SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000. OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission File No. 1-935 QUESTAR GAS COMPANY (Exact name of registrant as specified in its charter) STATE OF UTAH 87-0155877 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 45360, 180 East 100 South, Salt Lake City, Utah 84145-0360 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (801) 324-5555 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of April 30, 2000 Common Stock, $2.50 par value 9,189,626 shares Registrant meets the conditions set forth in General Instruction H(a)(1) and (b) of Form 10-Q and is filing this Form 10-Q with the reduced disclosure format. PART I FINANCIAL INFORMATION Item 1. Financial Statements QUESTAR GAS COMPANY STATEMENTS OF INCOME (Unaudited) 3 Months Ended 12 Months Ended March 31, March 31, 2000 1999 2000 1999 (In Thousands) REVENUES $ 200,520 $ 172,302 $ 478,155 $ 457,336 OPERATING EXPENSES Natural gas purchases 122,430 98,722 280,973 261,628 Operating and maintenance 26,171 24,881 104,598 96,527 Depreciation 9,181 8,666 36,941 34,096 Other taxes 3,989 2,226 9,388 8,039 TOTAL OPERATING EXPENSES 161,771 134,495 431,900 400,290 OPERATING INCOME 38,749 37,807 46,255 57,046 INTEREST AND OTHER INCOME 429 505 2,904 3,339 DEBT EXPENSE (5,177) (5,105) (20,134) (19,771) INCOME BEFORE INCOME TAXES 34,001 33,207 29,025 40,614 INCOME TAXES 13,286 12,949 9,349 13,662 NET INCOME $ 20,715 $ 20,258 $ 19,676 $ 26,952 See note to financial statements CONDENSED BALANCE SHEETS March 31, December 31, 2000 1999 1999 (Unaudited) (In Thousands) ASSETS Current assets Cash and short-term investments $ 1,708 Accounts receivable $ 94,086 $ 76,298 83,098 Inventories 10,689 12,996 21,680 Purchased-gas adjustments 432 Other current assets 2,533 2,231 3,168 Total current assets 107,308 91,525 110,086 Property, plant and equipment 1,023,075 950,684 1,013,599 Less allowances for depreciation 430,474 392,018 421,111 Net property, plant and equipment 592,601 558,666 592,488 Other assets 19,326 22,604 20,978 $ 719,235 $ 672,795 $ 723,552 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balances $ 2,456 $ 2,557 Notes payable to Questar Corporation 39,700 48,800 $ 79,300 Accounts payable and accrued expenses 78,943 67,030 69,122 Purchased-gas adjustments 15,065 12,598 Total current liabilities 136,164 130,985 148,422 Long-term debt 225,000 225,000 225,000 Other liabilities 1,314 1,603 1,394 Deferred income taxes and investment tax credits 78,524 73,525 85,343 Common shareholder's equity Common stock 22,974 22,974 22,974 Additional paid-in capital 81,875 41,875 81,875 Retained earnings 173,384 176,833 158,544 Total common shareholder's equity 278,233 241,682 263,393 $ 719,235 $ 672,795 $ 723,552 See note to financial statements QUESTAR GAS COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) 3 Months Ended March 31, 2000 1999 (In Thousands) OPERATING ACTIVITIES Net income $ 20,715 $ 20,258 Depreciation 10,024 9,362 Deferred income taxes and investment tax credits (6,819) (6,498) 23,920 23,122 Change in operating assets and liabilities 27,528 27,050 NET CASH PROVIDED FROM OPERATING ACTIVITIES 51,448 50,172 INVESTING ACTIVITIES Capital expenditures (10,167) (5,109) Proceeds from disposition of property, plant and equipment 30 2,704 NET CASH USED IN INVESTING ACTIVITIES (10,137) (2,405) FINANCING ACTIVITIES Checks outstanding in excess of cash balances 2,456 2,557 Decrease in notes payable to Questar Corporation (39,600) (47,900) Payment of dividends (5,875) (5,750) NET CASH USED IN FINANCING ACTIVITIES (43,019) (51,093) DECREASE IN CASH AND SHORT-TERM INVESTMENTS $ (1,708) $ (3,326) See note to financial statements QUESTAR GAS COMPANY NOTE TO FINANCIAL STATEMENTS March 31, 2000 (Unaudited) Note 1 - Basis of Presentation The interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. Due to the seasonal nature of the business, the results of operations for the three-month period ended March 31, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1999. