UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2009
QUESTAR GAS COMPANY
(Exact name of registrant as specified in its charter)
STATE OF UTAH | 333-69210 | 87-0155877 |
(State or other jurisdiction of incorporation or organization) | (Commission File No.) | (I.R.S. Employer Identification No.) |
180 East 100 South, P.O. Box 45360, Salt Lake City, Utah 84145-0360
Phone: (801) 324-5555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [X] (Do not check if a smaller reporting company) | Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. (June 30, 2009): $0.
At February 28, 2010, there were 9,189,626 shares of the registrant’s $2.50 par value common stock,outstanding. All shares are owned by Questar Corporation.
Registrant meets the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.
TABLE OF CONTENTS
Page No.
Where You Can Find More Information
5
5
Glossary of Commonly Used Terms
6
PART I
Nature of Business
7
Environmental Matters
9
Employees
9
9
Item 1B.
11
11
11
11
PART II
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
11
SELECTED FINANCIAL DATA (omitted)
11
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
11
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
15
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
16
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
32
32
33
PART III
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE (omitted)
33
EXECUTIVE COMPENSATION (omitted)
33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS (omitted)
33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
33
PRINCIPAL ACCOUNTING FEES AND SERVICES
33
PART IV
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
33
35
Where You Can Find More Information
Questar Gas Company (Questar Gas or the Company), is a wholly owned subsidiary of Questar Corporation (Questar). Both Questar and Questar Gas file annual, quarterly, and current reports with the Securities and Exchange Commission (SEC). The public may read and copy these reports and any other materials filed with the SEC at 100 F Street, N.E., Washington, D.C. 20549-0213. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. The SEC also maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including Questar Gas.
Investors can also access financial and other information via Questar’s Web site at www.questar.com. Questar and Questar Gas make available, free of charge, through the Web site copies of Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to such reports. Access to these reports is provided as soon as reasonably practical after such reports are electronically filed with the SEC. Information contained on or connected to Questar’s Web site which is not directly incorporated by reference into the Company’s Annual Report on Form 10-K should not be considered part of this report or any other filing made with the SEC.
Questar’s Web site also contains Statements of Responsibility for Board Committees, Corporate Governance Guidelines and the Business Ethics and Compliance Policy.
Finally, you may request a copy of filings, other than an exhibit to a filing unless that exhibit is specifically incorporated by reference into that filing, at no cost by writing or calling Questar Gas, 180 East 100 South Street, P.O. Box 45360, Salt Lake City, Utah 84145-0360 (telephone number (801) 324-5555).
Forward-Looking Statements
This Annual Report may contain or incorporate by reference information that includes or is based upon “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, expenses, the outcome of contingencies such as legal pr oceedings, trends in operations and financial results.
Any or all forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining actual future results. These statements are based on current expectations and the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements. Among factors that could cause actual results to differ materially are:
·
the risk factors discussed in Part I, Item 1A of this Annual Report;
·
general economic conditions, including the performance of financial markets and interest rates;
·
changes in industry trends;
·
changes in laws or regulations; and
·
other factors, most of which are beyond the Company’s control.
Questar Gas undertakes no obligation to publicly correct or update the forward-looking statements in this Annual Report, in other documents, or on the web site to reflect future events or circumstances. All such statements are expressly qualified by this cautionary statement.
Questar Gas Company 2009 Form 10-K
5
Glossary of Commonly Used Terms
B Billion.
Btu One British thermal unit – a measure of the amount of energy required to raise the temperature of a one-pound mass of water one degree Fahrenheit at sea level.
cf Cubic foot is a common unit of gas measurement. One standard cubic foot equals the volume of gas in one cubic foot measured at standard conditions – a temperature of 60 degrees Fahrenheit and a pressure of 30 inches of mercury (approximately 14.7 pounds per square inch).
dth Decatherms or ten therms. One dth equals one million Btu or approximately one Mcf.
FERC Federal Energy Regulatory Commission.
gas All references to “gas” in this report refer to natural gas.
heating degree days A measure of the number of degrees the average daily outside temperature is below 65 degrees Fahrenheit.
M Thousand.
MM Million.
PSCU Public Service Commission of Utah.
PSCW Public Service Commission of Wyoming.
Questar Gas Company 2009 Form 10-K
6
FORM 10-K
ANNUAL REPORT, 2009
PART I
ITEM 1. BUSINESS.
Nature of 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, 2009, Questar Gas was serving 898,558 sales and transportation customers. Questar Gas is the only non-municipal gas-distribution utility in Utah, where 97% of its customers are located. The Public Service Commission of Utah, the Public Service Commission of Wyoming 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.
General: Questar Gas's 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 area. During 2009, Questar Gas added 9,956 customers, a 1% increase. The rate of customer growth is the lowest in a number of years because of declines in housing construction.
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's sales to residential and commercial customers are seasonal, with a substantial portion of such sales made during the heating season. The typical residential customer in Utah (defined as a customer using 80 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.
In October 2006, the PSCU approved a pilot program for a conservation enabling tariff (CET) effective January 1, 2006, to promote energy conservation. Under the Company's prior rate structure, non-gas revenues declined when average temperature-adjusted usage per customer declined while non-gas revenues increased when average temperature-adjusted usage per customer increased. Under the CET, Questar Gas non-gas revenues are decoupled from the temperature-adjusted usage per customer. The tariff specifies a margin per customer for each month with differences to be deferred and recovered from customers or refunded to customers through periodic rate adjustments. These adjustments are limited to five percent of distribution non-gas revenues. Under the CET, Questar Gas recorded a $4.0 million revenue decrease in 2009 compared with a $1.0 million increase in 2008. In late 2007, the PSCU ordered a continuation of the CET program for an additional two years.
In January 2007, the PSCU approved a demand-side management program (DSM) effective January 1, 2007. Under the DSM, Questar Gas encourages the conservation of natural gas through advertising, rebates for efficient homes and appliances, and energy audits. The costs related to the DSM are deferred and recovered from customers through periodic rate adjustments. Questar Gas received revenues for recovery of DSM costs amounting to $26.9 million in 2009 compared with $6.6 million in 2008. As of December 31, 2009, Questar Gas had a regulatory asset of $40.6 million for DSM costs to be recovered from customers.
Questar Gas reduces gas supply risk with cost-of-service natural gas reserves. 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 pass through in its balancing account the economic results associated with hedging activities.
Questar Gas has designed its distribution system and annual gas-supply plan to handle peak design-day demand, which is defined as the estimated volume of gas that firm customers could use when the weather is extremely cold. For the 2009-2010 heating season, Questar Gas had an estimated peak design-day demand of 1,256 MMdth.
Competition, Customers and Growth: Questar Gas currently does not face direct competition from other distributors of natural gas for residential and commercial customers in its service territory. Natural gas has historically enjoyed a favorable price comparison with other energy sources used by residential and commercial customers with the notable exceptions of electricity from coal-fired power plants and occasionally fuel oil when oil prices are low. Questar Gas provides transportation service to industrial customers who buy gas directly from other suppliers. Questar Gas earns lower margins on this transportation service than firm-sales service and faces the risk that it could lose customers to other pipelines.
Questar Gas Company 2009 Form 10-K
7
Regulation: As a public utility, Questar Gas is subject to the jurisdiction of the PSCU and PSCW. Natural gas sales and transportation services are provided under rate schedules approved by the two regulatory commissions. Questar Gas is authorized to earn a return on equity of 10.0% in Utah and 10.5% 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 basis, typically twice a year in the spring and the fall. Questar Gas has also received permission from the PSCU and PSCW to recover as part of its gas costs the specific costs associated with hedging activities.
Questar Gas filed a general rate case in Utah in December 2007. The PSCU allowed Questar Gas to increase its non-gas distribution revenues by an annualized $12.0 million beginning August 15, 2008 and authorized a 10.0% return on equity. Questar Gas filed a general rate case in Wyoming in August 2008. The PSCW authorized a 10.5% return on equity. Questar Gas filed a general rate case in Utah in December 2009, requesting an allowed return on equity of 10.6%, an increase in rates of $17.2 million, a mechanism to adjust rates for investment in feeder line replacement, and a continuation of the CET.
Questar Gas is subject to the requirements of the Pipeline Safety Improvement Act of 2002. 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 recover these costs and to record a regulatory asset for costs incurred to comply with this Act.
Questar Gas has significant business relationships with affiliated companies: These affiliate relationships have allowed Questar Gas to lower its costs and improve efficiency. Transactions between Questar Gas and its affiliates are subject to greater scrutiny by regulators. The Questar corporate-organization structure and major subsidiaries are summarized below:
During 2009, Questar Pipeline transported 112.9 MMdth for Questar Gas compared to 120.9 MMdth in 2008. Questar Gas has reserved firm-transportation capacity of 901 Mdth per day under long-term contracts. Questar Pipeline's primary transportation agreement with Questar Gas will expire on June 30, 2017.
