<Page>
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, 2002.
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. 1-8796
QUESTAR CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF UTAH 87-0407509
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 45433, 180 East 100 South, Salt Lake City, Utah 84145-0433
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 324-5000
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, 2002
- ------------------------------- --------------------------------
Common Stock, without par value 81,753,370 shares
<Page>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
3 Months Ended 12 Months Ended
March 31, March 31,
2002 2001 2002 2001
----------------------------------------------------
(In Thousands, Except Per Share Amounts)
REVENUES $ 402,533 $ 562,638 $ 1,279,245 $ 1,492,089
OPERATING EXPENSES
Cost of natural gas and other products sold 178,528 331,158 522,381 744,020
Operating and maintenance 74,030 62,859 281,526 257,304
Depreciation, depletion and amortization 45,307 35,806 161,236 142,179
Exploration 2,748 1,067 8,667 6,843
Abandonment and impairment of oil
and gas properties 306 550 4,927 2,854
Production and other taxes 11,409 20,812 46,582 59,189
----------------------------------------------------
TOTAL OPERATING EXPENSES 312,328 452,252 1,025,319 1,212,389
----------------------------------------------------
OPERATING INCOME 90,205 110,386 253,926 279,700
INTEREST AND OTHER INCOME 7,406 15,169 27,535 42,186
MINORITY INTEREST 170 445 1,450 569
EARNINGS OF UNCONSOLIDATED AFFILIATES 657 114 702 2,891
DEBT EXPENSE (20,036) (15,592) (69,277) (63,542)
----------------------------------------------------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT 78,402 110,522 214,336 261,804
INCOME TAXES 28,250 41,262 75,258 91,635
----------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT 50,152 69,260 139,078 170,169
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR GOODWILL, net of
$2,010 attributed to minority interest (15,297) (15,297)
----------------------------------------------------
NET INCOME $ 34,855 $ 69,260 $ 123,781 $ 170,169
====================================================
EARNINGS PER COMMON SHARE - DILUTED
Income before cumulative effect $ 0.61 $ 0.85 $ 1.70 $ 2.10
Cumulative effect (0.19) (0.19)
----------------------------------------------------
Net income $ 0.42 $ 0.85 $ 1.51 $ 2.10
====================================================
Average diluted common shares outstanding 82,098 81,519 81,933 80,969
Dividends per common share $ 0.18 $ 0.175 $ 0.71 $ 0.69
</Table>
See notes accompanying consolidated financial statements
2
<Page>
QUESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
March 31, December 31,
2002 2001 2001
(Unaudited)
--------------------------------------
(In Thousands)
ASSETS
Current assets
Cash and cash equivalents $ 4,197 $ - $ 11,300
Accounts receivable 206,562 270,430 209,050
Hedging contracts 236 50,270
Inventories, at lower of average cost or market
Gas and oil storage 5,923 24,625 37,055
Materials and supplies 10,727 14,669 12,073
Purchased-gas adjustments 48,178 8,296
Prepaid expenses and other 15,680 10,742 16,136
Deferred income taxes - current 9,063
--------------------------------------
Total current assets 252,388 368,644 344,180
--------------------------------------
Property, plant and equipment 4,154,812 3,287,839 4,089,407
Less accumulated depreciation, depletion
and amortization 1,567,386 1,416,705 1,524,309
--------------------------------------
Net property, plant and equipment 2,587,426 1,871,134 2,565,098
--------------------------------------
Investment in unconsolidated affiliates 147,022 36,408 144,928
Securities available for sale 7,361 20,067 13,623
Goodwill 72,702 19,958 90,927
Cash held in escrow 11,922 26,518 6,838
Regulatory and other assets 66,129 71,029 70,117
--------------------------------------
$ 3,144,950 $ 2,413,758 $3,235,711
======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Checks outstanding in excess of cash balance $ - $ 1,390 $ -
Short-term loans 369,519 207,974 530,246
Accounts payable and accrued expenses 247,103 257,266 246,037
Energy price hedging contracts 52,011
Purchased-gas adjustments 23,849
Deferred income taxes - current 18,308 3,153
Current portion of long-term debt 1,607 8 1,705
--------------------------------------
Total current liabilities 642,078 536,957 781,141
--------------------------------------
Long-term debt, less current portion 1,075,529 669,578 997,423
Other liabilities 27,346 26,030 27,286
Deferred income taxes and investment tax credits 314,039 202,117 329,275
Minority interest 10,183 17,674 19,805
Common shareholders' equity
Common stock 291,024 263,866 282,297
Retained earnings 792,572 726,548 772,408
Other comprehensive income (loss) (7,821) (29,012) 26,076
--------------------------------------
Total common shareholders' equity 1,075,775 961,402 1,080,781
--------------------------------------
$ 3,144,950 $ 2,413,758 $3,235,711
======================================
</Table>
See notes accompanying consolidated financial statements
3
<Page>
QUESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
3 Months Ended
March 31,
2002 2001
------------------------
(In Thousands)
OPERATING ACTIVITIES
Net income $ 34,855 $ 69,260
Depreciation and amortization 47,772 37,249
Deferred income taxes and
investment tax credits (6,977) 14,578
Abandonment and impairment of gas
and oil properties 306 550
(Income) loss from unconsolidated affiliates
net of cash distributions and minority interest 1,384 (286)
Gain from selling properties and securities (4,486) (11,352)
