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, 1998 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 March 31, 1998 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, 1998 1997 1998 1997 (In Thousands) REVENUES $191,789 $175,313 $464,699 $402,338 OPERATING EXPENSES Natural gas purchases 118,098 97,211 269,820 204,146 Operating and maintenance 25,277 27,404 99,592 99,093 Depreciation 7,831 7,933 31,058 29,141 Other taxes 2,372 2,743 7,803 7,695 TOTAL OPERATING EXPENSES 153,578 135,291 408,273 340,075 OPERATING INCOME 38,211 40,022 56,426 62,263 INTEREST AND OTHER INCOME 732 723 3,397 3,047 DEBT EXPENSE (5,126) (4,342) (19,903) (16,707) INCOME BEFORE INCOME TAXES 33,817 36,403 39,920 48,603 INCOME TAXES 13,103 14,094 12,501 16,157 NET INCOME $20,714 $22,309 $27,419 $32,446 See note to financial statements QUESTAR GAS COMPANY CONDENSED BALANCE SHEETS (Unaudited) March 31, December 31, 1998 1997 1997 (In Thousands) ASSETS Current assets Cash and short-term investments $6,747 Accounts receivable $91,842 $79,441 86,487 Inventories 7,738 8,154 20,347 Purchased-gas adjustments 5,587 29,331 37,251 Other current assets 3,643 3,653 4,356 Total current assets 108,810 120,579 155,188 Property, plant and equipment 887,403 827,208 882,936 Less allowances for depreciation 361,225 333,171 354,761 Net property, plant and equipment 526,178 494,037 528,175 Other assets 19,732 20,736 21,488 $654,720 $635,352 $704,851 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balances $1,194 $2,924 Notes payable to Questar Corporation 35,700 58,700 $100,000 Accounts payable and accrued expenses 75,593 68,559 64,487 Total current liabilities 112,487 130,183 164,487 Long-term debt 225,000 175,000 225,000 Other liabilities 5,593 10,922 5,989 Deferred income taxes and investment tax credits 74,285 82,234 87,109 Redeemable cumulative preferred stock 4,808 Common shareholder's equity Common stock 22,974 22,974 22,974 Additional paid-in capital 41,875 41,875 41,875 Retained earnings 172,506 167,356 157,417 Total common shareholder's equity 237,355 232,205 222,266 $654,720 $635,352 $704,851 See note to financial statements QUESTAR GAS COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) 3 Months Ended March 31, 1998 1997 (In Thousands) OPERATING ACTIVITIES Net income $20,714 $22,309 Depreciation 8,419 8,641 Deferred income taxes and investment tax credits (12,824) 923 16,309 31,873 Change in operating assets and liabilities 52,097 (9,428) NET CASH PROVIDED FROM OPERATING ACTIVITIES 68,406 22,445 INVESTING ACTIVITIES Capital expenditures (9,514) (3,974) Proceeds from disposition of property, plant and equipment 3,092 596 NET CASH USED IN INVESTING ACTIVITIES (6,422) (3,378) FINANCING ACTIVITIES Decrease in notes payable to Questar Corporation (64,300) (17,500) Redemption of preferred stock (20) Checks outstanding in excess of cash balances 1,194 2,924 Payment of dividends (5,625) (6,346) NET CASH USED IN FINANCING ACTIVITIES (68,731) (20,942) DECREASE IN CASH AND SHORT-TERM INVESTMENTS ($6,747) ($1,875) See note to financial statements QUESTAR GAS COMPANY NOTE TO CONDENSED FINANCIAL STATEMENTS March 31, 1998 (Unaudited) Note 1 - Basis of Presentation The interim financial statements furnished 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, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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, 1997. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations QUESTAR GAS COMPANY March 31, 1998 (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, 1998 1997 1998 1997 (Dollars In Thousands) FINANCIAL RESULTS Revenues From unaffiliated customers $191,789 $174,222 $463,251 $398,560 From affiliates 1,091 1,448 3,778 Total revenues 191,789 175,313 464,699 402,338 Natural gas purchases 118,098 97,211 269,820 204,146 Revenues less natural gas purchases $73,691 $78,102 $194,879 $198,192 Operating income $38,211 $40,022 $56,426 $62,263 Net income 20,714 22,309 27,419 32,446 OPERATING STATISTICS Natural gas volumes (in thousands of decatherms) Residential and commercial sales 34,314 36,405 83,656 82,832 Industrial sales 2,830 2,902 9,451 8,992 Transportation for industrial customers 14,832 12,952 53,193 48,722 Total deliveries 51,976 52,259 146,300 140,546 Natural gas revenue (per decatherm) Residential and commercial $5.20 $4.47 $4.96 $4.30 Industrial sales 3.10 2.37 2.79 2.21 Transportation for industrial customers 0.11 0.14 0.12 0.13 Heating degree days Actual 2,392 2,455 5,402 5,166 Normal 2,743 2,743 5,801 5,801 Warmer than normal 13% 10% 7% 11% Number of customers at March 31 645,133 623,184 Revenues, less natural gas purchases, were $4,411,000 lower in the first quarter of 1998 and $3,313,000 lower in the 12-month period ended March 31, 1998 when compared with the same periods in 1997 because of several rate changes affecting the first quarter of 1998. A rate surcharge, associated with construction of a distribution pipeline into southern Utah and in effect for the past 10 years, was discontinued in September 1997. Some general-service customers, who met higher load factor standards, shifted to firm commercial rates, which have a lower margin. Retail usage of gas per customer has returned to a more-normal quantity after reaching an unusually high mark in the first quarter of 1997. The Company agreed to a negotiated annual rate reduction of $2.8 million of revenues in Utah that went into effect February 18, 1997. The growth rate in the number of customers served by Questar Gas continued at a strong pace. The number of customers served grew by 3.5% from a year ago to 645,133 at March 31, 1998. Temperatures, as measured in degree days, were warmer than normal in the 1998 and 1997 periods. However, Questar Gas' rates include a weather-normalization adjustment that reduces the revenue impact of weather fluctuations. Virtually all of Questar Gas' residential and