Wexpro manages, develops and produces cost-of-service reserves for gas utility affiliate Questar Gas under the terms of the Wexpro Agreement, a long-standing comprehensive agreement with the states of Utah and Wyoming. Pursuant to the Wexpro Agreement, Wexpro recovers its costs and receives an unlevered, after-tax return of approximately 19-20% on its investment base. Wexpro's investment base is its investment in commercial wells and related facilities adjusted for working capital and reduced for deferred income taxes and depreciation. The term of the Wexpro Agreement coincides with the productive life of the gas and oil properties covered therein. Wexpro's investment base totaled $431.9 million at December 31, 2009. See Note 10 to the financial statements included in Item 8 of Part II of this Annual Report for more information on the Wexpro Agreement.
Questar Gas Company 2009 Form 10-K
8
Wexpro delivers natural gas production to Questar Gas at a price equal to Wexpro's cost-of-service. Cost-of-service gas satisfied 51% of Questar Gas supply requirements during 2009. Wexpro sells crude-oil production from oil-producing properties at market prices. Wexpro recovers operating expenses and a return on investment from crude-oil sales. Any residual operating income after recovery of operating expenses and return on investment is shared with Questar Gas receiving 54% and Wexpro retaining 46%.
Wexpro's cost-of-service operations are contractually limited to a finite set of properties set forth in the Wexpro Agreement. Advances in technology (increased density drilling and multi-stage hydraulic fracture stimulation) have identified significant unexploited potential on many of the subject properties. Wexpro has identified over $1 billion of additional drilling opportunities that could support high single-digit to low double-digit growth in revenues and net income over the next five to ten years while delivering cost-of-service natural gas supplies to Questar Gas at prices competitive with alternative sources.
Questar Gas has contracts with Questar Gas Management to gather and process cost-of-service volumes produced from properties operated by Wexpro.
Environmental Matters
There are no material environmental matters.
Employees
At December 31, 2009, Questar Gas had 1,191 employees compared with 1,173 a year earlier.
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 operations could be materially adversely affected.
Risks Inherent in the Company’s Business
Questar Gas faces the same risks as other local-distribution companies. These risks include revenue variations based on seasonal changes in demand, access to sufficient gas supplies, declining residential usage per customer, adequate distribution facilities and adverse regulatory decisions. The risk of weather has been mitigated by the weather-normalization adjustment. The risk of declining usage has been mitigated by the CET.
Distribution operations involve numerous risks that might result in accidents and other operating risks and costs. There are inherent operating risks and hazards in Questar Gas’s distribution operations 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. 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.
As is customary in the distribution industry, Questar Gas maintains insurance against some, but not all, of these potential risks and losses. Questar Gas cannot assure that insurance will be adequate to cover these losses or liabilities. Losses and liabilities arising from uninsured or underinsured events could have a material adverse effect on Questar Gas’s financial condition and operations.
Questar Gas is dependent on bank credit facilities and continued access to capital markets to successfully execute its operating strategies. Questar Gas also relies on Questar's access to short-term commercial paper markets. The Company is dependent on these capital sources to provide financing for certain projects. 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. In lieu of commercial paper issuance, Questar at times has utilized back-up lines of credit with banks to meet short-term funding needs. Banks may be unable or unwilling to extend back-up lines of credit in the future. 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 availabili ty of money from banks and other sources. While management believes it is important to maintain investment grade credit ratings to conduct the Company's businesses, the Company may not be able to keep investment grade ratings.
Questar Gas Company 2009 Form 10-K
9
The severe economic recession increases credit risk.Questar Gas has significant credit exposure in outstanding accounts receivable from customers in all segments of its business. Questar Gas has tightened its credit procedures such as requiring deposits or prepayments to help manage this risk. Questar Gas also aggressively pursues collection of past-due accounts receivable.
Questar Gas’s revenue and cash flow is derived from assets that are concentrated in the Rocky Mountain region.Any circumstance or event that negatively impacts the economy in this area could materially reduce earnings and cash flow.
Risks Related to Regulation
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 and decisions may adversely affect Questar Gas profitability.
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 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 federal and state regulations governing activities on federal and state lands, notably the National Environmental Policy Act, the Endangered Species Act, the Clean Air Act, and the National Historic Preservation Act and similar state laws. The United States Fish and Wildlife Service may designate critical habitat areas for certain listed threatened or endangered species. A critical habitat designation could result in further material restrictions to federal land use and private land use and could delay or prohibit land access or development. The listing of certain species, such as the sage grouse, as threatened and endangered, could have a material impact on the Company's operations in areas where such species are found. The Clean Water Act and similar state laws regulate discharges of storm water, wastewater, oil, and other pollutants to surface water bodies, such as lakes, rivers, wetlands, and streams. Failure to obtain permits for su ch discharges could result in civil and criminal penalties, orders to cease such discharges, and other costs and damages. These laws also require the preparation and implementation of Spill Prevention, Control, and Countermeasure Plans in connection with on-site storage of significant quantities of oil. Questar Gas incurs significant costs to comply with federal pipeline-safety regulations.
Questar Gas may be exposed to certain regulatory and financial risks related to climate change. Federal and state courts and administrative agencies are considering the scope and scale of climate-change regulation under various laws pertaining to the environment, energy use and development, and greenhouse gas emissions. Questar Gas’s ability to access new natural gas reserves may be restricted by climate-change regulation. There are bills pending in Congress that would regulate greenhouse gas emissions through a cap-and-trade system under which emitters would be required to buy allowances for offsets of emissions of greenhouse gases. The Environmental Protection Agency (EPA) has adopted final regulations for the measurement and reporting of greenhouse gases emitted from certain large facilities (25,000 tons/year of CO2equivalent) beginning with operations in 2010. The first report is to be filed with the EPA by March 31, 2011. In addition, several o f the states in which Questar Gas operates are considering various greenhouse gas registration and reduction programs. Carbon dioxide regulation could increase the price of natural gas, restrict access to or the use of natural gas, and/or reduce natural gas demand. Federal, state and local governments may also pass laws mandating the use of alternative energy sources, such as wind power and solar energy, which may reduce demand for natural gas. While future climate-change regulation is likely, it is too early to predict how this regulation will affect Questar Gas’s business, operations or financial results. It is uncertain whether Questar Gas’ operations and properties, located in the Rocky Mountain region of the United States, are exposed to possible physical risks, such as severe weather patterns, due to climate change as a result of man-made greenhouse gases. However, management does not believe such physical risks are reasonably likely to have a material effect on the Company's financial condit ion or results of operations.
FERC oversees natural gas marketing. During the fourth quarter of 2008, FERC issued a number of orders related to market transparency that extend FERC oversight to many Questar subsidiaries. Order No. 704 requires all natural gas companies to report gas purchases and sales and their relationship to price reporting indexes. Order No. 712 defines changes in capacity release and asset management. Order No. 717 establishes new Standards of Conduct Rules and Order No. 720 requires intrastate pipelines to report available transportation capacity. In addition to the new orders, FERC released a policy statement on compliance in which it states that companies must have a "rigorous" FERC compliance program that extends to all subsidiaries, not just interstate pipelines. Since the enactment of the Energy Policy Act of 2005, granting FERC increased penalty authority for non compliance, FERC has targeted various issues in the natural gas industry for compliance audits and inv estigations.
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10
Other Risks
General economic and other conditions impact Questar Gas’s results.Questar Gas’s results may also be negatively affected by: changes in global economic conditions; changes in regulation; availability and economic viability of gas and oil properties for sale or exploration; 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 and other pipelines and storage facilities; 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. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Questar Gas distributes gas to customers along the Wasatch Front, the major populated area of Utah, 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, Richfield, 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 27,034 miles of street mains, service lines and interconnecting pipelines. Questar Gas has a major operations center in Salt Lake City, and has operations centers, field offices and service-center facilities through other parts of its service area.
ITEM 3. LEGAL PROCEEDINGS.
Questar Gas is involved in various commercial and regulatory claims and litigation and other legal proceedings that arise in the ordinary course of its business. Management does not believe any of them will have a material adverse effect on the Company's financial position, results of operations or cash flows. A liability is recorded for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the anticipated most likely outcome. Disclosures are provided for contingencies reasonably likely to occur which would have a material adverse effect on the Company's financial position, results of operations or cash flows. Some of the claims involve highly complex issues relating to liability, damages and other matters subject to substantial uncertainties and, therefore, the probability of liability or an estimate of loss cannot be reasonably determined.