Impairment of securities available for sale 530
Cumulative effect of accounting change 15,297
----------------------
88,681 109,999
Changes in operating assets and liabilities 71,072 (19,933)
----------------------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 159,753 90,066
INVESTING ACTIVITIES
Capital expenditures
Property, plant and equipment (71,981) (45,715)
Other investments (3,648) (2,000)
----------------------
Total capital expenditures (75,629) (47,715)
Proceeds from the disposition of
property, plant and equipment 6,964 30,773
Proceeds from the sales of securities 1,494 183
----------------------
NET CASH USED IN INVESTING ACTIVITIES (67,171) (16,759)
FINANCING ACTIVITIES
Issuance of common stock 3,066 6,615
Common stock repurchased (432) (11,379)
Issuance of long-term debt 200,000 185,000
Repayment of long-term debt (121,914) (227,565)
Decrease in short-term loans (160,727) (1,165)
Increase in cash held in escrow account (5,084) (21,131)
Checks outstanding in excess of cash balances 1,390
Payment of dividends (14,691) (14,127)
Other 101 (159)
----------------------
NET CASH USED IN FINANCING ACTIVITIES (99,681) (82,521)
Foreign currency translation adjustment (4) (202)
----------------------
Change in cash and cash equivalents (7,103) (9,416)
Beginning cash and cash equivalents 11,300 9,416
----------------------
Ending cash and cash equivalents $ 4,197 $ -
======================
</Table>
See notes accompanying consolidated financial statements
4
<Page>
QUESTAR CORPORATION AND SUBSIDIARIES
NOTES ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(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 of
operations for the interim periods presented. All such adjustments are of a
normal recurring nature. The results of operations for the three-and
twelve-month periods ended March 31, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. For further
information refer to the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
December 31, 2001.
Note 2 - New Accounting Standards
CUMULATIVE EFFECT FOR ACCOUNTING CHANGE - "GOODWILL AND OTHER INTANGIBLE
ASSETS" Statement of Financial Accounting Standards 142 (SFAS 142) "Goodwill
and Other Intangible Assets" was issued in June 2001. SFAS 142, addresses,
among other things, the financial accounting and reporting for goodwill
subsequent to an acquisition. According to the new standard, amortization of
goodwill was replaced by a requirement to test goodwill for impairment at
least yearly or sooner if a specific triggering event occurs. The Company
adopted the provisions of SFAS 142 as of January 1, 2002 and performed an
initial test that indicated an impairment of the goodwill acquired by
Consonus. As a result, the Company wrote off $17.3 million of goodwill, of
which, $15.3 million ($.19 per diluted common share) was attributed to Questar
InfoComm's share and reported as a cumulative effect of a change in
accounting for goodwill. The remaining $2.0 million was attributed to
minority shareholders. Consonus is a web-hosting and services subsidiary in
which Questar InfoComm owns 89%. Goodwill has declined in value because of
the sharp downturn in the information-technology sector. Consonus recorded
$2.2 million of goodwill amortization in 2001 that will not be repeated in
future years.
Also, in July 2001, the Company acquired $73 million of goodwill in two business
combinations. No impairment was indicated as a result of an initial test.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
The Company adopted SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" as of January 1, 2002 without an impact in the balance sheet,
income statement or statement of cash flows.
Note 3 - Earnings Per Share
The following table shows basic and diluted per common share.
<Table>
<Caption>
3 Months Ended 12 Months Ended
March 31, March 31,
2002 2001 2002 2001
-------------------------------------------------
(In Thousands, Except Per Share Amounts)
Income before cumulative effect $ 50,152 $ 69,260 $ 139,078 $ 170,169
Cumulative effect of change in
accounting for goodwill, net of $2,010
attributed to minority interest (15,297) (15,297)
-------------------------------------------------
Net income $ 34,855 $ 69,260 $ 123,781 $ 170,169
=================================================
</Table>
5
<Page>
Note 3 - Earnings Per Share (continued)
<Table>
<Caption>
3 Months Ended 12 Months Ended
March 31, March 31,
2002 2001 2002 2001
--------------------------------------------------
(In Thousands, Except Per Share Amounts)
Earnings per common share - basic
Income before cumulative effect $ 0.62 $ 0.86 $ 1.71 $ 2.12
Cumulative effect (0.19) (0.19)
--------------------------------------------------
Net income $ 0.43 $ 0.86 $ 1.52 $ 2.12
==================================================
Average basic common shares
outstanding 81,586 80,732 81,441 80,268
Earnings per common share - diluted
Income before cumulative effect $ 0.61 $ 0.85 $ 1.70 $ 2.10
Cumulative effect (0.19) (0.19)
--------------------------------------------------
Net income $ 0.42 $ 0.85 $ 1.51 $ 2.10
==================================================
Average diluted common shares
outstanding 82,098 81,519 81,933 80,969
</Table>
Note 4 - Operations by Line of Business
<Table>
<Caption>
3 Months Ended 12 Months Ended
March 31, March 31,
2002 2001 2002 2001
--------------------------------------------------
(In Thousands)
REVENUES FROM UNAFFILIATED CUSTOMERS
Questar Market Resources $ 125,158 $ 230,865 $ 540,160 $ 760,594
Questar Regulated Services
Natural gas distribution 260,958 308,939 653,169 641,400