commercial volumes were covered under the weather-normalization adjustment in the first quarters of 1998 and 1997. In March 1998, the Public Service Commission of Wyoming approved Questar Gas' gas-merchant unbundling proposal that was filed in Wyoming in 1997. Under this plan, a transportation service option is extended to residential and commercial customers as well as industrial customers. Customers choosing transportation service are allowed to secure gas supplies directly from producers and marketers and pay Questar Gas a fee for transportation services. Questar Gas continues to offer a traditional bundled sales service as well. The unbundling proposal called for an open enrollment period to be held from March 1 through April 30. However, no suppliers signed up to provide gas to Wyoming customers. Another open enrollment will be held next year. Questar expects that the option of unbundled service in Wyoming, will not have a material effect on earnings. Volumes delivered to industrial customers increased 11% in the first quarter of 1998 when compared with the same quarter of 1997 due to additions and expanded operations with several ongoing customers. Margins from gas delivered to industrial customers are substantially lower than from gas delivered to residential and commercial customers. Questar Gas' natural gas purchases were higher in the 3- and 12-month periods of 1998 compared with the same periods of 1997. Higher gas purchase prices were paid by the Company as natural gas prices increased sharply during the 1996-1997 winter heating season. The increase in gas costs was first noted as an increase in the purchased-gas cost account, but was ultimately collected in rates. Questar Gas' rates include the recovery of gas costs which amount to $2.27 per decatherm (dth) in 1998 compared with $1.54 per dth in 1997. The Company routinely files for adjustment of purchased-gas costs with the Utah and Wyoming Public Service Commissions on a semiannual basis. Operating and maintenance expenses were 8% lower in the first quarter of 1998 because of cost reductions as a result of sharing services with an affiliated company, capitalizing labor costs associated with construction projects, lower bad debt costs and because of a write-off of obsolete inventory in 1997. Questar Gas and Questar Pipeline share the costs of certain administrative, marketing, accounting, technical and related services under Questar Regulated Services Co. Depreciation expense was lower in the first quarter of 1998 when compared with the 1997 first quarter primarily as a result of less gas production. The average depreciation rate was unchanged from year to year. Others taxes, primarily property taxes, were lower in the first quarter of 1998 after a refund from a local taxing agency. Interest expense was higher in the 3- and 12-month periods of 1998 due primarily to an issuance of $50 million of medium-term notes with an average interest rate of 6.88 % in the second and third quarters of 1997. The effective income tax rate was 38.7% in the both the first quarter of 1998 and 1997. The Company recognized $577,000 of tight-sands gas-production credits in the 1998 period and $608,000 in the 1997 period. Liquidity and Capital Resources Operating Activities Net cash provided from operating activities of $68,406,000 was $45,961,000 more than was generated in the same period of 1997. The increase in cash flow was primarily due to collection of gas costs, which were under-collected in the first quarter of 1997. Investing Activities Capital expenditures were $9,514,000 in the first three months of 1998 compared with $3,974,000 in the corresponding 1997 period. Capital expenditures for calendar year 1998 are estimated at $65,400,000. Financing Activities The Company has a short-term borrowing arrangement with its parent company, Questar Corporation. As of March 31, Questar Gas had loan balances outstanding of $35,700,000 in 1998 and $58,700,000 in 1997. Financing activities in the first quarters of 1998 and 1997 included payment of dividends and a partial repayment of loans from Questar using net cash provided from operations. Capital expenditures for 1998 will be financed with net cash flow provided from operating activities and borrowings from Questar. Forward Looking Statements This 10-Q contains forward-looking statements about the future operations 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. PART II OTHER INFORMATION Item 3. Legal Proceedings. (a) On May 6, 1998, the Public Service Commission of Wyoming (PSCW) issued a written order officially approving the application filed by Questar Gas Company (the Company) to offer choice of commodity suppliers to its general service (commercial and residential) customers in Wyoming. As of the close of the open season on April 30, 1998, no commodity supplier had signed up to provide service to Wyoming customers. (b) On May 6, 1998, the Public Service Commission of Utah (PSCU), requested that the Company and other parties file supplemental briefs in a pending case involving the Company's gathering rates. (See the Company's Annual Report on Form 10-K for 1997, page 7, for a discussion of the case.) The PSCU also set the matter for additional hearings in June. In the case, which involves potential refunds of up to $7.8 million, the Division of Public Utilities, a state agency, claims that a reduction in gathering rates charged to the Company by an affiliate should be extended retroactively to March of 1996. Item 6. Exhibits and Reports on Form 8-K. a. The following exhibit has been filed as part of this report: Exhibit No.Exhibit 12. Ratio of Earnings to Fixed Charges. 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 14, 1998 /s/ D. N. Rose D. N. Rose President and Chief Executive Officer May 14, 1998 /s/S. E. Parks (Date) S. E. Parks Vice President, Treasurer and Chief Financial Officer