Regulatory Proceedings
See Note 6 to the financial statements included in Item 8 of Part II of this Annual Report for information concerning various regulatory proceedings.
ITEM 4. (REMOVED AND REPLACED).
PART II
ITEM 5. MARKET FOR REGISTRANT’S EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the Company’s outstanding shares of common stock, $2.50 par value, are owned by 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 accompanying the financial statements included in Item 8 of Part II of this Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
The Company, as a wholly owned subsidiary of a reporting company under the Securities Exchange Act, is entitled to omit information requested in this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Questar Gas reported net income of $41.6 million in 2009 compared with $40.2 million in 2008 and $37.4 million in 2007. Operating income increased $2.7 million in 2009 compared with 2008 and increased $8.1 million or 11% in 2008 compared with
Questar Gas Company 2009 Form 10-K
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2007 due primarily to higher revenues from new-customer growth and the outcome of a rate case that authorized higher recovery in rates of certain costs. Following is a summary of Questar Gas financial and operating results:
| Year Ended December 31, | Change | |||
| 2009 | 2008 | 2007 | 2009 vs. 2008 | 2008 vs. 2007 |
| (in millions) | ||||
Operating Income |
|
|
|
|
|
REVENUES |
|
|
|
|
|
Residential and commercial sales | $874.0 | $926.7 | $876.6 | ($52.7) | $50.1 |
Industrial sales | 8.3 | 12.0 | 9.9 | (3.7) | 2.1 |
Transportation for industrial customers | 11.2 | 9.9 | 9.9 | 1.3 |
|
Service | 5.4 | 5.6 | 5.9 | (0.2) | (0.3) |
Other | 21.0 | 46.1 | 30.2 | (25.1) | 15.9 |
Total Revenues | 919.9 | 1,000.3 | 932.5 | (80.4) | 67.8 |
Cost of natural gas sold | 626.6 | 736.9 | 687.2 | (110.3) | 49.7 |
Margin | 293.3 | 263.4 | 245.3 | 29.9 | 18.1 |
Other Operating Expenses |
|
|
|
|
|
Operating and maintenance | 106.4 | 87.1 | 73.4 | 19.3 | 13.7 |
General and administrative | 42.9 | 38.7 | 45.5 | 4.2 | (6.8) |
Depreciation and amortization | 43.8 | 41.5 | 38.8 | 2.3 | 2.7 |
Other taxes | 13.3 | 11.9 | 11.5 | 1.4 | 0.4 |
Total Other Operating Expenses | 206.4 | 179.2 | 169.2 | 27.2 | 10.0 |
Operating Income | $ 86.9 | $ 84.2 | $ 76.1 | $ 2.7 | $ 8.1 |
|
|
|
|
|
|
Operating Statistics |
|
|
|
|
|
Natural gas volumes (MMdth) |
|
|
|
|
|
Residential and commercial sales | 109.4 | 112.3 | 106.1 | (2.9) | 6.2 |
Industrial sales | 1.3 | 1.7 | 1.6 | (0.4) | 0.1 |
Transportation for industrial customers | 58.0 | 62.2 | 53.8 | (4.2) | 8.4 |
Total industrial | 59.3 | 63.9 | 55.4 | (4.6) | 8.5 |
Total deliveries | 168.7 | 176.2 | 161.5 | (7.5) | 14.7 |
Natural gas revenue (per dth) |
|
|
|
|
|
Residential and commercial | $7.99 | $8.25 | $8.26 | ($0.26) | ($0.01) |
Industrial sales | 6.50 | 6.99 | 6.18 | (0.49) | 0.81 |
Transportation for industrial customers | 0.19 | 0.16 | 0.18 | 0.03 | (0.02) |
System natural gas cost (per dth) | $5.01 | $6.14 | $ 5.93 | ($1.13) | $0.21 |
Colder (warmer) than normal temperatures | 5% | 8% | 2% | (3%) | 6% |
Temperature-adjusted usage per customer (dth) | 109.0 | 109.9 | 110.8 | (0.9) | (0.9) |
Customers at December 31, (in thousands) | 898.6 | 888.6 | 873.6 | 10.0 | 15.0 |
Margin Analysis
Questar Gas's margin (revenues less gas costs) increased $29.9 million in 2009 compared to 2008 and increased $18.1 million in 2008 compared to 2007. Following is a summary of major changes in Questar Gas's margin for 2009 compared to 2008 and 2008 compared to 2007:
| Change | |
| 2009 vs. 2008 | 2008 vs. 2007 |
| (in millions) | |
New customers | $2.6 | $3.9 |
Change in rates | 6.2 | 4.1 |
Questar Gas Company 2009 Form 10-K
12
Conservation-enabling tariff | (4.0) | 1.0 |
Change in usage per customer | (1.5) | (1.3) |
Demand-side management cost recovery | 20.3 | 6.0 |
Recovery of gas-cost portion of bad-debt costs | (2.4) | 2.9 |
Other | 8.7 | 1.5 |
Increase | $29.9 | $18.1 |
At December 31, 2009, Questar Gas served 898,558 customers, up from 888,602 at December 31, 2008. New-customer growth increased the margin by $2.6 million in 2009 and $3.9 million in 2008.
Temperature-adjusted usage per customer decreased 1% in 2009 compared with 2008 and decreased 1% in 2008 compared with 2007. The impact on the Company margin from changes in usage per customer has been mitigated by a conservation-enabling tariff (CET) that was approved by the PSCU beginning 2006. The CET resulted in a margin decrease of $4.0 million in 2009 and a margin increase of $1.0 million in 2008.
Weather, as measured in degree days, was 5% colder than normal in 2009 and 8% colder than normal in 2008. A weather-normalization adjustment on customer bills generally offsets financial impacts of moderate temperature variations.
In December 2007, Questar Gas filed a general rate case in Utah. In the second quarter of 2008, Questar Gas received an order from the PSCU increasing rates by $12.0 million. The PSCU reduced Questar Gas's allowed return on equity from 11.2% to 10%. The new rates went into effect in mid-August 2008 and increased the margin by $6.2 million in 2009 and $4.1 million in 2008.
In August 2008, Questar Gas filed a general rate case in Wyoming. In the second quarter of 2009, Questar Gas received an order from the PSCW increasing rates by $0.4 million effective July 2009. The PSCW allowed a return on equity of 10.5%.
Questar Gas filed a general rate case in Utah in December 2009, requesting an allowed return on equity of 10.6%, an increase in rates of $17.2 million, a mechanism to adjust rates for investment in feeder line replacement, and a continuation of the CET.
Expenses
Cost of natural gas sold decreased 15% in 2009 compared with 2008 due to a decrease in the cost of purchased gas. Cost of natural gas sold increased 7% in 2008 compared with 2007 due to a 6% increase in sales volumes and an increase in the cost of natural gas. 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, 2009, Questar Gas had a $22.1 million over-collected balance in the purchased-gas adjustment account representing costs recovered from customers in excess of costs incurred.
Operating and maintenance expenses increased $19.3 million in 2009 compared to 2008 due to a $20.2 million increase in DSM costs recovered from customers. Bad debt costs decreased $3.0 million. Operating and maintenance expenses increased $13.7 million or 19% in 2008 compared to 2007 due primarily to $3.9 million higher bad-debt costs, $5.9 million higher demand-side management costs and $1.4 million higher labor costs. General and administrative costs increased $4.2 million in 2009 compared to 2008 due to higher labor costs. General and administrative expenses decreased $6.8 million or 15% in 2008 compared to 2007 due to $3.5 million lower labor costs and $1.4 million lower legal costs. The sum of operating, maintenance, general and administrative expenses per customer was $166 in 2009 compared to $142 in 2008 and $136 in 2007. DSM costs per customer amounted to $30 in 2009 compared to $7 in 2008 and $1 in 2007.
Depreciation expense increased 6% in 2009 compared to 2008 and increased 7% in 2008 compared to 2007 as a result of plant additions from customer growth and system expansion.
Interest and other income
Interest and other income, which consists primarily of returns earned on working-gas inventory and purchased-gas-adjustment account, amounted to $7.6 million in 2009, compared to $5.2 million in 2008 and $7.4 million in 2007.
Interest expense
Interest expense rose 13% in 2009 compared to 2008 and 6% in 2008 compared to 2007. In March 2008, Questar Gas sold $50.0 million of 10-year notes with a 6.3% interest rate and $100.0 million of 30-year notes with a 7.2% interest rate.
Income taxes
The effective combined federal and state income tax rate was 37.0% in 2009, and 37.4% in 2008 and 2007.