Natural gas transmission 12,502 10,842 51,062 43,746
Other 841 1,216 4,228 4,233
--------------------------------------------------
Total Regulated Services 274,301 320,997 708,459 689,379
Corporate and other operations 3,074 10,776 30,626 42,116
--------------------------------------------------
Total $ 402,533 $ 562,638 $ 1,279,245 $1,492,089
==================================================
REVENUES FROM AFFILIATES
Questar Market Resources $ 27,971 $ 27,981 $ 100,520 $ 98,544
Questar Regulated Services
Natural gas distribution 301 1,190 2,074 4,971
Natural gas transmission 20,985 20,193 76,283 76,507
Other 423 339 1,547 554
Corporate and other operations 7,391 7,047 29,788 32,329
--------------------------------------------------
Total $ 57,071 $ 56,750 $ 210,212 $ 212,905
==================================================
OPERATING INCOME (LOSS)
Questar Market Resources $ 28,663 $ 53,075 $ 134,929 $ 159,047
Questar Regulated Services
Natural gas distribution 44,890 43,327 59,945 60,998
Natural gas transmission 15,741 15,036 60,027 56,854
Other (68) 84 (235) 64
--------------------------------------------------
Total Regulated Services 60,563 58,447 119,737 117,916
Corporate and other operations 979 (1,136) (740) 2,737
--------------------------------------------------
Total $ 90,205 $ 110,386 $ 253,926 $ 279,700
==================================================
</Table>
6
<Page>
Note 4 - Operations by Line of Business (continued)
<Table>
<Caption>
3 Months Ended 12 Months Ended
March 31, March 31,
2002 2001 2002 2001
--------------------------------------------------
(In Thousands)
NET INCOME (LOSS)
Questar Market Resources $ 17,602 $ 38,344 $ 80,392 $ 102,765
Questar Regulated Services
Natural gas distribution 24,166 23,720 26,319 27,168
Natural gas transmission 7,417 7,657 29,501 30,358
Other 160 188 2,803 473
--------------------------------------------------
Total Regulated Services 31,743 31,565 58,623 57,999
Corporate and other operations 807 (649) 63 9,405
--------------------------------------------------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 50,152 69,260 139,078 170,169
CUMULATIVE EFFECT (15,297) (15,297)
--------------------------------------------------
NET INCOME $ 34,855 $ 69,260 $123,781 $ 170,169
==================================================
</Table>
Note 5 - Financing
As part of a program to restructure its financing arrangements following the
2001 acquisition of SEI, QMR issued $200 million of notes in a private placement
on January 16, 2002. The notes mature in five years and have a coupon rate of
7%. Subsequently, the private placement notes were registered with the SEC and
exchange notes with the same terms were issued in April 2002.
Note 6 - Investment in Unconsolidated Affiliates
Questar, indirectly through subsidiaries, has interests in businesses accounted
for on an equity basis. These businesses are engaged in either the
transportation or the gathering and processing of natural gas. As of March 31,
2002, these affiliates did not have debt obligations with third-party lenders.
Summarized operating results of the businesses are listed below.
<Table>
<Caption>
3 Months Ended
March 31,
2002 2001
-------------------------
(In Thousands)
Transportation
Revenues $ 3,824 $ 1,981
Operating income (loss) 307 (2,756)
Income (loss) before income taxes 320 (6,004)
Gas gathering and processing
Revenues $ 4,816 $ 8,579
Operating income 1,154 165
Income before income taxes 1,173 298
</Table>
7
<Page>
Note 7 - Comprehensive Income
Comprehensive income is the sum of net income as reported in the Consolidated
Statement of Income and other comprehensive income transactions reported in
Shareholders' Equity. Other comprehensive income transactions that currently
apply result from changes in the market value of securities available for sale,
changes in the market value of energy-hedging contracts and changes in holding
value resulting from foreign currency translation adjustments. These
transactions are not the culmination of the earnings process, but result from
periodically adjusting historical balances to market value. Income or loss is
realized when the securities available for sale are sold or the gas or oil
underlying the hedging contracts is sold.
<Table>
<Caption>
3 Months Ended
March 31,
2002 2001
----------------------
(In thousands)
Net income $ 34,855 $ 69,260
Other comprehensive income
Unrealized loss on hedging
transactions (49,773) (52,100)
Unrealized loss on securities
available for sale (4,499) (12,953)
Foreign currency translation adjustment (103) (2,269)
----------------------
Other comprehensive loss before
income taxes (54,375) (67,322)
Income taxes on other comprehensive loss (20,478) (25,720)
----------------------
Net other comprehensive loss (33,897) (41,602)
----------------------
Total comprehensive income $ 958 $ 27,658
======================
</Table>
Note 8 - Reclassifications
Certain reclassifications were made to the 2001 financial statements to conform
with the 2002 presentation.
8
<Page>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
QUESTAR CORPORATION AND SUBSIDIARIES
March 31, 2002
(Unaudited)
Results of Operations
Questar Market Resources
Questar Market Resources (QMR or Market Resources) through its subsidiaries
conducts gas and oil exploration, development and production, gas gathering and
processing, and energy marketing operations. Wexpro, a subsidiary of QMR,
conducts cost of service development of gas reserves on behalf of affiliated
company, Questar Gas. Following is a summary of QMR's financial results and
operating information.
