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 SEPTEMBER 30, 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 October 31, 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. 1 PART I FINANCIAL INFORMATION Item 1. Financial Statements QUESTAR GAS COMPANY STATEMENTS OF INCOME (Unaudited) 3 Months Ended 9 Months Ended 12 Months Ended September 30, September 30, September 30, 2000 1999 2000 1999 2000 1999 (In Thousands) REVENUES $ 59,552 $ 54,823 $328,246 $297,299 $480,884 $459,327 OPERATING EXPENSES Natural gas purchases 32,619 26,839 190,828 162,302 285,791 260,628 Operating and maintenance 24,170 23,679 73,306 73,691 102,923 97,388 Depreciation 9,182 8,909 27,220 26,194 37,452 35,639 Other taxes 2,464 2,107 8,991 6,486 10,130 7,630 TOTAL OPERATING EXPENSES 68,435 61,534 300,345 268,673 436,296 401,285 OPERATING INCOME (LOSS) (8,883) (6,711) 27,901 28,626 44,588 58,042 INTEREST AND OTHER INCOME 605 553 1,718 2,524 2,174 3,216 DEBT EXPENSE (5,265) (4,509) (15,401) (14,357) (21,106) (19,691) INCOME (LOSS) BEFORE INCOME TAXES (13,543) (10,667) 14,218 16,793 25,656 41,567 INCOME TAXES (5,654) (4,800) 4,722 5,238 8,496 13,842 NET INCOME (LOSS) $ (7,889) $ (5,867) $ 9,496 $ 11,555 $ 17,160 $ 27,725 See note to financial statements 2 QUESTAR GAS COMPANY CONDENSED BALANCE SHEETS September 30, December 31, 2000 1999 1999 (Unaudited) (In Thousands) ASSETS Current assets Cash and cash equivalents $ 1,708 Accounts receivable $ 21,169 $ 15,669 83,098 Inventories, at lower of average cost or market Gas stored underground 23,065 19,264 18,497 Materials and supplies 2,327 4,429 3,183 Purchased-gas adjustments 8,880 11,263 432 Prepaid expenses and other 2,927 2,754 3,168 Total current assets 58,368 53,379 110,086 Property, plant and equipment 1,054,589 981,176 1,013,599 Less allowances for depreciation 445,829 410,897 421,111 Net property, plant and equipment 608,760 570,279 592,488 Other assets 19,189 21,600 20,978 $686,317 $645,258 $723,552 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balances $ 1,661 $ 1,716 Notes payable to Questar Corporation 75,200 25,100 $ 79,300 Accounts payable and accrued expenses 39,718 43,694 69,122 Total current liabilities 116,579 70,510 148,422 Long-term debt 225,000 225,000 225,000 Other liabilities 466 1,529 1,394 Deferred income taxes and investment tax credits 89,008 86,740 85,343 Common shareholder's equity Common stock 22,974 22,974 22,974 Additional paid-in capital 81,875 81,875 81,875 Retained earnings 150,415 156,630 158,544 Total common shareholder's equity 255,264 261,479 263,393 $686,317 $645,258 $723,552 See note to financial statements 3 QUESTAR GAS COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) 9 Months Ended September 30, 2000 1999 (In Thousands) OPERATING ACTIVITIES Net income $ 9,496 $ 11,555 Depreciation 29,817 28,200 Deferred income taxes and investment tax credits 3,665 6,717 42,978 46,472 Change in operating assets and liabilities 21,467 30,192 NET CASH PROVIDED FROM OPERATING ACTIVITIES 64,445 76,664 INVESTING ACTIVITIES Capital expenditures (46,123) (35,602) Proceeds from disposition of property, plant and equipment 34 2,746 NET CASH USED IN INVESTING ACTIVITIES (46,089) (32,856) FINANCING ACTIVITIES Checks outstanding in excess of cash balances 1,661 1,716 Decrease in notes payable to Questar Corporation (4,100) (71,600) Equity investment 40,000 Payment of dividends (17,625) (17,250) NET CASH USED IN FINANCING ACTIVITIES (20,064) (47,134) DECREASE IN CASH AND CASH EQUIVALENTS $ (1,708) $ (3,326) See note to financial statements 4 QUESTAR GAS COMPANY NOTE TO FINANCIAL STATEMENTS September 30, 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- and nine-month periods ended September 30, 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. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations QUESTAR GAS COMPANY September 30, 2000 (Unaudited) Operating Results Following is a summary of financial and operating information for the Company: 3 Months Ended 9 Months Ended 12 Months Ended September 30, September 30, September 30, 2000 1999 2000 1999 2000 1999 FINANCIAL RESULTS - (dollars in thousands) Revenues From unaffiliated customers $ 58,287 $ 53,957 $324,771 $296,002 $476,375 $457,758 From affiliates 1,265 866 3,475 1,297 4,509 1,569 Total revenues 59,552 54,823 328,246 297,299 480,884 459,327 Natural gas purchases 32,619 26,839 190,828 162,302 285,791 260,628 Margin $ 26,933 $ 27,984 $137,418 $134,997 $195,093 $198,699 Operating income (loss) $ (8,883) $ (6,711) $ 27,901 $ 28,626 $ 44,588 $ 58,042 Net income (loss) (7,889) (5,867) 9,496 11,555 17,160 27,725 OPERATING STATISTICS Natural gas volumes (in thousands of decatherms) Residential and commercial sales 7,462 8,252 50,567 54,822 77,946 84,249 Industrial sales 1,993 1,827 7,244 7,049 10,018 9,827 Transportation for industrial customers 12,899 12,258 40,781 37,409 55,015 50,988 Total deliveries 22,354 22,337 98,592 99,280 142,979 145,064 Natural gas revenue (per decatherm) Residential and commercial $ 5.79 $ 5.18 $ 5.56 $ 4.73 $ 5.37 $ 4.83 Industrial sales 4.25 2.85 3.46 2.91 3.35 2.97 Transportation for industrial customers $ 0.12 $ 0.13 $ 0.12 $ 0.13 $ 0.12 $ 0.14 Heating degree days Colder (warmer) than normal 7% 3% (18%) (7%) (15%) (5%) Number of customers at September 30, Residential and commercial 690,205 670,652 Industrial 1,345 1,361 Total 691,550 672,013 The margin decreased 4% in the third quarter of 2000 when compared with the prior-year quarter due to changes in the rate treatment of gathering and processing costs which reduced the margin in the third quarter of 2000. The margin increased 2% for the nine-month period of 2000 compared with 1999 primarily from higher residential and commercial rates and from an increased number of residential customers. 6 The Public Service Commission of Utah (PSCU) issued a final order on August 11, 2000, which granted $6.5 million of additional annualized rate relief over and above the $7 million interim rate relief granted on January 1, 2000, that includes the collection of $5 million annually for gas processing costs. The rate order also allows for an 11% return on equity. The number of customers served by Questar Gas grew by 19,537 or 2.9% from a year ago to 691,550. The number of customer additions for the year ending December 31, 2000 is expected to be between 20,000 to 21,000. Volumes delivered were unchanged in the third quarter and were 1% lower for the nine and twelve-month periods of 2000 when compared with the same periods in 1999. Temperature adjusted usage of gas per customer was 3% lower in the 2000 quarter compared with the prior year quarter and unchanged for the nine-month periods year-to-year. Weather was 7% colder than normal in the third quarter of 2000 and 3% colder than normal in the 1999 quarter. For the nine-month periods, weather was 18% warmer in 2000 compared with 7% warmer in the comparable 1999 period. The effects of warmer weather were mitigated somewhat by a weather normalization adjustment. Questar Gas' natural gas purchase costs increased in each of the 2000 periods presented when compared with the 1999 periods due to higher commodity costs. Commodity rates for the first half were $2.23 per Dth in 2000 compared to $1.72 per Dth in 1999. In the third quarter, commodity rates were $2.23 per Dth in 2000 compared to $1.88 per Dth in 1999. Natural gas purchases in the third quarter of 2000 were partially offset by $1.3 million due to a one-time refund of gas processing costs. The Company files for adjustment of purchased-gas costs with the Utah and Wyoming Public Service Commissions on a semiannual basis. Effective October 1, 2000, the PSCU approved on an interim basis a $63 million pass-through filing that increased Utah natural gas rates 12.7%. Also effective October 1, 2000, the Wyoming Public Service Commission approved a $2.5 million pass-through filing for Wyoming natural gas rates. Operating and maintenance (O & M) expenses increased 2% in the third quarter of 2000 compared with the prior year primarily from one-time expense adjustments amounting to $2,250,000 in the 1999 quarter. O & M expenses decreased 1% for the nine months of 2000 compared with 1999 mainly from lower information-technology costs which were partially offset by the higher costs associated with strong customer growth and increased bad debt expenses. Depreciation expenses was higher in the 2000 periods presented compared to the 1999 periods as a result of increased investment in property, plant and equipment, particularly technology related which have a shorter useful life. Other taxes increased in the three- and nine-months comparisons because of a current year adjustment of prior year taxes and from higher property tax rates in 2000. Interest and other income was 32% lower in the nine-month period of 2000 compared with the prior year. Gains from the sale of surplus property were $649,000 less in the 2000 period. The effective income tax rate for the nine-month period was 33.2% in 2000 and 31.2% in 1999. The lower effective income tax rate in 1999 was due to an adjustment of federal income taxes in the 1999 period. The Company realized $1,374,000 of tight-sands gas-production credits in the 2000 period and $1,381,000 in the 1999 period. Liquidity and Capital Resources Operating Activities Net cash provided from operating activities in the first nine months of 2000 was $12.2 million less than was generated in the same period of 1999. The decrease in cash flows resulted partially from lower net income and from lower cash flows generated from operating assets and liabilities. The year-to-year decrease in cash flows from operating assets and liabilities was primarily due to higher customer receivables, increased underground gas storage inventory costs, and higher tax and other liability payments. 