Questar Gas Company 2009 Form 10-K
13
Investing Activities
Following is a summary of Questar Gas’s capital expenditures for 2009 and 2008 and a forecast for 2010:
| Year Ended December 31, | ||
| 2010 Forecast | 2009 | 2008 |
| (in millions) | ||
Cash capital expenditures |
| $82.6 | $126.3 |
Change in capital expenditure accruals |
| 5.0 | (4.1) |
Total capital expenditures | $128.9 | $87.6 | $122.2 |
During 2009, Questar Gas added 1,215 miles of main, feeder and service lines to provide service to additional customers and replaced a segment of high-pressure feeder lines.
Credit Ratings
Questar issues commercial paper rated A-2 by Standard & Poor's Corporation and P-2 by Moody's Investors Services, to meet short-term financing requirements and may loan proceeds to Questar Gas. Questar maintains committed credit lines with banks to provide liquidity support. The table below sets forth credit ratings for Questar and Questar Gas. The outlook associated with each rating is deemed stable by each rating agency:
| Moody’s | Standard & Poor’s |
Questar Gas | A3 | BBB+ |
Questar commercial paper | P-2 | A-2 |
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, 2009:
| Payments Due by Year | ||||||
| Total | 2010 | 2011 | 2012 | 2013 | 2014 | After 2014 |
| (in millions) | ||||||
Fixed-rate long-term debt | $ 370.0 |
| $ 2.0 | $ 91.5 | $ 42.0 |
| $234.5 |
Interest on fixed-rate long-term debt | 290.6 | $ 23.3 | 23.3 | 21.4 | 15.3 | $ 15.1 | 192.2 |
Gas-purchase contracts | 446.1 | 81.1 | 30.9 | 26.6 | 26.4 | 26.4 | 254.7 |
Transportation and storage contracts | 649.4 | 87.7 | 87.4 | 84.5 | 82.5 | 79.1 | 228.2 |
Operating leases | 3.9 | 1.6 | 1.6 | 0.7 |
|
|
|
Total | $1,760.0 | $193.7 | $145.2 | $224.7 | $166.2 | $120.6 | $909.6 |
Critical Accounting Policies, Estimates and Assumptions
Questar Gas’s significant accounting policies are described in Note 1 to 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 operations 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 bills to approximate the impact of normal temperatures on non-gas 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. In 2006, the PSCU approved a three-year pilot program for a conservation enabling tariff effective January 1, 2006, to promote energy conservation. Under the CET, Questar Gas non-gas revenues are decoupled from the volume of gas used by customers. The tariff specifies a margin per customer for each month with differences to be deferred and recovered from
Questar Gas Company 2009 Form 10-K
14
customers or refunded to customers through periodic rate adjustments. These adjustments are limited to five percent of non-gas revenues.
Rate Regulation
Regulatory agencies establish rates for the 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 ASC 980 "Regulated Operations," 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Questar Gas’s primary market risk exposures arise from changes in demand for natural gas and competition from other energy sources. The demand for natural gas will vary based on economic conditions, conservation efforts and prices. 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. The economic impact of this decline in usage per customer has been somewhat offset by the addition of new customers and the CET.
Credit Risk
Questar Gas requires deposits from customers that pose credit risks. No single customer accounted for a significant portion of revenue in 2009.
Interest-Rate Risk
The fair value of fixed-rate debt is subject to change as interest rates fluctuate. The Company's ability to borrow and the rates quoted by lenders can be adversely affected by the illiquid credit markets as described in Item 1A. Risk Factors of Part I of this Annual Report on Form 10-K. The Company had $370.0 million of fixed-rate long-term debt with a fair value of $404.1 million at December 31, 2009. A year earlier the Company had $370.0 million of fixed-rate long-term debt with a fair value of $356.7 million. If interest rates had declined 10%, fair value would increase to $419.7 million in 2009 and $374.7 million in 2008. The fair value calculations do not represent the cost to retire the debt securities.
Climate-Change Risk
Federal and state courts and administrative agencies are considering the scope and scale of climate-change regulation under various laws pertaining to the environment, energy use and development, and greenhouse gas emissions. Questar's ability to access new natural gas reserves may be restricted by climate-change regulation. There are bills pending in Congress that would regulate greenhouse gas emissions through a cap-and-trade system under which emitters would be required to buy allowances for offsets of emissions of greenhouse gases. The EPA has adopted final regulations for the measurement and reporting of greenhouse gases emitted from certain large facilities (25,000 tons/year of CO2equivalent) beginning with operations in 2010. The first report is to be filed with the EPA by March 31, 2011. In addition, several of the states in which Questar Gas operates are considering various greenhouse gas registration and reduction programs. Carbon dioxide regulation could increase the price of natural gas, restrict access to or the use of natural gas, and/or reduce natural gas demand. Federal, state and local governments may also pass laws mandating the use of alternative energy sources, such as wind power and solar energy, which may reduce demand for natural gas. While future climate-change regulation is likely, it is too early to predict how this regulation will affect Questar Gas's business, operations or financial results. It is uncertain whether Questar Gas's operations and properties, located in the Rocky Mountain region of the United States, are exposed to possible physical risks, such as severe weather patterns, due to climate change as a result of man-made greenhouse gases. However, management does not believe that such physical risks are reasonably likely to have a material effect on the Company's financial condition or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page No.
Financial Statements:
Report of Independent Registered Public Accounting Firm
17
Statements of Income, three years ended December 31, 2009
18
Balance Sheets at December 31, 2009 and 2008
19
Statements of Common Shareholder’s Equity, three years ended December 31, 2009
21
Statements of Cash Flows, three years ended December 31, 2009
22
Notes Accompanying the Financial Statements
23
Questar Gas Company 2009 Form 10-K
15
Financial Statement Schedule:
For the three years ended December 31, 2009
Valuation and Qualifying Accounts
32
All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or Notes thereto.
Questar Gas Company 2009 Form 10-K
16
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholder of
Questar Gas Company
We have audited the accompanying balance sheets of Questar Gas Company as of December 31, 2009 and 2008, and the related statements of income, shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement 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 audits 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement present ation. 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, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, 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.
/s/ Ernst & Young LLP
Ernst & Young LLP
Salt Lake City, Utah
March 11, 2010
Questar Gas Company 2009 Form 10-K
17
See notes accompanying the financial statements
Questar Gas Company 2009 Form 10-K
18
Questar Gas Company 2009 Form 10-K
19
QUESTAR GAS COMPANY | ||
BALANCE SHEETS | ||
| December 31, | |
| 2009 | 2008 |
| (in millions) | |
LIABILITIES AND COMMON SHAREHOLDER’S EQUITY |
|
|
Current Liabilities |
|
|
Notes payable to Questar | $ 87.0 | $ 88.3 |
Accounts payable and accrued expenses | 125.9 | 111.7 |
Accounts payable to affiliates | 50.5 | 49.5 |
Customer advances | 30.3 | 34.9 |
Federal income taxes payable | 0.8 |
|
Interest payable | 5.8 | 5.8 |
Purchased-gas adjustment | 22.1 | 45.8 |
Total Current Liabilities | 322.4 | 336.0 |
|
|
|
Long-term debt | 370.0 | 370.0 |
Deferred income taxes | 189.0 | 154.0 |
Customer contributions-in-aid-of-construction | 52.2 | 53.9 |
Other long-term liabilities | 6.5 | 6.5 |
Commitments and contingencies - Note 5 |
|
|
|
|
|
COMMON SHAREHOLDER’S EQUITY |
|
|
Common stock - par value $2.50 per share; authorized 50.0 million shares; 9.2 million issued and outstanding | 23.0 | 23.0 |
Additional paid-in capital | 148.9 | 147.9 |
Retained earnings | 227.1 | 213.7 |
Total Common Shareholder’s Equity | 399.0 | 384.6 |
TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY | $1,339.1 | $1,305.0 |
See notes accompanying the financial statements
Questar Gas Company 2009 Form 10-K
20
QUESTAR GAS COMPANY |
|
|
|
| |||
|
| Additional |
|
| Common | Paid-in | Retained |
| Stock | Capital | Earnings |
| (in millions) | ||
Balances at January 1, 2007 | $23.0 | $116.0 | $190.6 |
2007 net income |
|
| 37.4 |
Dividends paid |
|
| (27.0) |
Share-based compensation |
| 0.7 |
|
Balances at December 31, 2007 | 23.0 | 116.7 | 201.0 |
Equity contribution |
| 30.0 |
|
2008 net income |
|
| 40.2 |
Dividends paid |
|
| (27.5) |
Share-based compensation |
| 1.2 |
|
Balances at December 31, 2008 | 23.0 | 147.9 | 213.7 |
2009 net income |
|
| 41.6 |
Dividends paid |
|
| (28.2) |
Share-based compensation |
| 1.0 |
|
Balances at December 31, 2009 | $23.0 | $148.9 | $227.1 |
See notes accompanying the financial statements
