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, 1999 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, 1999 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, 1999 1998 1999 1998 (In Thousands) REVENUES $172,302 $191,789 $457,336 $464,699 OPERATING EXPENSES Natural gas purchases 98,722 118,098 261,628 269,820 Operating and maintenance 24,881 25,277 96,527 99,592 Depreciation 8,666 7,831 34,096 31,058 Other taxes 2,226 2,372 8,039 7,803 TOTAL OPERATING EXPENSES 134,495 153,578 400,290 408,273 OPERATING INCOME 37,807 38,211 57,046 56,426 INTEREST AND OTHER INCOME 505 732 3,339 3,397 DEBT EXPENSE (5,105) (5,126) (19,771) (19,903) INCOME BEFORE INCOME TAXES 33,207 33,817 40,614 39,920 INCOME TAXES 12,949 13,103 13,662 12,501 NET INCOME $20,258 $20,714 $26,952 $27,419 See note to financial statements QUESTAR GAS COMPANY CONDENSED BALANCE SHEETS (Unaudited) March 31, December 31, 1999 1998 1998 (In Thousands) ASSETS Current assets Cash and short-term investments $3,326 Accounts receivable $76,298 $91,842 80,512 Inventories 12,996 7,738 22,296 Purchased-gas adjustments 5,587 2,067 Other current assets 2,231 3,643 2,838 Total current assets 91,525 108,810 111,039 Property, plant and equipment 950,684 887,403 948,280 Less allowances for depreciation 392,018 361,225 382,657 Net property, plant and equipment 558,666 526,178 565,623 Other assets 22,604 19,732 23,853 $672,795 $654,720 $700,515 LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities Checks outstanding in excess of cash balances $2,557 $1,194 Notes payable to Questar Corporation 48,800 35,700 $96,700 Accounts payable and accrued expenses 67,030 75,593 71,288 Purchased-gas adjustments 12,598 Total current liabilities 130,985 112,487 167,988 Long-term debt 225,000 225,000 225,000 Other liabilities 1,603 5,593 330 Deferred income taxes and investment tax credits 73,525 74,285 80,023 Common shareholder's equity Common stock 22,974 22,974 22,974 Additional paid-in capital 41,875 41,875 41,875 Retained earnings 176,833 172,506 162,325 Total common shareholder's equity 241,682 237,355 227,174 $672,795 $654,720 $700,515 See note to financial statements QUESTAR GAS COMPANY CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) 3 Months Ended March 31, 1999 1998 (In Thousands) OPERATING ACTIVITIES Net income $20,258 $20,714 Depreciation 9,362 8,419 Deferred income taxes and investment tax credits (6,498) (12,824) 23,122 16,309 Change in operating assets and liabilities 27,050 52,097 NET CASH PROVIDED FROM OPERATING ACTIVITIES 50,172 68,406 INVESTING ACTIVITIES Capital expenditures (5,109) (9,514) Proceeds from disposition of property, plant and equipment 2,704 3,092 NET CASH USED IN INVESTING ACTIVITIES (2,405) (6,422) FINANCING ACTIVITIES Checks outstanding in excess of cash balances 2,557 1,194 Decrease in notes payable to Questar Corporation (47,900) (64,300) Payment of dividends (5,750) (5,625) NET CASH USED IN FINANCING ACTIVITIES (51,093) (68,731) DECREASE IN CASH AND SHORT-TERM INVESTMENTS ($3,326) ($6,747) See note to financial statements QUESTAR GAS COMPANY NOTE TO FINANCIAL STATEMENTS March 31, 1999 (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, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 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, 1998. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations QUESTAR GAS COMPANY March 31, 1999 (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, 1999 1998 1999 1998 (Dollars In Thousands) FINANCIAL RESULTS Revenues From unaffiliated customers $172,093 $191,789 $456,058 $463,251 From affiliates 209 1,278 1,448 Total revenues 172,302 191,789 457,336 464,699 Natural gas purchases 98,722 118,098 261,628 269,820 Revenues less natural gas purchases $73,580 $73,691 $195,708 $194,879 Operating income $37,807 $38,211 $57,046 $56,426 Net income 20,258 20,714 26,952 27,419 OPERATING STATISTICS Natural gas volumes (in thousands of decatherms) Residential and commercial sales 32,425 34,314 81,342 83,656 Industrial sales 2,940 2,830 9,791 9,451 Transportation for industrial customers 13,351 14,832 53,980 53,193 Total deliveries 48,716 51,976 145,113 146,300 Natural gas revenue (per decatherm) Residential and commercial $4.87 $5.20 $4.98 $4.96 Industrial sales 3.01 3.10 3.02 2.79 Transportation for industrial customers 0.13 0.11 0.13 0.12 Heating degree days Actual 2,296 2,392 5,366 5,402 Normal 2,743 2,743 5,801 5,801 Warmer than normal 16% 13% 7% 7% Number of customers at March 31, Residential and commercial 666,301 643,891 Industrial 1,329 1,242 Total 667,630 645,133 Revenues less natural gas purchases, or the margin, was unchanged in the first quarter of 1999 compared with the first quarter of 1998. The additional margin resulting from adding customers was offset by lower usage per customer and the expiration of a surcharge for extending service into southern Utah in 1988. Temperatures, as measured in degree days, were warmer than normal in all periods presented. Questar Gas' rates include a weather-normalization adjustment that reduces the revenue impact of weather fluctuations. The number of customers served by Questar Gas grew by 22,497 or 3.5% from a year ago to 667,630 at March 31, 1999. Customer additions in 1999 are expected to reach 20,000 or 21,000. Volumes delivered to industrial customers decreased 8% in the first quarter of 1999 when compared with the same period of 1998 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 and therefore, the reduced volumes did not have a significant effect on the margin earned. Questar Gas' natural gas purchases decreased in the 1999 periods because of lower gas costs and lower sales volumes. Commodity or gas costs in Utah rates decreased from $2.27 per Decatherm in the first quarter of 1998 to $1.72 per Decatherm in the first quarter of 1999. The reduction reflects lower prices paid to producers. 