7 Investing Activities Capital expenditures were $46.1 million for the nine months of 2000. Capital expenditures for calendar year 2000 are estimated at $63.3 million. Financing Activities Net cash generated from operating activities was used to fund capital expenditures, repay loans to Questar and pay dividends. Loan balances owed to Questar as of September 30, amounted to $75.2 million in 2000 and $25.1 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. Early Retirement Offered On August 28, 2000, Questar's Regulated Services unit announced an early retirement window program to be effective October 31, 2000. A total of 281 employees and 14 disability recipients from Questar Gas, Questar Pipeline and Questar Regulated Services were eligible for the enhanced benefit. The offer was accepted by 262 of Regulated Services' employees and all 14 long-term disability recipients. The window program is projected to result in pretax labor cost savings for Regulated Services of over $1 million in 2000 and $6-8 million yearly. Regulatory Matters Effective October 1, 2000, the PSCU approved on an interim basis a $63 million increase in its Utah natural gas rates which resulted in a 12.7 percent increase for the typical residential Utah customer. The increase was based on recent significant increases in natural gas prices at the wellhead and was part of Questar Gas' gas-cost-adjustment or "pass-through" filings. Such filings enable the company to adjust rates at least twice each year to reflect changes in gas-supply costs. These costs are passed on to the customer on a dollar-for-dollar basis with no markup. The impact of the gas cost increase on customers was lessened by the fact that close to 50% of the Company's annual supply comes from its own wells and is priced to customers at cost of service prices rather than market prices. Also, effective October 1, 2000, the Wyoming Public Service Commission approved a $2.5 million pass-through filing for Wyoming natural gas rates. 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 SAB raised issues concerning the timing of recording revenues given that sales transactions may contain some conditions allowing customers to return products or receive refunds. The SEC expects companies that make conditional sales to postpone fully recognizing revenues until the earnings process is completed. The Company records revenues when services are provided or products are delivered. Periodically revenues are collected subject to refund pending final orders from regulatory agencies. In those situations, revenues are reported net of estimated refunds. The pronouncement is effective for Questar Gas beginning with the fourth quarter 2000 and is not expected to cause a change in the method used to record revenues. 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. 8 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. 9 Part II Other Information Item 1. Legal Proceedings. a. Questar Gas Company ("Questar Gas" or the "Company"), on August 31, 2000, filed an "out-of-period" pass-on application with the Public Service Commission of Wyoming (the PSCW"), seeking approval to reflect higher natural gas prices in its rates. In the application, as supplemented, the Company requested permission to reflect annualized gas costs of $13,778,002 in rates for Wyoming customers effective October 1, 2000. The PSCW authorized the Company to reflect the requested gas cost increase in rates effective October 1, 2000. b. On September 20, 2000, Questar Gas, filed a special pass-through application with the Public Service Commission of Utah (the "PSCU"). In its application, Questar Gas requested permission to reflect annualized gas costs of $354,405,075 in rates for Utah customers effective October 1, 2000. In this out-of-period application, the Company noted that purchased gas prices had increased significantly higher than the estimated prices used in its mid-year filing and reported that its 191 or gas cost account was undercollected by approximately $5.9 million as of the end of August. Questar Gas advised the PSCU that reflecting the increase in its rates would increase the typical residential customer's annual bill by approximately 12.7 percent per year. By an interim order dated October 18, 2000, the PSCU authorized the Company to reflect the requested increase in rates effective October 1, 2000. c. The Committee of Consumer Services ("Committee"), a party to the Company's general rate case, has appealed the PSCU's order concerning the treatment of carbon dioxide ("CO2") removal costs. In its order concerning Questar Gas's general rate case, the PSCU, adopted the stipulation entered into by the Company and the Division of Public Utilities that allows Questar Gas to collect $5 million of annual CO2 removal costs. The Committee opposed this stipulation during the proceedings and filed a request for rehearing with the PSCU after the PSCU approved it. When the PSCU took no action on its request for rehearing, the Committee filed an appeal seeking judicial review of the decision. The