Questar Gas Company 2009 Form 10-K
21
QUESTAR GAS COMPANY |
|
|
| |
STATEMENTS OF CASH FLOWS |
|
|
| |
| Year Ended December 31, | |||
| 2009 | 2008 | 2007 | |
| (in millions) | |||
OPERATING ACTIVITIES |
|
|
| |
Net income | $ 41.6 | $ 40.2 | $ 37.4 | |
Adjustments to reconcile net income to net |
|
|
| |
cash provided by operating activities: |
|
|
| |
Depreciation and amortization | 47.8 | 45.2 | 42.7 | |
Deferred income taxes | 34.1 | 30.3 | 4.0 | |
Share-based compensation | 1.0 | 1.2 | 0.7 | |
Changes in operating assets and liabilities |
|
|
| |
Accounts receivable | 7.7 | (21.6) |
| |
Inventories | 21.2 | (23.6) | 8.0 | |
Prepaid expenses | (1.4) | 0.5 | (0.5) | |
Accounts payable and accrued expenses | 0.8 | 4.3 | 10.3 | |
Federal income taxes | 7.9 | (3.1) | (4.8) | |
Purchased-gas adjustments | (23.7) | (12.3) | 16.2 | |
Regulatory assets, liabilities and other | (17.7) | (8.4) | 0.5 | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | 119.3 | 52.7 | 114.5 | |
|
|
|
| |
INVESTING ACTIVITIES |
|
|
| |
Property, plant and equipment | (82.6) | (126.3) | (135.9) | |
Cash used in disposition of assets | (1.6) | (3.4) | (0.7) | |
Proceeds from disposition of assets | 0.3 | 0.3 | 1.8 | |
Affiliated-company property, plant and equipment transfers | 0.1 | 0.5 | (1.9) | |
NET CASH USED IN INVESTING ACTIVITIES | (83.8) | (128.9) | (136.7) | |
|
|
|
| |
FINANCING ACTIVITIES |
|
|
| |
Equity contribution |
| 30.0 |
| |
Change in notes payable to Questar | (1.3) | 15.4 | 59.7 | |
Long-term debt issued, less issuance costs |
| 148.4 |
| |
Long-term debt repaid |
| (93.0) | (10.0) | |
Dividends paid | (28.2) | (27.5) | (27.0) | |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | (29.5) | 73.3 | 22.7 | |
Change in cash and cash equivalents | 6.0 | (2.9) | 0.5 | |
Beginning cash and cash equivalents | 1.2 | 4.1 | 3.6 | |
Ending cash and cash equivalents | $ 7.2 | $ 1.2 | $ 4.1 | |
|
|
|
| |
Supplemental Disclosure of Cash Paid During the Year for: |
|
|
| |
Interest | $27.9 | $23.4 | $23.7 | |
Income taxes paid (received) | (18.4) | (2.4) | 24.8 | |
See notes accompanying the financial statements
Questar Gas Company 2009 Form 10-K
22
QUESTAR GAS COMPANY
NOTES ACCOMPANYING THE FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies
Nature of Business
Questar Gas Company (Questar Gas or Company) 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.
Accounting Standards References
In July 2009 the Financial Accounting Standards Board (FASB) completed a revision of non-governmental U.S. generally accepted accounting principles (GAAP) into a single authoritative source and issued a codification of accounting rules and references. Authoritative standards included in the codification are designated by their Accounting Standards Codification (ASC) topical reference, and revised standards are designated as Accounting Standards Updates (ASU), with a year and assigned sequence number. The codification effort, while not creating or changing accounting rules, changed how users would cite accounting regulations. Citations in financial statements must identify the sections within the new codification. The codification is effective for interim and annual periods ending after September 15, 2009. The Company is complying with the new codification standards.
Preparation of Financial Statements
The financial statements of Questar Gas were prepared in accordance with GAAP and with the instructions for annual reports on Form 10-K and Regulations S-X and S-K.
Use of Estimates
The preparation of financial statements and notes in conformity with GAAP requires that management formulate 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.
The Company applies the regulatory accounting principles prescribed under ASC 980 "Regulated Operations" to the rate-regulated businesses. Under ASC 980, the Company records regulatory assets and liabilities that would not be recorded under GAAP for non-rate regulated entities. Regulatory assets and liabilities record probable future revenues or expenses associated with certain credits or charges that will be recovered from or refunded to customers through the rate-making process. See Note 6 for a description and comparison of regulatory assets and liabilities as of December 31, 2009 and 2008.
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 bills to approximate the effect of abnormal weather on non-gas revenues. The weather-normalization adjustment significantly reduces the impact of weather on gas-distribution earnings. The PSCU approved a "conservation enabling tariff" (CET), to promote energy conservation. Under the CET, Questar Gas non-gas revenues are decoupled from the volume of gas used by customers. The tariff specifies a margin per customer for each month with differences to be deferred and recovered from customers or refunded to customers through periodic rate adjustments. Rate adjustments occur every six months under the CET program. The adjustments amortize deferred CET amounts over a 12-month period. These adjustments are limited to five percent of non-gas revenues.
Regulation
Questar Gas is regulated by the PSCU and the 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 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.
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.
Questar Gas Company 2009 Form 10-K
23
Notes Receivable from or Payable to Questar
Notes receivable from or payable to Questar represent interest bearing demand notes for cash loaned to or borrowed from Questar until needed in operations. The funds are centrally managed by Questar. Amounts loaned to Questar earn an interest rate that is identical to the interest rate paid by the Company for borrowings from Questar.
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 regulatory commissions allow Questar Gas to record periodic mark-to-market adjustments for commodity-price derivatives in the purchased-gas-adjustment account.
Property, Plant and Equipment
Property, plant and equipment balances are stated at historical cost. Maintenance and repair costs are expensed.
Depreciation and Amortization
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. Major categories of fixed assets in the gas distribution operations are grouped together and depreciated on a straight-line method. Under the group method, salvage value is not considered when determining depreciation rates. Gains and losses on asset disposals are recorded as adjustments in accumulated depreciation. Average depreciation, depletion and amortization rates for the year ended December 31, were 3.0% in 2009 and 3.1% in 2008 and 2007.
Contributions-in-aid-of-construction
Customer contributions-in-aid-of-construction reduce property, plant and equipment unless the amounts are refundable to customers. Contributions for main-line extensions may be refundable to customers if additional customers connect to the main-line segment within five years. Refundable contributions are recorded as liabilities until refunded or the five-year period expires without additional customer connections. Amounts not refunded reduce property, plant and equipment. Capital expenditures in the Consolidated Statements of Cash Flows are reported net of nonrefunded contributions.
Impairment of Long-Lived Assets
Properties are evaluated on a specific-asset basis or in groups of similar assets, as applicable. Impairment is indicated when a triggering event occurs and the sum of the estimated undiscounted future net cash flows of an evaluated asset is less than the asset’s 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 commodity prices and operating costs.
Goodwill
Goodwill represents the excess of the amount paid over the fair value of net assets acquired in a business combination and is not subject to amortization. Goodwill is tested for impairment at a minimum of once a year or when a triggering event occurs. If a triggering event occurs, the undiscounted net cash flows of the intangible 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 interest costs when applicable. The PSCU and PSCW require the capitalization of allowance for funds used during construction(AFUDC) during the construction period of rate-regulated plant and equipment. AFUDC on equity funds amounted to zero in 2009 and 2007 and $0.3 million in 2008 and increased interest and other income in the Statements of Income. AFUDC on borrowed funds reduced interest expense by $0.3 million in 2009, $0.8 million in 2008 and $0.7 million in 2007.
Credit Risk
The Company’s primary market area is located in Utah, southwestern Wyoming and southeastern Idaho. Exposure to credit risk may be affected by the concentration of customers in these regions due to changes in economic or other conditions. Customers include individuals and numerous commercial and industrial enterprises that may react differently to 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.
Bad-debt expense associated with accounts receivable for the year ended December 31, amounted to $3.5 million in 2009, $6.6 million in 2008 and $2.6 million in 2007. The allowance for bad-debt expenses was $5.1 million at December 31, 2009 and $5.4
Questar Gas Company 2009 Form 10-K
24
million at December 31, 2008. Questar Gas estimates bad-debt expense as a percentage of general-service revenues with periodic adjustments. Uncollected accounts are generally written off six months after gas is delivered and interest is no longer accrued.
