, hereby ratifying and confirming our signatures as they may be signed by the attorneys appointed herein to the Annual Report on Form 10-K for 2005 and any and all amendments to such Report.
Witness our hands on the respective dates set forth below:
Signature
Title
Date
/s/K. O. Rattie
Chairman of the Board
2/14/06
K. O. Rattie
/s/A. K. Allred
President & Chief
2/14/06
A. K. Allred
Executive Officer
/s/Teresa Beck
Director
2/14/06
Teresa Beck
/s/W. Whitley Hawkins
Director
2/14/06
W. Whitley Hawkins
/s/Robert E. Kadlec
Director
2/14/06
Robert E. Kadlec
/s/Gary G. Michael
Director
2/14/06
Gary G. Michael
/s/Harris H. Simmons
Director
2/14/06
Harris H. Simmons
Exhibit 31.1.
CERTIFICATION
I, Alan K. Allred, certify that:
1.
I have reviewed this report of Questar Gas Company on Form 10-K for the period ending December 31, 2005;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
March 21, 2006
/s/Alan K. Allred
Alan K. Allred
President and Chief
Executive Officer
Exhibit 31.2.
CERTIFICATION
I, S. E. Parks, certify that:
1.
I have reviewed this report of Questar Gas Company on Form 10-K for the period ending December 31, 2005;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
March 21, 2006
/s/S. E. Parks
S. E. Parks
Vice President and Chief
Financial Officer
Exhibit 32.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Questar Gas Company (the Company) on Form 10-K for the period ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the Report), Alan K. Allred, President and Chief Executive Officer of the Company, and S. E. Parks, Vice President and Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
QUESTAR GAS COMPANY
March 21, 2006
/s/Alan K. Allred
Alan K. Allred
President and Chief Executive Officer
March 21, 2006
/s/S. E. Parks
S. E. Parks
Vice President and Chief
Financial Officer
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