Company has filed a motion to intervene in the case. d. The Company filed an appeal with the Supreme Court of Utah after the PSCU, by order dated December 9, 1999, denied Questar Gas's request to recover the CO2 removal costs in its semi-annual pass-through filing. See Questar Gas's Form 8-K Report dated December 9, 1999 for a description of the PSCU's order denying the Company's request to recover the costs in its pass-through application. Oral arguments to consider the Company's appeal will be heard on December 13, 2000. In its brief, Questar Gas noted that the CO2 removal costs are "costs" that can be recovered through the Company's 191 account and the PSCU's action to exclude such costs should only be done prospectively, not retroactively. Questar Gas also defended its decision to pay processing plant costs as a reasonable, prudent, and low-cost means to solve a problem caused by the combustion settings on appliances used in its service area. 10 Item 5. Other Information. Messrs. Gary W. DeBernardi, Lowell F. Gill, and Stephen C. Yeager retired as officers and employees of the Company effective October 31, 2000. Mr. DeBernardi, age 57, had served as Vice President, Technical Services, for Questar Gas and its primary affiliates, Questar Pipeline Company ("Pipeline") and Questar Regulated Services Company ("QRS") and had 31 years of service at retirement. Mr. Gill, age 58, had served as Vice President, Transportation Operations, for the Company and QRS and as Vice President and General Manager for Pipeline; he had 38 years of service. Mr. Yeager, age 53, had served as Vice President, Business, Development, for all three entities and had over 24 years of service. The retirements of these officers, coupled with the retirements of other employees, led to a reorganization of responsibilities and the appointment of two new officers. Ms. Susan Glasmann, age 53, was named to serve as Vice President, Operations, for the Company, Pipeline, and QRS effective November 1. She had been serving as the Company's Vice President and General Manager since August 1, 1998. Mr. Alan K. Allred, age 50, was named to serve as Vice President, Business Development, for Questar Gas and its affiliates in the Regulated Services group. Mr. Allred has more than 22 years of experience with the Company and its affiliates and had been serving as Manager, Regulatory Affairs. In his new position, Mr. Allred has responsibility for regulatory affairs, gas supply management, capacity marketing, gas control, parnterships, acquisitions and new ventures. Mr. Shahab Saeed, age 41, was named to serve as Vice President, Support Services, for Questar Gas and its affiliates in the Regulated Services group. He has more than 19 years of service and had been serving as Manager, Administrative Services. Mr. Saeed, in his new position, has responsibility for engineering, human resources, information services, system integrity, safety and environmental activities, research and development, materials and equipment, and facilities. Messrs. R. D. Cash, D. N. Rose and S. E. Parks will continue to serve in their executive officer positions as Chairman of the Board, President and Chief Executive Officer and Vice President, Treasurer, and Chief Financial Officer, respectively. Item 6. Exhibits and Reports on Form 8-K a. The following exhibit has been filed as part of this report. Exhibit No. Exhibit 10.1.* Joint Annual Management Incentive Plan adopted by Questar Gas Company, Questar Pipeline Company, and Questar Regulated Services Company as amended and restated effective October 26, 2000. 10.2.* Questar Gas Company Deferred Compensation Plan for Directors as amended and restated effective October 26, 2000. 11 10.3.* Questar Corporation Long-term Stock Incentive Plan as amended and restated effective October 26, 2000. (Exhibit No. 10.3. to Questar Corporation's Form 10-Q Report for Quarter Ended September 30, 2000.) *Exhibit so marked is a management contract or compensation plan or arrangement. (b) The Company did not file any Current Reports on Form 8-K during the quarter. 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) November 13, 2000 /s/ D. N. Rose D. N. Rose President and Chief Executive Officer November 13, 2000 /s/ S. E. Parks S. E. Parks Vice President, Treasurer, and Chief Financial Officer 12 EXHIBIT INDEX Exhibit Number Exhibit 10.1.* Joint Annual Management Incentive Plan adopted by Questar Gas Company, Questar Pipeline Company, and Questar Regulated Services Company as amended and restated effective October 26, 2000. 10.2.* Questar Gas Company Deferred Compensation Plan for Directors as amended and restated effective October 26, 2000. 10.3.* Questar Corporation Long-term Stock Incentive Plan as amended and restated effective October 26, 2000. (Exhibit No. 10.3. to Questar Corporation's Form 10-Q Report for Quarter Ended September 30, 2000.) *Exhibit so marked is a management contract or compensation plan or arrangement.