Questar Gas Company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2010

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

QUESTAR GAS COMPANY

(Exact name of registrant as specified in its charter)

STATE OF UTAH

333-69210

87-0155877

(State or other jurisdiction of

incorporation or organization)

(Commission File No.)

(I.R.S. Employer

Identification No.)

180 East 100 South Street, P.O. Box 45360 Salt Lake City, Utah 84145-0360

(Address of principal executive offices)

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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ]

Accelerated filer

[ ]

Non-accelerated filer [X] (Do not check if a smaller reporting company)

Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

At April 30, 2010, there were 9,189,626 shares of the registrant’s common stock, $2.50 par value, outstanding. All shares are owned by Questar Corporation.

Registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is filing this form with the reduced disclosure format.

Questar Gas Company

Form 10-Q for the Quarter Ended March 31, 2010

TABLE OF CONTENTS

Page

PART I.

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

Statements of Income for the three and twelve months ended

March 31, 2010 and 2009

Condensed Balance Sheets as of March 31, 2010, March 31, 2009

and December 31, 2009

Condensed Statements of Cash Flows for the three months ended

March 31, 2010 and 2009

Notes Accompanying the Condensed Financial Statements

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

ITEM 4.

CONTROLS AND PROCEDURES

PART II.

OTHER INFORMATION

ITEM 6.

EXHIBITS

Signatures

Questar Gas 2010 Form 10-Q

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.


QUESTAR GAS COMPANY
STATEMENTS OF INCOME
(Unaudited)
	3 Months Ended March 31,		12 Months Ended March 31,
	2010	2009	2010	2009
	(in millions)
REVENUES
From unaffiliated customers	$ 360.7	$ 405.7	$ 873.9	$1,009.7
From affiliated companies	0.3		1.3	4.1
Total Revenues	361.0	405.7	875.2	1,013.8

OPERATING EXPENSES
Cost of natural gas sold (excluding operating expenses shown separately)	237.0	293.1	570.5	737.2
Operating and maintenance	39.0	31.0	114.4	96.3
General and administrative	11.3	9.8	44.4	38.0
Depreciation and amortization	11.1	10.8	44.1	42.1
Other taxes	4.0	3.8	13.5	12.2
Total Operating Expenses	302.4	348.5	786.9	925.8
OPERATING INCOME	58.6	57.2	88.3	88.0
Interest and other income	1.5	1.8	7.3	5.6
Interest expense	(6.8)	(7.8)	(27.5)	(27.4)
INCOME BEFORE INCOME TAXES	53.3	51.2	68.1	66.2
Income taxes	(20.2)	(19.4)	(25.2)	(24.8)
NET INCOME	$ 33.1	$ 31.8	$ 42.9	$ 41.4

See notes accompanying the condensed financial statements


QUESTAR GAS COMPANY
CONDENSED BALANCE SHEETS	March 31,				December 31,
	2010	2009			2009
	(Unaudited)
	(in millions)
ASSETS
Current Assets
Cash and cash equivalents	$ 1.5		$ 0.7	$ 7.2
Note receivable from Questar			12.6
Accounts receivable, net	85.7		92.9	77.0
Unbilled gas accounts receivable	57.5		46.1	86.6
Accounts receivable from affiliates	3.1		2.9	3.3
Gas stored underground	10.7		11.6	42.5
Materials and supplies	11.9		14.9	12.1
Regulatory assets	34.8		29.5	43.3
Prepaid expenses and other	1.7		0.5	3.4
Purchased-gas adjustment	3.1
Deferred income taxes – current	3.6		2.7	3.6
Total Current Assets	213.6		214.4	279.0
Property, Plant and Equipment	1,734.9		1,654.9	1,721.9
Accumulated depreciation and amortization	(695.6)		(665.9)	(690.4)
Net Property, Plant and Equipment	1,039.3		989.0	1,031.5
Regulatory assets	15.4		17.1	16.0
Goodwill	5.6		5.6	5.6
Other noncurrent assets	6.9		7.8	7.0
TOTAL ASSETS	$1,280.8		$1,233.9	$1,339.1

LIABILITIES AND COMMON SHAREHOLDER’S EQUITY
Current Liabilities
Notes payable to Questar	$ 63.4			$ 87.0
Accounts and other payables	112.7		$ 76.1	132.5
Accounts payable to affiliates	56.0		51.3	50.5
Customer advances	9.4		11.8	30.3
Purchased-gas adjustment			98.6	22.1
Total Current Liabilities	241.5		237.8	322.4
Long-term debt	370.0		370.0	370.0
Deferred income taxes	186.8		158.4	189.0
Other long-term liabilities	57.2		58.1	58.7

COMMON SHAREHOLDER’S EQUITY
Common stock	23.0		23.0	23.0
Additional paid-in capital	149.3		148.1	148.9
Retained earnings	253.0		238.5	227.1
Total Common Shareholder’s Equity	425.3		409.6	399.0
TOTAL LIABILITIES AND COMMON SHAREHOLDER’S EQUITY	$1,280.8		$1,233.9	$1,339.1