Asset Retirement Obligations
Questar Gas records asset retirement obligations (ARO) when there are legal obligations associated with the retirement of tangible long-lived assets. The Company has not capitalized future abandonment costs on a majority of its long-lived distribution assets because the Company does not have a legal obligation to restore the area surrounding abandoned assets. In these cases, the regulatory agencies have opted to leave retired facilities in the ground undisturbed rather than requiring the Company excavate and dispose of the assets. If recording an ARO is warranted, the fair value of retirement costs are estimated by Company personnel based on abandonment costs of similar properties available to field operations and depreciated over the life of the related assets. Revisions to ARO estimates result from changes in expected cash flows or material changes in estimated retirement costs. Income or expense resulting from the settlement of ARO liabilities is included in net gain or (loss) from a sset sales on the Consolidated Statements of Income. The ARO liability is adjusted to present value each period through an accretion calculation using a credit-adjusted risk-free interest rate. The ARO balance was $4.1 million at December 31, 2009 and $4.3 million at December 31, 2008, and is included with other long-term liabilities.
Income Taxes
Questar and its subsidiaries file a consolidated federal income tax return. Deferred income taxes are provided for the temporary 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. The Company records interest earned on income tax refunds in interest and other income and records penalties and interest charged on tax deficiencies in interest expense.
ASC 740 "Income Taxes" specifies the accounting for uncertainty in income taxes by prescribing a minimum recognition threshold for a tax position to be reflected in the financial statements. If recognized, the tax benefit is measured as the largest amount of tax benefit that is more-likely-than-not to be realized upon ultimate settlement. Management has considered the amounts and the probabilities of the outcomes that could be realized upon ultimate settlement and believes that it is more-likely-than-not that the Company's recorded income tax benefits will be fully realized. There were no unrecognized tax benefits at the beginning or at the end of the twelve-month periods ended December 31, 2009, 2008 and 2007. Income tax returns for 2006 and subsequent years are subject to examination.
Share-Based Compensation
Questar issues stock options and restricted shares to certain officers, employees and non-employee directors under its Long-Term Stock Incentive Plan (LTSIP), including certain officers and employees of Questar Gas. Since January 1, 2006, the fair value of stock options is expensed during the vesting period. Questar uses the Black-Scholes-Merton mathematical model in estimating the fair value of stock options for accounting purposes. The granting of restricted shares results in recognition of compensation cost measured at the grant-date market price. Questar uses an accelerated method in recognizing share-based compensation costs with graded-vesting periods. See Note 7 for further discussion on share-based compensation.
Reclassifications
Certain reclassifications were made to prior-year financial statements to conform with the 2009 presentation.
All dollar amounts in this annual report on Form 10-K are in millions, except where otherwise noted.
Note 2 – Fair-Value Measures
Beginning in 2008, Questar Gas adopted the effective provisions of ASC 820 "Fair Value Measurements and Disclosures." ASC 820 defines fair value in applying GAAP, establishes a framework for measuring fair value and expands disclosures about fair-value measurements. ASC 820 does not change existing guidance as to whether or not an instrument is carried at fair value. In February 2008, the FASB delayed the effective date of ASC 820 for one year for certain nonfinancial assets and nonfinancial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis. On January 1, 2009, Questar Gas adopted, without material impact on the financial statements, the delayed provisions of ASC 820 related to nonfinancial assets and nonfinancial liabilities that are not required or permitted to be measured at fair value on a recurring basis. Questar Gas did not have any assets or liabilities measured at fair value on a non-recurring basis at Dece mber 31, 2009. The following table discloses carrying value and fair value of Questar Gas’s financial instruments:
Questar Gas Company 2009 Form 10-K
25
| Carrying | Estimated | Carrying | Estimated |
| Value | Fair Value | Value | Fair Value |
| December 31, 2009 | December 31, 2008 | ||
| (in millions) | |||
Financial assets |
|
|
|
|
Cash and cash equivalents | $ 7.2 | $ 7.2 | $ 1.2 | $ 1.2 |
Financial liabilities |
|
|
|
|
Notes payable to Questar | 87.0 | 87.0 | 88.3 | 88.3 |
Long-term debt | 370.0 | 404.1 | 370.0 | 356.7 |
The carrying amounts of cash and cash equivalents and notes payable to Questar approximate fair value. The fair value of fixed-rate long-term debt is based on the discounted present value of future cash flows using the Company's current borrowing rates. The borrowing rates are credit-risk adjusted.
Note 3 – Debt
Questar makes loans to Questar Gas under a short-term borrowing arrangement. Short-term notes payable to Questar totaled $87.0 million at December 31, 2009 with an interest rate of 0.66% and $88.3 million at December 31, 2008 with an interest rate of 3.39%.
At December 31, 2009, Questar Gas had $370.0 million of long-term debt consisting of $220.0 million of medium-term notes with interest rates ranging from 5.02% to 6.91% due 2011 to 2018; $50.0 million of 6.30% notes due 2018; and $100.0 million of 7.20% notes due 2038. Long-term debt maturities in the next five years are $2.0 million in 2011, $91.5 million in 2012 and $42.0 million in 2013. All notes are unsecured obligations and rank equally with all other unsecured liabilities. Covenants for these debt obligations do not restrict dividend payments.
Note 4 – Income Taxes
Details of Questar Gas’s income tax expense and deferred income taxes are provided in the following tables. The components of income tax expense were as follows:
| Year Ended December 31, | ||
| 2009 | 2008 | 2007 |
| (in millions) | ||
Federal |
|
|
|
Current | ($ 8.3) | ($ 5.3) | $ 16.4 |
Deferred | 31.6 | 28.0 | 3.7 |
State |
|
|
|
Current | (1.2) | (0.6) | 2.3 |
Deferred | 2.7 | 2.3 | 0.3 |
Deferred investment tax credits recognized | (0.4) | (0.4) | (0.4) |
Total Income Tax Expense | $24.4 | $24.0 | $ 22.3 |
The difference between the statutory federal income tax rate and the Company’s effective income tax rate is explained as follows:
| Year Ended December 31, | ||
| 2009 | 2008 | 2007 |
Federal income taxes statutory rate | 35.0% | 35.0% | 35.0% |
Increase (decrease) as a result of: |
|
|
|
State income taxes, net of federal income tax benefit | 1.5 | 1.7 | 2.8 |
Amortize investment tax credits related to rate regulated assets | (0.6) | (0.6) | (0.7) |
Other | 1.1 | 1.3 | 0.3 |
Effective income tax rate | 37.0% | 37.4% | 37.4% |
Questar Gas Company 2009 Form 10-K
26
Significant components of the Company’s deferred income taxes were as follows:
| December 31, | |
| 2009 | 2008 |
| (in millions) | |
Deferred income taxes - liability |
|
|
Property, plant and equipment | $190.3 | $155.0 |
Employee benefits and compensation costs | (1.3) | (1.0) |
Total deferred income taxes - liability | $189.0 | $154.0 |
The deferred income taxes – current asset amounted to $3.6 million at December 31, 2009 and $2.7 million at December 31, 2008.
Note 5 – Commitments and Contingencies
Questar Gas is involved in various commercial and regulatory claims and litigation and other legal proceedings that arise in the ordinary course of its business. Management does not believe any of them will have a material adverse effect on the Company's financial position, results of operations or cash flows. A liability is recorded for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the anticipated most likely outcome. Disclosures are provided for contingencies reasonably likely to occur which would have a material adverse effect on the Company's financial position, results of operations or cash flows. Some of the claims involve highly complex issues relating to liability, damages and other matters subject to substantial uncertainties and, therefore, the probability of liability or an estimate of loss cannot be reasonably determined.
Commitments
Historically, 40 to 50% of Questar Gas gas-supply has been provided by cost-of-service reserves developed and produced by Wexpro. In 2009, Questar Gas purchased the remainder of its gas supply from multiple third-parties under index-based or fixed-price contracts. Questar Gas has commitments to purchase gas for $81.1 million in 2010, $30.9 million in 2011, $26.6 million in 2012, $26.4 million in 2013 and 2014 based on current prices. 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 $225.3 million in 2009, $395.5 million in 2008 and $374.8 million in 2007. In addition, Questar Gas has contracted for underground storage. Questar Gas stores gas during off-peak periods (typically during the summer) and withdraws gas from storage to meet peak-gas demand (typically in the winter).
Questar Gas has third-party transportation commitments requiring yearly payments of $5.0 million through 2017 and $1.4 million in 2018.
Questar Gas has contracted for transportation and storage services with Questar Pipeline and third parties. Annual payments and the years covered are as follows:
| (in millions) |
2010 | $ 87.7 |
2011 | 87.4 |
2012 | 84.5 |
2013 | 82.5 |
2014 | 79.1 |
After 2014 | 228.2 |
Note 6 – Rate Regulation
Rate Changes
Questar Gas filed a general rate case in Utah in December 2009, requesting an allowed return on equity of 10.6%, an increase in rates of $17.2 million, a mechanism to adjust rates for investment in feeder line replacement, and a continuation of the CET.