<Table>
<Caption>
3 Months Ended 12 Months Ended
March 31, March 31
2002 2001 2002 2001
-------------------------------------------------
FINANCIAL RESULTS - (In thousands)
Revenues
From unaffiliated customers $125,158 $230,865 $540,160 $760,594
From affiliates 27,971 27,981 100,520 98,544
-------------------------------------------------
Total revenues $153,129 $258,846 $640,680 $859,138
=================================================
Operating income $ 28,663 $ 53,075 $134,929 $159,047
Net income 17,602 38,344 80,392 102,765
OPERATING STATISTICS
Nonregulated production volumes
Natural gas (in million cubic feet) 20,007 15,787 74,794 67,800
Oil and natural gas liquids (in thousands
of barrels) 747 495 2,752 2,166
Nonregulated production revenue (average
selling price)
Natural gas (per thousand cubic feet) $ 2.44 $ 4.17 $ 2.80 $ 3.28
Oil and natural gas liquids (per barrel) $ 18.85 $ 21.48 $ 18.71 $ 20.43
Wexpro investment base at March 31, net of
deferred income taxes (in millions) $ 163.0 $ 122.2
Marketing volumes (in thousands of
energy equivalent decatherms) 22,465 24,028 90,228 102,635
Natural gas gathering volumes (in
thousands of decatherms)
For unaffiliated customers 23,904 22,085 93,548 93,276
For Questar Gas 12,223 10,211 39,173 37,149
For other affiliated customers 7,387 6,799 27,637 26,703
-------------------------------------------------
Total gathering 43,514 39,095 160,358 157,128
=================================================
Gathering revenue (per decatherm) $ 0.14 $ 0.13 $ 0.13 $ 0.13
</Table>
9
<Page>
Revenues
Lower selling prices for energy more than offset the effect of higher natural
gas production resulting in a 41% decrease in revenues. In the first quarter of
2002, nonregulated production increased 31% to 24.5 billion cubic feet
equivalent when compared with the first quarter of 2001. Natural gas production
rose 27% and oil and natural gas liquids rose 51% due to the acquisition of
Shenandoah Energy Inc. (SEI) on July 31, 2001. A combination of property sales
and normal declines in producing fields put downward pressure on production from
existing fields.
The average realized selling price for natural gas declined 41% from $4.17 to
$2.44 per Mcf (thousand cubic feet), while the combined nonregulated oil and
natural gas liquids selling price fell 12% to $18.85 per barrel. An energy
shortage in the western United States combined with a cold winter to drive up
first quarter 2001 energy prices. Weak energy prices in the first quarter of
2002 began to improve in March; too late to impact first quarter earnings.
However as prices improved, QMR added to the number of its energy-price hedging
contracts. A summary of QMR's energy-price hedging positions for equity gas and
oil production, excluding Wexpro, follows:
<Table>
<Caption>
Percent of production
under price hedging Average price
Time periods contracts net to the well
- ------------ Gas Oil Gas per Mcf Oil per bbl
--- --- ----------- -----------
2nd and 3rd quarters of 2002 61% 81% $3.05 $22.82
4th quarter of 2002 53% 84% $3.42 $22.82
12 months of 2003 47% 52% $3.30 $21.80
12 months of 2004 28% $3.23
</Table>
The practice of entering into energy-price hedging contracts benefited QMR in
the first quarter of 2002 by incrementally adding $10.9 million to revenues from
gas sales and $111,000 to revenues from the sale of oil. Approximately 35% of
the volumes of equity gas production and 41% of the volumes of equity oil
production, excluding Wexpro, were priced under hedging contracts in the
quarter.
Marketing revenues and margins also suffered from the decline in energy prices
in the first quarter of 2002. The margin, representing revenues less the costs
to purchase gas and oil and transportation of gas, decreased from $4.5 million
in the first quarter of 2001 to $3.1 million in the first quarter of 2002. Also,
the volumes marketed declined by 7% during the same period to period comparison.
Expenses
Operating and maintenance expenses, which include general overhead charges, were
$11.7 million higher in the first quarter of 2002 compared with the first
quarter of 2001, because of additional producing properties and higher gas
gathering charges. The additional operating and maintenance expenses associated
with properties acquired during 2001 was $8.2 million. Gas gathering charges
increased $1.4 million due to an 11% increase in volumes gathered. Exploration
expenses increased as a result of drilling dry exploratory wells.
Depreciation, depletion and amortization expense increased 41% in the comparison
of the first quarter of 2002 with the prior year quarter. As was mentioned,
equity production volumes increased 31% and the average DD&A rate increased from
$.83 per energy equivalent Mcf in 2001 to $.89 in 2002. Production and other
taxes decreased following the decline of gas and oil prices.
Other income
QMR sold non-strategic producing properties resulting in pretax gains of $4.5
million in 2002 and $9.4 million in 2001. In addition, gathering properties sold
in the first quarter of 2001 generated a $1.1 million pretax gain. The after tax
gains of property sales was $2.8 million in the first quarter of 2002 and $6.6
million in the first quarter of 2001.
10
<Page>
Wexpro's earnings
Wexpro's net income was $1.0 million higher in 2002. Wexpro's investment in gas
development projects grew $40.8 million from the level reported at March 31,
2001. Wexpro conducts cost of service development of gas reserves on behalf of
Questar Gas.
Questar Regulated Services
Questar Gas and Questar Pipeline conduct the regulated services of natural gas
distribution, transmission and storage.
Natural Gas Distribution
Questar Gas conducts natural gas distribution operations. Following is a summary
of financial results and operating information.