See notes accompanying the condensed financial statements


QUESTAR GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
	3 Months Ended March 31,
	2010	2009
	(in millions)
OPERATING ACTIVITIES
Net income	$ 33.1	$ 31.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	12.1	11.8
Deferred income taxes	(2.2)	4.4
Share-based compensation	0.4	0.2
Changes in operating assets and liabilities	7.9	74.3
NET CASH PROVIDED BY OPERATING ACTIVITIES	51.3	122.5

INVESTING ACTIVITIES
Property, plant and equipment	(26.1)	(15.0)
Cash used in asset dispositions	(0.1)	(0.2)
Proceeds from asset dispositions		0.1
NET CASH USED IN INVESTING ACTIVITIES	(26.2)	(15.1)

FINANCING ACTIVITIES
Change in notes receivable from Questar		(12.6)
Change in notes payable to Questar	(23.6)	(88.3)
Dividends paid	(7.2)	(7.0)
NET CASH USED IN FINANCING ACTIVITIES	(30.8)	(107.9)
Change in cash and cash equivalents	(5.7)	(0.5)
Beginning cash and cash equivalents	7.2	1.2
Ending cash and cash equivalents	$ 1.5	$ 0.7

See notes accompanying the condensed financial statements

QUESTAR GAS COMPANY

NOTES ACCOMPANYING THE CONDENSED FINANCIAL STATEMENTS

Note 1 – Nature of Business

Questar Gas Company (Questar Gas or Company) is a wholly owned subsidiary of Questar Corporation (Questar). The Company provides retail natural gas distribution in Utah, southwestern Wyoming and a small portion of southeastern Idaho. Questar Gas is regulated by the Public Service Commission of Utah (PSCU) and the Public Service Commission of Wyoming (PSCW). The Public Utility Commission of Idaho has contracted with the PSCU for rate oversight of Questar Gas’s Idaho operations.

Note 2 – Basis of Presentation of Interim Financial Statements

The interim condensed financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP) and with the instructions for quarterly reports on Form 10-Q and Regulations S-X and S-K. The interim condensed financial statements reflect all normal, recurring adjustments and accruals that are, in the opinion of management, necessary for a fair presentation of financial position and results of operations for the interim periods presented. Interim financial statements do not include all of the information and notes required by GAAP for audited annual financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Certain reclassifications were made to prior-period financial statements to conform with the current presentation.

The preparation of the condensed financial statements and notes in conformity with GAAP requires that management make estimates and assumptions that affect the amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from estimates. The results of operations for the three and twelve months ended March 31, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

All dollar amounts in this quarterly report on Form 10-Q are in millions, except where otherwise noted.

Note 3 – Fair Value Measurements

The following table discloses the fair value and related carrying amount of certain financial instruments not disclosed in other notes to the condensed financial statements in this quarterly report on Form 10-Q:


	Carrying	Estimated	Carrying	Estimated
	Amount	Fair Value	Amount	Fair Value
	March 31, 2010		December 31, 2009
	(in millions)
*Financial assets*
Cash and cash equivalents	$ 1.5	$ 1.5	$ 7.2	$ 7.2
*Financial liabilities*
Notes payable to Questar	63.4	63.4	87.0	87.0
Long-term debt	370.0	415.2	370.0	404.1

The carrying amounts of cash and cash equivalents and notes payable to Questar approximate fair values. The fair value of fixed-rate long-term debt is based on the discounted present value of cash flows using the Company's current credit-risk adjusted borrowing rates.

Note 4 - Questar Considering Spinoff of Market Resources Excluding Wexpro

On April 21, 2010, Questar Corporation announced it is considering a possible tax-free spinoff of Market Resources and its subsidiaries excluding Wexpro. After the spinoff, Questar Corporation would remain an integrated natural gas company comprised of subsidiaries Wexpro, Questar Pipeline, and Questar Gas. On April 28, 2010, the Internal Revenue Service, in a private letter ruling, confirmed that the proposed spinoff would be a tax-free transaction. Receipt of the referenced private letter ruling is among several precedent conditions to consummation of the proposed spin transaction, including board approval. Subject to those precedent conditions, the spinoff transaction may occur in the second half of 2010.

On April 22, 2010, Moody's Investors Service affirmed its A3 rating of long-term debt issued by Questar Gas and Standard & Poor’s placed the BBB+ rating long-term debt issued by Questar Gas on CreditWatch with positive implications. Moody’s affirmed its P-2 rating of Questar’s short-term debt and Standard & Poor’s placed its A-2 rating of Questar’s short-term debt on CreditWatch with positive implications.

Note 5 – Questar Gas General Rate Case

On April 8, 2010, the Public Service Commission of Utah (PSCU) approved a stipulated settlement of Questar Gas's Utah general rate case. The settlement increases Questar Gas's allowed return on equity from 10.0% to 10.35% and extends the existing conservation enabling tariff (CET). The settlement also provides for a rate-tracking mechanism to allow for recovery of the capital costs associated with Questar Gas's high-pressure natural gas feeder-line replacement program.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following information updates the discussion of Questar Gas’s financial condition provided in its previous 2009 Form 10-K filing, and analyzes the changes in the results of operations between the three- and twelve-month periods ended March 31, 2010 and 2009. For definitions of commonly used terms found in this Form 10-Q, please refer to the "Glossary of Commonly Used Terms" provided in the Company’s 2009 Form 10-K.