Questar Gas Company 2009 Form 10-K
27
Questar Gas filed a general rate case in Utah in December 2007. The PSCU allowed Questar Gas to increase its non-gas distribution revenues by an annualized $12.0 million beginning August 15, 2008 and authorized a 10.0% return on equity. Questar Gas filed a general rate case in Wyoming in August 2008. The PSCW authorized a 10.5% return on equity.
In January 2007, the PSCU approved a demand-side management program (DSM) effective January 1, 2007. Under the DSM, Questar Gas encourages the conservation of natural gas through advertising, rebates for efficient homes and appliances, and energy audits. The costs related to the DSM are deferred and recovered from customers through periodic rate adjustments. Questar Gas received revenues for recovery of DSM costs amounting to $26.9 million in 2009 compared with $6.6 million in 2008. As of December 31, 2009, Questar Gas had a regulatory asset of $40.6 million for DSM costs to be recovered from customers.
In October 2006, the PSCU approved a three-year pilot program for a conservation enabling tariff (CET) effective January 1, 2006, to promote energy conservation. Under the company's prior rate structure, non-gas revenues declined when average temperature-adjusted usage per customer declined while non-gas revenues increased when average temperature-adjusted usage per customer increased. Under the CET, Questar Gas non-gas revenues are decoupled from the temperature-adjusted usage per customer. The tariff specifies a margin per customer for each month with differences to be deferred and recovered from customers or refunded to customers through periodic rate adjustments. These adjustments are limited to five percent of distribution non-gas revenues. Under the CET, Questar Gas recorded a $4.0 million revenue decrease in 2009 compared with a $1.0 million increase in 2008. In late 2007, the PSCU ordered a continuation of the CET program for an additional two years through 2010.
Other Regulatory Assets and Liabilities
The Company has other regulatory assets and liabilities in addition to purchased-gas adjustments. The rate-regulated entities recover the costs of assets but do not generally receive a return on these assets.
Following is a description of the Company's regulatory assets:
·
Gains and losses on the reacquisition of debt are deferred and amortized as interest expense over the would-be remaining life of the reacquired debt. The reacquired debt costs had a weighted-average life of approximately 13.1 years as of December 31, 2009.
·
The CET asset (liability) represents actual revenues received that are less than (in excess of) the allowed revenues. These amounts are recovered (refunded) through periodic rate adjustments.
·
The DSM program liability represents funds available for the program that exceed amounts expended to date. These amounts are refunded through periodic rate adjustments.
·
The costs of complying with pipeline-integrity regulations are recovered in rates subject to a PSCU order. Questar Gas is allowed to recover $5.1 million per year. Costs incurred in excess of this amount will be recovered in future rate changes.
·
Questar Gas has a regulatory asset that represents future expenses related to abandonment of Wexpro operated gas and oil wells. The regulatory asset will be reduced over an 18 year period following an amortization schedule that commenced January 1, 2003, or as cash is paid to plug and abandon wells.
·
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 Company is allowed to recover certain deferred taxes from customers over the life of the related property, plant and equipment.
| December 31, | |
Current regulatory assets | 2009 | 2008 |
| (in millions) | |
Demand side management | $40.6 | $17.8 |
Deferred production taxes | 2.7 | 2.8 |
Total | $43.3 | $20.6 |
Questar Gas Company 2009 Form 10-K
28
| December 31, | |
Long-term regulatory assets | 2009 | 2008 |
| (in millions) | |
Cost of reacquired debt | $6.9 | $7.5 |
Questar Gas pipeline integrity costs | 5.8 | 7.0 |
Asset retirement obligations - cost-of-service gas wells | 3.3 | 3.6 |
Total | $16.0 | $18.1 |
A current regulatory liability for CET amounted to $5.1 million at December 31, 2009 and $0.3 million at December 31, 2008. Current regulatory liabilities are included with accounts payable and accrued expense in the Balance Sheets. A long-term regulatory liability for income taxes refundable to customers amounted to $1.1 million at December 31, 2009 and $1.3 million at December 31, 2008. Long-term regulatory liabilities are included with other long-term liabilities in the Balance Sheets.
Note 7 – Share-Based Compensation
Questar issues stock options and restricted shares to certain officers and employees of Questar Gas under its LTSIP and recognizes expense over time as the stock options or restricted shares vest. Share-based compensation expense amounted to $1.0 million in 2009 compared with $1.2 million in 2008 and $0.7 million in 2007.
The Company uses the Black-Scholes-Merton mathematical model in estimating the fair value of stock options for accounting purposes. Fair-value calculations rely upon subjective assumptions used in the mathematical model and may not be representative of future results. The Black-Scholes-Merton model was intended for measuring the value of options traded on an exchange. The calculated fair value of options granted and major assumptions used in the model at the date of grant are listed below:
|
|
| 2009 |
|
|
| Input Variables |
Fair value of options at grant date |
|
| $35.38 |
Risk-free interest rate |
|
| 1.78% |
Expected price volatility |
|
| 28.1% |
Expected dividend yield |
|
| 1.39% |
Expected life in years |
|
| 5.0 |
There were 57,000 unvested stock options at December 31, 2009. Stock-option transactions under the terms of the LTSIP for the three years ended December 31, 2009, are summarized below:
| Options Outstanding | Price Range | Weighted-Average Price |
Balance at December 31, 2006 | 929,940 | $7.50 – $14.01 | $12.65 |
Exercised | (203,833) | 7.50 – 14.01 | 12.15 |
Employee transfer | 64 | 10.69 | 10.69 |
Balance at December 31, 2007 | 726,171 | 7.50 – 14.01 | 12.79 |
Exercised | (162,492) | 7.50 – 14.01 | 12.30 |
Employee transfer | (259, 860) | 7.50 – 14.01 | 12.36 |
Balance at December 31, 2008 | 303,819 | 8.50 – 14.01 | 13.42 |
Granted | 57,000 | 35.38 | 35.38 |
Exercised | (27,250) | 8.50 – 14.01 | 13.42 |
Employee transfer | (20,500) | 11.48 – 13.56 | 13.00 |
Balance at December 31, 2009 | 313,069 | $11.48 – $35.38 | $17.44 |
Questar Gas Company 2009 Form 10-K
29
Options Outstanding | Options Exercisable | Unvested Options | |||||
Range of exercise prices | Number outstanding at Dec. 31, 2009 | Weighted-average remaining term in years | Weighted-average exercise price | Number exercisable at Dec. 31, 2009 | Weighted-average exercise price | Number unvested at Dec. 31, 2009 | Weighted- average exercise price |
$11.48 – $13.56 | 203,846 | 3.0 | $13.31 | 203,846 | $13.31 |
|
|
14.01 – 35.38 | 109,223 | 3.7 | 25.16 | 52,223 | 14.01 | 57,000 | $35.38 |
$11.48 – $35.38 | 313,069 | 3.2 | $17.44 | 256,069 | $13.45 | 57,000 | $35.38 |
Restricted shares are valued at the grant-date market price and amortized to expense over the vesting period. Most restricted share grants vest in equal installments over a three or four year period from the grant date. The weighted average vesting period of unvested restricted shares at December 31, 2009, was 14 months. Transactions involving restricted shares under the terms of the LTSIP for the three years ended December 31, 2009, are summarized below:
| Restricted Shares Outstanding | Price Range | Weighted-Average Price |
Balance at December 31, 2006 | 54,758 | $17.45 – $36.75 | $27.19 |
Granted | 19,700 | 41.08 – 54.53 | 41.76 |
Distributed | (13,408) | 17.45 – 25.50 | 21.50 |
Forfeited | (1,500) | 36.75 – 41.08 | 39.63 |
Balance at December 31, 2007 | 59,550 | 17.45 – 54.53 | 32.97 |
Granted | 24,400 | 53.83 | 53.83 |
Distributed | (43,770) | 17.45 – 54.53 | 35.20 |
Employee transfer | (4,532) | 17.45 – 36.75 | 26.11 |
Balance at December 31, 2008 | 35,648 | 25.50 – 54.53 | $45.39 |
Granted | 21,900 | 35.38 | 35.38 |
Distributed | (9,956) | 25.50 – 54.53 | 35.44 |
Employee transfer | (2,898) | 25.50 – 53.83 | 46.47 |
Balance at December 31, 2009 | 44,694 | $35.38 – $54.53 | $42.63 |
Note 8 – Employee Benefits
Pension Plan
Questar Gas’s employees are covered by Questar’s defined-benefit pension plan. Benefits are generally based on the employee’s age at retirement, years of service and highest earnings in a consecutive 72 semimonthly pay period during the 10 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 pension plan approximately equal to the yearly expense. Questar also has a nonqualified pension plan that covers certain management employees in addition to the qualified pension plan. The nonqualified pension plan provides for defined-benefit payments upon retirement of the management employee, or to the spouse upon death of the management employee above the benefit limit defined by the Internal Revenue Service for the qualified plan. The nonquali fied pension plan is unfunded. Claims are paid from the Company’s general funds. Qualified pension plan assets consist principally of equity securities and corporate and U.S. government debt obligations. A third-party consultant calculates the pension plan projected benefit obligation. Pension expense was $13.3 million in 2009, $9.3 million in 2008 and $11.5 million in 2007.