<Table>
<Caption>
3 Months Ended 12 Months Ended
March 31, March 31,
2002 2001 2002 2001
-------------------------------------------------
FINANCIAL RESULTS - (in thousands)
Revenues
From unaffiliated customers $ 260,958 $ 308,939 $ 653,169 $ 641,400
From affiliates 301 1,190 2,074 4,971
-------------------------------------------------
Total revenues 261,259 310,129 655,243 646,371
Cost of natural gas sold 177,129 230,154 445,520 441,917
-------------------------------------------------
Margin $ 84,130 $ 79,975 $ 209,723 $ 204,454
=================================================
Operating income $ 44,890 $ 43,327 $ 59,945 $ 60,998
Net income $ 24,166 $ 23,720 $ 26,319 $ 27,168
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 43,361 36,704 90,307 86,169
Industrial sales 3,440 3,267 10,857 10,377
Transportation for industrial customers 11,860 14,714 51,770 55,533
-------------------------------------------------
Total deliveries 58,661 54,685 152,934 152,079
=================================================
Natural gas revenue (per decatherm)
Residential and commercial $ 5.51 $ 7.73 $ 6.35 $ 6.58
Industrial sales 4.85 5.64 5.02 4.52
Transportation for industrial customers 0.15 0.13 0.13 0.13
Heating degree days
Colder than normal 21% 1% 7% 1%
Number of customers at March 31,
Residential and commercial 733,907 704,424
Industrial 1,315 1,323
------------------------
Total 735,222 705,747
========================
</Table>
11
<Page>
Revenues less cost of gas sold (margin)
Questar Gas's margin was 5% higher in the first quarter of 2002 and 3% higher in
the 12-months ended March 31, 2002 when compared with the same periods of the
previous year. A 4.2% year-to-year increase in the number of customers, lower
processing costs and a change in the method of collecting bad debt costs more
than offset a 3.9% decline in the temperature-adjusted usage per customer in the
first quarter of 2002. The Company added 10,500 customers in July of 2001 in an
acquisition of small distribution systems in eastern Utah and southwestern
Wyoming. Declining usage per customer has been a persistent trend experienced by
Questar Gas for the past 20 years and one of the reasons for requesting a
general rate increase in Utah on May 3, 2002. A combination of declining usage
per customer and the rising costs of meeting a customer-growth rate twice the
industry average have led to less revenues to cover increasing costs of service.
In an interim measure associated with the pass through filing in late 2001, the
Company was allowed to include the gas-cost portion of bad debt expenses in
Utah's semi-annual gas cost filings. This interim change in procedure allows an
accelerated recovery of the growing bad debt charges experienced by the Company.
The margin benefited by approximately $.9 million in the first quarter of 2002
as a result.
While colder temperatures in 2002 resulted in an increase in the gas volumes
delivered, the financial effect was mitigated by a weather-normalization
adjustment (WNA). Generally under the WNA, customers pay for non-gas costs based
on normal temperatures.
Gas volumes delivered to industrial customers were 19% lower in the first
quarter of 2002. A major steel-manufacturer suspended its gas deliveries when it
filed for Chapter 11 bankruptcy and shut down its facilities.
Expenses
Operating and maintenance expenses were 6% higher in the 3-month period and 5%
higher in the 12-month period ended March 31, 2002, when compared to the same
periods in the previous year due primarily to increased bad debt expenses and
higher labor-related costs. Bad debt expenses were $.6 million higher in the
first quarter of 2002 and $3.6 million higher in the 12-months ended March 31,
2002. Bad debt costs have risen because of an increasing number of customers and
a higher frequency of personal and business bankruptcies. Management is closely
monitoring its receivables and is enforcing its credit policies to minimize
future uncollectible receivables. Labor-related expenses have increased
primarily because of higher pension costs. Higher depreciation expenses in the
2002 periods were caused by increased investment in computer equipment and
software, which are depreciated over a relatively short life.
Other income
The Company earns a return on the balances in the purchased-gas adjustment
account if it is under-collected and from its investment in gas stored
underground. Interest and other income was lower in 2002 due to a lower
inventory balance, an over-collected purchase-gas adjustment account and a
smaller gain from selling assets.
12
<Page>
Natural Gas Transmission
Questar Pipeline conducts the natural gas transmission, storage and processing
operations. Following is a summary of financial results and operating
information.
<Table>
<Caption>
3 Months Ended 12 Months Ended
March 31, March 31,
2002 2001 2002 2001
-------------------------------------------------
FINANCIAL RESULTS - (in thousands)
Revenues
From unaffiliated customers $ 12,502 $ 10,842 $ 51,062 $ 43,746
From affiliates 20,985 20,193 76,283 76,507
-------------------------------------------------
Total revenues $ 33,487 $ 31,035 $ 127,345 $ 120,253
=================================================
Operating income $ 15,741 $ 15,036 $ 60,027 $ 56,854
Net income $ 7,417 $ 7,657 $ 29,501 $ 30,358
OPERATING STATISTICS
Natural gas transportation volumes (in
thousands of decatherms)
For unaffiliated customers 52,452 42,434 205,628 171,943
For Questar Gas 51,345 38,686 122,918 110,554
For other affiliated customers 553 1,911 5,534 8,956
-------------------------------------------------
Total transportation 104,350 83,031 334,080 291,453
=================================================
Transportation revenue (per decatherm) $ 0.21 $ 0.23 $ 0.24 $ 0.25
</Table>
Revenues
Revenues were higher in the 3- and 12-month periods of 2002 compared with the
2001 periods due primarily to increased revenues from transportation operations.