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 lower in the 3- and 12-month periods of 1999 due to labor cost savings from an early retirement program effective August 1998. Labor cost savings amounted to $1.3 million in the first quarter of 1999. Higher data processing costs for various projects, such as communications equipment, system enhancements and Year 2000 testing and the costs of serving more customers, partially offset the impact of the reduced labor costs. Depreciation expense was higher in the 1999 periods presented when compared with the 1998 periods primarily as a result of increased investment in property, plant and equipment. Lower payroll taxes resulting from fewer employees caused in a decline in other taxes in the first quarter of 1999. Interest and other income was lower in the first quarter of 1999 due to nonrecurring gains from selling surplus properties in 1998. The effective income tax rate was 39.0% in the first quarter of 1999 and 38.7% in the first quarter of 1998. The Company realized $502,000 of tight-sands gas-production credits in the 1999 period and $577,000 in the 1998 period. Liquidity and Capital Resources Operating Activities Net cash provided from operating activities of $50,172,000 was $18,234,000 less than was generated in the first quarter of 1998. The decrease in cash flow resulted primarily from timing differences in the collection of purchased gas costs and payment on accounts to vendors. Investing Activities Capital expenditures were $5,109,000 in the first quarter of 1999 compared with $9,514,000 in the first quarter of 1998. Capital expenditures for calendar year 1999 are estimated at $60 million. 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 payable to Questar of $48.8 million in 1999 and $35.7 million in 1998. Capital expenditures for 1999 are expected to be financed with net cash flow provided from operating activities and borrowings from Questar. Regulatory and Other Matters Questar Gas filed an application on November 25, 1998 with the Public Service Commission of Utah (PSCU) to recover the costs associated with a contract for the removal of carbon dioxide from the gas stream. The contract covers the costs of a new plant being constructed and operated by an affiliate of Questar Gas. The Division of Public Utilities and the Committee of Consumer Services have filed testimony questioning the Company's decision to enter into the contract and opposing pass-through rate coverage for the costs under the contract. Both agencies have filed a motion for summary judgement with the PSCU. Hearings on the issues are scheduled for June 1999. The contracts annual cost of service ranges between $7.5 - $8.5 million. Year 2000 Issues Questar Coporation established a team to address the issue of computer programs and embedded computer chips being unable to distinguish between the year 1900 and the year 2000 (Y2K). The team has identified 59 projects that are in varying stages of remediation and the scope includes Questar and its affiliated companies. The projects fit into the general classifications of application software, infrastructure, noninformation technology equipment and critical third-party associations. Questar Gas estimates that Y2K costs will be $2.3 million and expects to be Y2K compliant before the end of 1999. Failure to correct a material Y2K problem could result in an interruption, or a failure of, certain normal business activities or operations. Such failures could materially and adversly affect the Company's results of operations, liquidity and financial condition. The infrastructure section of the plan addresses hardware and systems software other than applications software. Currently, there are 19 projects identified: 1 in start-up, 8 in assessment, 6 in remediation, 0 in testing and 4 completed and deemed to be Y2K ready. The applications software section addresses either the conversion or replacement of applications software that is not Y2K compliant. Currently, there are 39 projects in this section: 10 in start-up, 7 in assesssment, 4 in remediation, 4 in testing and 14 completed and deemed to be Y2K compliant. Non-information technology equipment is considered to be one project and addresses hardware, software and associated embedded computer chips used in the operation of all facilities operated by the Company. Because this section has unique charateristics and is large, the Company has employed the services of a consultant to assist in the effort. The project is in the assessment phase and is expected to be completed by year-end 1999. Inquiries of critical third parties have been taking place with more contacts scheduled. Contacting parties is scheduled to be completed by mid-year. Contingency plans for dealing with third-party issues will be developed by the end of 1999. The complete text of Questar Gas' Y2K disclosure can be viewed in Form 10-K for December 31, 1998, filed with the Securities and Exchange Commission. 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, the adverse effects of failure to achieve Y2K compliance 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) is involved in regulatory proceedings to consider its request to recover the costs of a contract to process gas as "gas costs" eligible for pass-through treatment. The processing plant, which is owned by an affiliate of the Company, strips carbon dioxide from natural gas volumes extracted from coal seams in order to increase the heating content of such gas and make such gas more efficient and safer to use in appliances that have been set historically to burn gas at a higher Btu level. The Division of Public Utilities and the Committee of Consumer Services, which are parties to the proceedings, have filed a motion for summary judgment seeking a determination from the Public Service Commission of Utah (PSCU) that such costs not be considered as eligible for pass-through treatment. Public hearings, which were originally scheduled for April of 1999, will be conducted on June 7th on the motion for summary judgment and on June 22, 1999, on other issues if the PSCU does not grant the motion for summary judgment. 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 13, 1999 /s/ D. N. Rose D. N. Rose President and Chief Executive Officer May 13, 1999 /s/ S. E. Parks S. E. Parks Vice President, Treasurer, and Chief Financial Officer