Questar Gas’s portion of plan assets and benefit obligations cannot 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, 2009 and 2008, Questar’s projected 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 generally limits payments to 170% of the 1992
Questar Gas Company 2009 Form 10-K
30
contribution. Plan assets consist principally of equity securities and corporate and U.S. government debt obligations. A third party consultant calculates the projected benefit obligation. The cost of postretirement benefits other than pensions was $3.8 million in 2009, $2.4 million in 2008 and $2.6 million in 2007.
The Company’s portion of plan assets and benefit obligations related to postretirement medical and life insurance benefits cannot be determined because the plan assets are not segregated or restricted to meet the Company’s obligations. At December 31, 2009 and 2008, Questar’s accumulated benefit obligation exceeded the fair value of plan assets.
Employee Investment Plan
Questar Gas participates in Questar’s Employee Investment Plan (EIP). The EIP allows eligible employees to purchase shares of Questar common stock or other investments through payroll deduction at the current fair market value on the transaction date. The Company currently contributes an overall match of 80% of employees’ pre-tax purchases up to a maximum of 6% of their qualifying earnings. In addition, the Company contributes $200 annually to the EIP for each eligible employee. The Company’s expense equaled its matching contribution of $3.3 million, $3.7 million and $3.5 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Note 9 – Related Party Transactions
Questar Gas provided administrative, technical, accounting, legal, data-processing and communication services to Questar Pipeline and charged $20.4 million in 2009, $21.5 million in 2008 and $22.5 million in 2007. Questar Gas also provided services to other affiliated companies amounting to $6.5 million in 2009, $4.9 million in 2008 and $4.1 million in 2007. The majority of these costs are allocated. The allocation methods are based on the specific nature of the charges. Management believes that the allocation methods are reasonable.
Questar Gas has reserved transportation capacity on Questar Pipeline for 901,000 dth per day. 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 $71.8 million in 2009, $71.5 million in 2008 and $74.5 million in 2007, which included demand charges. The costs of these services were included in cost of natural gas sold.
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 $1.0 million in 2009, $6.1 million in 2008 and $4.9 million in 2007. The amounts that Questar Gas paid Wexpro for the operation of cost-of-service gas properties were $225.0 million in 2009, $209.0 million in 2008 and $155.6 million in 2007. Questar Gas reports these amounts in cost of natural gas sold.
Also included in cost of natural gas sold are amounts paid to Questar Gas Management for gathering and processing gas. These costs amounted to $24.2 million in 2009, $22.8 million in 2008 and $15.8 million in 2007.
Questar Gas has a lease with an affiliate for space in an office building located in Salt Lake City, Utah. Rent expense was $2.5 million in 2009, 2008 and 2007. The lease payment will be $2.5 million annually in 2010 through 2011.
Questar charged Questar Gas for certain administrative functions amounting to $8.4 million in 2009, $5.7 million in 2008 and $8.5 million in 2007. 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 $0.2 million in 2009, $2.0 million in 2008 and $0.6 million in 2007. Questar Gas loaned excess funds to Questar and earned interest income of $0.1 million in 2009, zero in 2008 and $1.0 million in 2007.
Note 10 – Supplemental Cost-of-Service Gas Reserves (Unaudited)
The following information is provided with respect to estimated natural gas reserves, which are managed, developed and produced by Wexpro at cost of service pursuant to the Wexpro Agreement. The estimates of proved gas reserves were prepared by Wexpro’s reservoir engineers. Gas reserve estimates are subject to numerous uncertainties inherent in estimating quantities of proved reserves, projecting future rates or 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. Geological and engineering data demonstrate with reasonable certainty that these quantities are recoverable under existing economic and operating conditions. Since the gas reserves operated by Wexpro are delivered to Questar Gas at cost of service, SEC guidelines with respect to standard economic
Questar Gas Company 2009 Form 10-K
31
assumptions are not applicable. The SEC anticipated this potential difficulty and provides that companies may give appropriate recognition to differences 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 gas reserves. See Note 9 for amounts paid by Questar Gas to Wexpro pursuant to the Wexpro Agreement.
|
|
Proved Reserves | Natural Gas |
| (Bcf) |
Balance at December 31, 2009 | 649.4 |
Balance at December 31, 2008 | 646.9 |
Balance at December 31, 2007 | 615.9 |
FINANCIAL STATEMENT SCHEDULE:
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. (T) 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, as of December 31, 2009. Based on such evaluation, such officers have concluded that, as of December 31, 2009, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company 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 si milar functions as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended December 31, 2009, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Assessment of Internal Control Over Financial Reporting
Questar Gas management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(e). Questar Gas management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. The criteria set forth by the Committee of Sponsoring Organizations of the
Questar Gas Company 2009 Form 10-K
32
Treadway Commission inInternal Control – Integrated Framework were used to make this assessment. We believe that the Company’s internal control over financial reporting as of December 31, 2009, is effective based on those criteria.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE(Omitted).
ITEM 11. EXECUTIVE COMPENSATION(Omitted).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS(Omitted).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE(Omitted).
The Company, as a wholly owned subsidiary of a reporting company under the Securities Exchange Act, is entitled to omit all of Items 10 through 13.
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.
| 2009 | 2008 |
Audit Fees: | $1,217,596 | $1,309,254 |
Questar Gas Portion | 242,933 | 269,954 |
Audit Related Fees | 106,221 | 100,000 |
Questar Gas Portion | 55,442 | 36,929 |
Tax Fees | 8,000 | 3,570 |
Questar Gas Portion | 853 | 942 |
All Other Fees | 194,027 | 237,879 |
Questar Gas Portion | - | 53,395 |
PART IV
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.)
Questar Gas Company 2009 Form 10-K
33
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 dated December 31, 1997.)
3.9.*
Bylaws (as amended effective August 12, 2003).
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.)
10.4.*
Purchase Agreement between Company and Underwriters, effective March 24, 2008 (Exhibit No. 1.1 to Current Report on Form 8-K dated March 26, 2008.)
12.
Ratio of Earnings to Fixed Charges
24.
Power of Attorney.
31.1.
Certification signed by Ronald W. Jibson, Questar Gas Company President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2.
Certification signed by Richard J. Doleshek, Questar Gas Company Executive Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.
Certification signed by Ronald W. Jibson and Richard J. Doleshek, Questar Gas Company President and Chief Executive Officer and Executive 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.
Questar Gas Company 2009 Form 10-K
34
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 11th day of March, 2010.
QUESTAR GAS COMPANY
(Registrant)
By/s/Ronald W. Jibson
Ronald W. Jibson
President & 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/Ronald W. Jibson
President & Chief Executive Officer;
Ronald W. Jibson
Director
(Principal Executive Officer)
/s/Richard J. Doleshek
Executive Vice President and
Richard J. Doleshek
Chief Financial Officer
(Principal Financial Officer)
/s/D. M. Curtis
Vice President & Controller
D. M. Curtis
(Principal Accounting Officer)
*Keith O. Rattie
Chairman of the Board; Director
*Ronald W. Jibson
President & Chief Executive Office, Director
*Teresa Beck
Director
*Robert E. McKee III
Director
*Gary G. Michael
Director
*Harris H. Simmons
Director
*Bruce A. Williamson
Director
March 11, 2010
*By /s/Ronald W. Jibson
Date
Ronald W. Jibson, 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.)
Questar Gas Company 2009 Form 10-K
35
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 dated December 31, 1997.)
3.9.*
Bylaws (as amended effective August 12, 2003).
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.)
10.4.*
Purchase Agreement between Company and Underwriters, effective March 24, 2008 (Exhibit No. 1.1 to Current Report on Form 8-K dated March 26, 2008.)
12.
Ratio of Earnings to Fixed Charges
24.
Power of Attorney.
31.1.
Certification signed by Ronald W. Jibson, Questar Gas Company President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2.
Certification signed by Richard J. Doleshek, Questar Gas Company Executive Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.
Certification signed by Ronald W. Jibson and Richard J. Doleshek, Questar Gas Company President and Chief Executive Officer and Executive 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.
Questar Gas Company 2009 Form 10-K
36