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations QUESTAR GAS COMPANY March 31, 2000 (Unaudited) Operating Results Following is a summary of financial and operating information for the Company: 3 Months Ended 12 Months Ended March 31, March 31, 2000 1999 2000 1999 FINANCIAL RESULTS - (dollars in thousands) Revenues From unaffiliated customers $ 199,527 $ 172,093 $ 475,040 $ 456,058 From affiliates 993 209 3,115 1,278 Total revenues 200,520 172,302 478,155 457,336 Natural gas purchases 122,430 98,722 280,973 261,628 Margin $ 78,090 $ 73,580 $ 197,182 $ 195,708 Operating income $ 38,749 $ 37,807 $ 46,255 $ 57,046 Net income 20,715 20,258 19,676 26,952 OPERATING STATISTICS Natural gas volumes (in thousands of decatherms) Residential and commercial sales 33,908 32,425 83,684 81,342 Industrial sales 3,204 2,940 10,087 9,791 Transportation for industrial customers 14,017 13,351 52,309 53,980 Total deliveries 51,129 48,716 146,080 145,113 Natural gas revenue (per decatherm) Residential and commercial $ 5.41 $ 4.87 $ 5.05 $ 4.98 Industrial sales 3.27 3.01 3.03 3.02 Transportation for industrial customers $ 0.13 $ 0.13 $ 0.13 $ 0.13 Heating degree days Actual 2,353 2,296 5,374 5,366 Normal 2,743 2,743 5,801 5,801 Warmer than normal 14% 16% 7% 7% Number of customers at March 31, Residential and commercial 687,985 666,301 Industrial 1,363 1,329 Total 689,348 667,630 Questar Gas' margin increased 6% in the first quarter and 1% in the twelve months ended March 31, 2000 compared with the same periods of 1999 resulting primarily from interim rate relief received January 1, 2000 and gas volumes delivered to new customers. The increase was partially offset by a 2% decline in gas usage per customer. The Public Service Commission of Utah (PSCU) granted Questar Gas' request for $7.1 million of interim rate relief, subject to refund, pending outcome of the Company's request for a general rate increase. The Company is seeking approximately $22 million of rate relief to offset higher costs. The PSCU must rule on the Company's general rate filing by August 14, 2000. The number of customers served by Questar Gas grew by 21,718 or 3.3% from a year ago to 689,348. The number of customer additions for the year ending December 31, 2000 is expected to be between 20,000 to 21,000. Temperature adjusted usage per customer was approximately one decatherm or 2% lower in the first quarter of 2000 compared with the same period in 1999. Temperatures were warmer than normal for all periods presented. Volumes delivered to industrial customers increased by 6% in the 3-month period ended March 31, 2000. Industrial deliveries were 2% lower in the twelve months ended March 31, 2000 because a major steel-producing customer reduced operations. The margin earned from gas delivered to industrial customers is substantially lower than from gas delivered to residential and commercial customers. Questar Gas' natural gas purchase costs increased in the three-and twelve-month periods of 2000 when compared with the 1999 periods due to an increase in the volumes of gas sold and higher commodity costs. The Company files for adjustment of purchased-gas costs with the Utah and Wyoming Public Service Commissions on a semiannual basis. Operating and maintenance expenses were higher in the 2000 periods presented due to higher costs of serving a growing number of customers, including increased costs for the collection of receivables. Depreciation expense increased in the 2000 periods presented as a result of investment in property, plant and equipment. Other taxes increased 79% in the first quarter comparison because of an adjustment of prior year taxes. The effective income tax rate for the first quarter was 39.1% in 2000 and 39% in 1999. The Company realized $467,000 of tight-sands gas-production credits in the 2000 period and $502,000 in the 1999 period. Liquidity and Capital Resources Operating Activities Net cash provided from operating activities in the first quarter of 2000 was $1,276,000 more than was generated in the first quarter of 1999. The increase in cash flow resulted primarily from higher net income and timing differences in the collection of purchased gas costs and payments on accounts to vendors. Investing Activities Capital expenditures were $10.2 million in the first quarter of 2000. Capital expenditures for calendar year 2000 are estimated at $63.3 million. Financing Activities Cash generated from operating activities was used to fund capital expenditures and repay loans to Questar. Loan balances owed to Questar as of March 31, amounted to $39.7 million in 2000 and $48.8 million in 1999. Capital expenditures