Transportation volumes increased 26% in the first quarter and 15% in the
12-month period in response to regional energy development. Main Line 104, a
77-mile extension in central Utah with a 272,000 dth per day capacity, began
operations in November 2001 and is fully subscribed. Total firm daily demand was
1,410,000 decatherm in the first quarter of 2002 compared with 1,174,000
decatherm in the first quarter of 2001.
Expenses
Operating and maintenance expenses were higher in the 2002 periods primarily
because of legal fees partially offset by lower fuel costs. In the first quarter
of 2002, legal expenses were $.9 million higher than the year earlier quarter.
Gas purchased and used in a processing plant was approximately $.5 million less
in 2002. Depreciation expense was higher in the 2002 periods compared with the
2001 periods as a result of capital investments.
Consolidated Results of Operations
Revenues
Revenues were lower in the 3- and 12-month periods of 2002 compared with the
same periods in 2001 due primarily to lower prices for natural gas more than
offsetting an increase in production volumes. The effect was broadly evident in
the exploration and production, natural gas distribution and energy-marketing
activities in the first quarter of 2002. Production of nonregulated gas and oil
increased 31% in the first quarter and 13% in the 12-month comparison primarily
due to the acquisition of SEI.
13
<Page>
Expenses
The cost of natural gas and other products sold, primarily includes natural
gas distribution and energy marketing activities, was lower in the 2002
periods presented due to a decrease in energy prices and reduced marketing
volumes. Operating and maintenance expenses were higher in the 2002 periods
presented when compared with the same periods in 2001 because of additional
producing properties, higher gas gathering charges, higher bad debt expenses,
increased pension costs and increased legal fees.
Depreciation, depletion and amortization expense increased in the 2002 periods
presented because of investment in 2001 in all lines of business and increased
volumes of production in 2002. The average DD&A rate for equity gas and oil
production increased from $.83 per Mcfe in the first quarter of 2001 to $.89 in
2002. Amortization of goodwill of $.5 million in the first quarter of 2001 was
not repeated in 2002 due to a change in accounting for goodwill mandated by a
new accounting rule. Production and other taxes declined due to lower prices.
Higher debt expense in the 2002 periods reflects an increase in the Company's
debt levels in 2001 as a result of the expansion in the number of gas and oil
properties, the construction of natural gas pipelines and the connection of
distribution customers. In addition, in October 2001, Questar Pipeline
borrowed $100 million of floating-rate debt from a bank for a 12-month period
to repay through a wholly owned subsidiary, Questar TransColorado, Inc.,
one-half of the outstanding and currently maturing debt owed by the
TransColorado Gas Transmission Company.
Other income
In the first quarter, the Company realized pretax gains from property sales
of $4.5 million in 2002 and $11.6 million in 2001. The Company sold
non-strategic properties and used the proceeds to reduce its level of debt.
The Company wrote off its investment in a security available for sale when
the underlying business ceased operations in the first quarter of 2002.
Income taxes
The effective income tax rate for the first three months was 36.0% in 2002 and
37.3% in 2001. The Company recognized $1.5 million of nonconventional fuel tax
credits in the 2002 period and $1.7 million in the 2001 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities in the first quarter of 2002 was
$69.7 million more than was provided during the first quarter of 2001. The
increase in cash flows resulted primarily from changes in operating assets and
liabilities. The purchased-gas adjustment account was in an over-collected
position in 2002 compared with an under-collected balance in 2001. Gas was
withdrawn from storage to meet the heating demands caused by an exceptionally
cold winter, where temperatures were 21% colder than normal in the first quarter
of 2002.
14
<Page>
Investing Activities
A comparison of capital expenditures for the first quarter of 2002 and 2001 plus
an estimate for calendar year 2002 is presented below. Capital expenditures for
calendar year 2002 are estimated to be $375 million.
<Table>
<Caption>
Forecast
Actual --------
------ 12 Months
3 Months Ended Ended
March 31, Dec. 31,
2002 2001 2002
-------------------------------------
(In Thousands)
Questar Market Resources $ 38,887 $ 23,408 189,900
Questar Regulated Services
Natural gas distribution 9,419 12,765 59,600
Natural gas transmission 26,842 8,658 104,400
Other 155 591 6,000
-------------------------------------
Total Questar Regulated Services 36,416 22,014 170,000
Corporate and other operations 326 2,293 14,700
-------------------------------------
$ 75,629 $ 47,715 $ 374,600
=====================================
</Table>
Financing Activities
Net cash flow provided from operating activities plus the proceeds from
selling properties were more than sufficient to finance capital expenditures
and pay dividends. The excess cash flow plus the proceeds from issuing $200
million of five-year, 7% notes in January 2002 were used to repay
approximately $80 million of debt. The issuance of long-term debt was part of
a debt restructuring plan that QMR has undertaken since acquiring SEI. The
Company expects to finance the remaining 2002 capital expenditures from the
net cash flow provided from operating activities and the proceeds from
selling non-strategic assets.
Short-term borrowings at March 31, 2002 were comprised of $265.5 million of
commercial paper and $104 million of short-term bank loans. A year earlier, the
Company had $120 million of commercial paper and $88.9 million of
short-term bank loans outstanding.
Moody's Reviews Possible Downgrade of Debt Ratings
On May 2, 2002, Moody's Investors Service placed Questar Corporation and its
subsidiaries under review for a possible downgrade of its debt ratings. The
review was prompted by Moody's concern of Questar's leverage following the
$403 million acquisition of Shenandoah Energy, Inc. and the shift in business
mix towards nonregulated businesses. Moody's review will assess Questar's
plan to reduce its leverage and to manage increased business risk and
commodity price exposure. Ratings under review include:
Questar Corporation - Prime 1 rated commercial paper
Questar Gas Company - A1 rated senior unsecured debt
Questar Pipeline Company - A1 rated senior unsecured debt
Questar Market Resources - Baa2 rated senior unsecured debt
Regulatory Matters
GENERAL RATE CASE FILED
Questar Gas filed a general rate case application with the Public Service
Commission of Utah (PSCU) on May 3, 2002. The Company is requesting a 5.7%
increase effective January 1, 2003, that amounts to $23 million of annualized
revenues and a 12.6% return on equity. Questar Gas is also requesting that the
PSCU approve the use of a future test
15
<Page>
year that ends January 1, 2003.
PURCHASED-GAS FILINGS
Effective January 1, 2002, the PSCU approved, on an interim basis, a $66.9
million decrease in natural gas rates that resulted in an 11% decrease for the
typical residential Utah customer. The decrease was based on a significant drop
in natural gas prices at the wellhead. Also, effective January 1, 2002, the
Public Service Commission of Wyoming approved a $2.9 million pass-through gas
cost decrease for Wyoming natural gas rates. Questar Gas routinely submits
purchased-gas adjustment or "pass-through" filings.
FEDERAL RATES
The Federal Energy Regulatory Commission (FERC) rejected proposed tariff sheets
submitted by Questar Pipeline for its new firm "park and loan" service. The
Company intends to file a new application, in which it will address FERC's
concerns, and expects to receive FERC approval in time to begin the new service
in June of 2002.
TransColorado Case
The trial involving the partners of TransColorado Gas Transmission Company
concluded May 2, 2002. The legal issues are complex and trial preparation is
costly. The Company expects to receive an order from the judge before the end
of the third quarter of 2002. For more information refer to Item 1. Legal
Proceedings in this Form 10-Q.
Quantitative and Qualitative Disclosures about Market Risk
QMR's primary market-risk exposures arise from commodity-price changes for
natural gas, oil and other hydrocarbons and changes in interest rates. QMR also
has an investment in a foreign operation that subjects it to exchange-rate risk.
A QMR subsidiary has long-term contracts for pipeline capacity for the next
several years and is obligated for transportation services with no guarantee
that it will be able to recover the full cost of these transportation
commitments.
Hedging Policy
The Company has established policies and procedures for managing market risks
through the use of commodity-based derivative arrangements. The primary
objectives of these energy-price hedging transactions are to support the
Company's earnings targets and to protect earnings from downward movements in
commodity prices. The Company targets between 50 and 75% of the current year's
production to be hedged at or above budget levels by the end of March in the
current year. The Company will add incrementally to these hedges, to reach
forward beyond the current year when price levels are attractive. The volume of
production hedged and the mix of derivative instruments employed are regularly
evaluated and adjusted by management in response to changing market conditions
and reviewed periodically by the Company's Board of Directors. Additionally,
under the terms of the QMR's revolving credit facility, not more than 75% of
Market Resources' production quantities can be committed to hedging
arrangements. The Company does not enter into derivative arrangements for
speculative purposes.
Energy-Price Risk Management
Oil and natural gas prices fluctuate in response to many factors including
changes in supply and demand. QMR bears a majority of the risk associated with
commodity price changes and uses energy-price hedging arrangements in the normal
course of business to limit the risk of adverse price movements. However, these
same arrangements usually limit future gains from favorable price movements.
QMR held energy-price hedging contracts covering the price exposure for about
77.4 million dth of gas and 2.6 million barrels of oil as March 31, 2002. The
fair value of these hedging contracts was a $236,000 current asset. The fair
value
16
<Page>
of the hedging contracts declined $50.7 million from the current asset
measured at December 31, 2001. Settlement of contracts represented $16.0
million of the change and decline in energy prices on futures markets
amounted to $34.7 million of the change. The hedging contracts exist for a
significant share of QMR-owned gas and oil production and for a portion of
energy-marketing transactions. A portion of the contracts at March 31, 2002
had terms extending through December 2004. About 63% of those contracts,
representing approximately $3.0 million, will settle and be reclassified from
other comprehensive income in the next 12 months. A year earlier QMR held
hedging contracts covering 42.6 million dth of natural gas and 735,000
barrels of oil.
QMR's undiscounted mark-to-market valuation of financial gas and oil
price-hedging contracts plus a sensitivity analysis follows:
<Table>
<Caption>
2002 2001
-----------------------
(In Millions)
Mark-to-market valuation as of March 31, $ (4.0) $ (48.4)
Value if gas and oil prices decrease by 10% $ 24.1 $ (39.4)
Value if gas and oil prices increase by 10% $ (32.1) $ (57.3)
</Table>
The calculations reflect energy prices posted on the NYMEX, various "into the
pipe" postings, and fixed prices on the indicated dates. These sensitivity
calculations do not consider changes in the fair value of the corresponding
scheduled physical transactions (i.e., the correlation between the index price
and the price to be realized for the physical delivery of gas or oil
production), which should largely offset the change in value of the hedge
contracts. Also, the sensitivity measures exclude mark-to-market calculations on
physical hedge contracts, where settlement is achieved through delivery of the
gas or oil as opposed to cash settlements with counterparties.