for the remainder of 2000 are expected to be financed with net cash flow provided from operating activities and borrowings from Questar. Regulatory Matters Questar Gas filed a general rate case December 17, 1999 requesting approximately $22 million of general rate relief and also asked for $7.1 million of interim rate relief. Higher costs of serving customers, inclusion of charges for the removal of carbon dioxide from part of the gas supply and lower gas usage per customer were cited among the reasons for requesting rate relief. The PSCU granted $7.1 million of interim rate relief, subject to refund, effective January 1, 2000. The Division of Public Utilities and the Committee of Consumer Services, state regulatory agencies, filed direct testimony on April 19, 2000 recommending annual revenue increases, including the interim relief, of $10.3 million and $1.8 million, respectively. Questar Gas is preparing rebuttal testimony, which is due May 24, 2000. Hearings have been scheduled to begin June 5, 2000. The PSCU's final order on the rate case must be issued by August 14, 2000. Revenue Recognition Guideline Issued by the Securities and Exchange Commission (SEC) In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." The issue is the timing of recording revenues given that sales transactions may contain some conditions allowing customers to return products or receive refunds. The effect of adopting this accounting guideline is not known at this time because the Company has not completed its evaluation. For the Company, the guidelines of SAB 101are effective in the second quarter of 2000. Forward-Looking Statements This 10-Q contains forward-looking statements about future operations, capital spending, regulatory matters and expectations of Questar Gas. According to management, these statements are made in good faith and are reasonable representations of the Company's expected performance at the time. Actual results may vary from management's stated expectations and projections due to a variety of factors. Important assumptions and other significant factors that could cause actual results to differ materially from those discussed in forward-looking statements include changes in: general economic conditions, gas prices and availability of gas supplies, competition, regulatory issues, weather conditions and other factors beyond the control of the Company. These other factors include the rate of inflation and adverse changes in the business or financial condition of the Company. These factors are not necessarily all of the important factors that could cause actual results to differ significantly from those expressed in any forward-looking statements. Other unknown or unpredictable factors could also have a significant adverse effect on future results. The Company does not undertake an obligation to update forward-looking information contained herein or elsewhere to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information. PART II OTHER INFORMATION Item 1. Legal Proceedings. Questar Gas Company (Questar Gas or the Company) has a pending general rate case before the Public Service Commission of Utah (PSCU). In the application, Questar Gas requested a rate increase of approximately $22 million, an interim rate increase of $7.065 million, and a return on equity of 12 percent (compared to its current return on equity of 11.3-11.5 percent). The PSCU granted Questar Gas's request for interim relief effective January 1, 2000, subject to refund. On April 19, 2000, the Division of Public Utilities and the Committee of Consumer Services two state agencies filed testimony with the PSCU recommending that the Company be limited to increases of $10.3 million and $1.8 million, respectively. (These amounts are inclusive of, not in addition to, the interim rate relief amount.) Public hearings before the PSCU are scheduled to begin June 5, 2000. The PSCU, under Utah law, has 240 days from the filing date or August 14, 2000 in which to issue an order concerning the Company's application. SIGNATURES Pursuant to the requirements 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. QUESTAR GAS COMPANY (Registrant) May 12, 2000 /s/ D. N. Rose D. N. Rose President and Chief Executive Officer May 12, 2000 /s/ S. E. Parks S. E. Parks Vice President, Treasurer, and Chief Financial Officer