Interest-Rate Risk Management
As of March 31, 2002, the Company had $132 million of variable-rate long-term
debt and $943.5 million of fixed-rate long-term debt. The book value of
variable-rate long-term debt approximates fair value. Effective October 2001,
the Company hedged $100 million of variable-rate debt by entering a fixed-rate
interest swap for one year. Declining interest rates have resulted in a $627,000
reduction in the fair value of the interest-rate hedge.
Foreign Currency Risk Management
The Company does not hedge the foreign currency exposure of its foreign
operation's net assets and long-term debt. Long-term debt held by the foreign
operation, amounting to $61.1 million (U.S.), is expected to be repaid from
future operations of the foreign company.
Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of Section
27(A) of the Securities Act of 1933, as amended, and Section 21(E) of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included or incorporated by reference in this
report, including, without limitation, statements regarding the Company's future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
In addition, forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may", "will", "could", "expect",
"intend", "project", "estimate", "anticipate", "believe", "forecast", or "
"continue" or the negative thereof or variations thereon or similar terminology.
Although 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 expressed or implied in forward-looking
statements include changes in general economic conditions, gas and oil prices
17
<Page>
and supplies, competition, rate and regulatory issues, regulation of the Wexpro
settlement agreement, availability of gas and oil properties for sale or for
exploration and other factors beyond the control of the Company. These other
factors include the rate of inflation, quoted prices of securities available for
sale, the weather and other natural phenomena, the effect of accounting policies
issued periodically by accounting standard-setting bodies, possible adverse
repercussions from terrorist attacks or acts of war, and adverse changes in the
business or financial condition of the Company.
18
<Page>
Item 1. Legal Proceedings.
There are various legal proceedings pending against Questar Corporation
("Questar" or the "Company") and its affiliates. Management believes that the
outcome of these cases will not have a material adverse effect on the Company's
financial position or liquidity. One significant case is discussed below:
The trial in the complex litigation involving the partners in
TransColorado Gas Transmission Company ("TransColorado") ended May 2, 2002.
The five-week trial was held before a judge in Garfield County, Colorado to
determine the validity of a contractual right claimed by Questar
TransColorado, Inc. ("QTC"), a direct subsidiary of Questar Pipeline Company
("Questar Pipeline"), and a third-tier subsidiary of Questar, to put its 50
percent interest in the TransColorado pipeline project to KN TransColorado,
Inc. ("KNTC") during the 12-month period beginning March 31, 2001. (QTC has
given notice of its election to exercise its contractual right subject to a
standstill agreement pending the resolution of the litigation.)
The litigation involves allegations filed by KNTC, a subsidiary of Kinder
Morgan Inc. ("Kinder Morgan"), that QTC and its affiliates breached their
fiduciary duties to TransColorado and KNTC by developing a plan to construct and
operate a new pipeline that would compete with TransColorado, rendering it
economically unviable. KNTC requested at least $150 million in damages plus
punitive damages, a declaratory judgment that KNTC's obligation to purchase
QTC's interest in the project be declared void and unenforceable, and a
dissolution of the partnership under Colorado law. QTC and its affiliates
subsequently filed a counterclaim against KNTC and named affiliates including
Kinder Morgan, seeking a declaratory judgment that the contractual right to
exercise the put is binding and enforceable and damages of at least $185
million.
The judge has requested both sets of parties to file post-trail briefs and
draft findings of fact and conclusions of law by June 7, 2002, and to appear at
a hearing scheduled for July 26, 2002, to respond to his written questions
received in advance of such date. The trial proceedings bolstered the
expectation of the Questar parties that the contractual right to exercise the
put will be vindicated. The Questar parties believe that the judge will issue
his order prior to the end of the third quarter, but also expect that any
decision rendered by the judge may be appealed.
Item 5. Other Information
R. D. Cash, age 59, resigned from his position as the Company's Chief
Executive Officer effective May 1, 2002, when he retired as an employee. He will
continue to serve as Chairman of the Board of Questar and its public reporting
affiliates. The Board of Directors had previously named Keith O. Rattie, age 48,
to succeed Mr. Cash as Chief Executive Officer effective May 1, 2002. Mr.
Rattie, who had been serving as President and Chief Operating Officer since
February 1, 2001, has the title of President and Chief Executive Officer.
Item 6. Exhibits and Reports on Form 8-K.
a. The following exhibit has been filed as part of this report.
19
<Page>
Exhibit No. Exhibit
- ---------- -------
10.17* Consulting contract with R. D. Cash
*Exhibit so marked is management contract or compensation plan or arrangement.
b. The Company did not file any Current Reports on Form 8-K during
the first quarter of 2002.
20
<Page>
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 CORPORATION
(Registrant)
May 14, 2002 /s/Keith O. Rattie
- ------------ -------------------------------
(Date) Keith O. Rattie
President and
Chief Executive Officer
May 14, 2002 /s/S. E. Parks
- ------------ -------------------------------
(Date) S. E. Parks
Senior Vice President, Treasurer
and Chief Financial Officer
21
<Page>
EXHIBIT INDEX
Exhibit
Number Exhibit
- -------- --------
10.17* Consulting contract with R. D. Cash
*Exhibit so marked is management contract or compensation plan or arrangement.