RESULTS OF OPERATIONS

Questar Gas reported net income of $33.1 million in the first quarter of 2010 compared with $31.8 million in the first quarter of 2009, a 4% increase. Net income for the 12 months ended March 31, 2010, was $42.9 million, up 4% from $41.4 million for the 12 months ended March 31, 2009. Operating income increased $1.4 million, or 2%, in the 2010-to-2009 first-quarter comparison due to a higher margin that more than offset higher costs. Operating income was flat in the 12 months ended March 31, 2010, compared to the 12 months ended March 31, 2009. Following is a summary of Questar Gas financial and operating results:


	3 Months Ended March 31,				12 Months Ended March 31,
	2010	2009		Change	2010	2009	Change

Operating Income
REVENUES
Residential and commercial sales	$342.0		$392.0	($50.0)	$824.0	$942.7	($118.7)
Industrial sales	6.6		2.3	4.3	12.6	11.4	1.2
Transportation for industrial customers	2.9		2.5	0.4	11.6	10.1	1.5
Service	1.7		1.7		5.4	5.7	(0.3)
Other	7.8		7.2	0.6	21.6	43.9	(22.3)
Total Revenues	361.0		405.7	(44.7)	875.2	1,013.8	(138.6)
Cost of natural gas sold	237.0		293.1	(56.1)	570.5	737.2	(166.7)
Margin	124.0		112.6	11.4	304.7	276.6	28.1
OTHER OPERATING EXPENSES
Operating and maintenance	39.0		31.0	8.0	114.4	96.3	18.1
General and administrative	11.3		9.8	1.5	44.4	38.0	6.4
Depreciation and amortization	11.1		10.8	0.3	44.1	42.1	2.0
Other taxes	4.0		3.8	0.2	13.5	12.2	1.3
Total Other Operating Expenses	65.4		55.4	10.0	216.4	188.6	27.8
Operating Income	$ 58.6		$ 57.2	$ 1.4	$ 88.3	$88.0	$ 0.3


Operating Statistics
Natural gas volumes (MMdth)
Residential and commercial sales	44.6	44.5	0.1	109.5	106.8	2.7
Industrial sales	1.1	0.3	0.8	2.1	1.6	0.5
Transportation for industrial customers	16.5	16.5		58.0	62.8	(4.8)
Total industrial	17.6	16.8	0.8	60.1	64.4	(4.3)
Total deliveries	62.2	61.3	0.9	169.6	171.2	(1.6)
Natural gas revenue (per dth)
Residential and commercial sales	$7.66	$8.81	($1.15)	$7.52	$8.82	($1.30)
Industrial sales	6.01	7.57	(1.56)	6.08	7.22	(1.14)
Transportation for industrial customers	$0.18	$0.15	$0.03	$0.20	$0.16	$0.04
Colder (warmer) than normal temperatures		(1%)	1%	5%	2%	3%
Temperature-adjusted usage per customer (dth)	46.6	47.4	(0.8)	108.1	108.1
Customers at March 31, (thousands)	904.0	892.8	11.2

Margin Analysis

Questar Gas margin (revenues minus gas costs) increased $11.4 million in the first quarter of 2010 compared to the first quarter of 2009 and increased $28.1 million in the 12 months ended March 31, 2010 compared to the 12 months ended March 31, 2009. Following is a summary of major changes in Questar Gas margin:


	Change
	3 Months Ended March 31,	12 Months Ended March 31,
	2010 to 2009	2010 to 2009

Customer growth	$1.2	$3.0
General rate case		1.0
Demand-side management cost recovery	11.5	26.1
Recovery of gas-cost portion of bad-debt costs	(1.5)	(5.3)
Other	0.2	3.3
Increase	$11.4	$28.1

At March 31, 2010, Questar Gas served 904,040 customers, up from 892,829 at March 31, 2009. Customer growth increased the margin by $1.2 million in the first quarter of 2010 and $3.0 million in the 12 months ended March 31, 2010.

Temperature-adjusted usage per customer decreased 2% in the first quarter of 2010 compared to the first quarter of 2009 and was flat in the 12 months ended March 31, 2010 compared to the 12 months ended March 31, 2009. The impact on the Company margin from changes in usage per customer has been mitigated by a conservation-enabling tariff that was approved by the PSCU beginning in 2006.

Weather, as measured in degree days, was normal in the first quarter of 2010 compared to 1% warmer than normal in the first quarter of 2009. Weather for the 12 months ended March 31, 2010, was 5% colder than normal compared to 2% colder than normal for the 12 months ended March 31, 2009. A weather-normalization adjustment on customer bills generally offsets financial impacts of moderate temperature variations.

The Company filed a general rate case in December 2009, requesting an allowed return on equity of 10.6%, a mechanism to adjust rates for feeder-line replacement and a continuation of the CET. On April 8, 2010, the Company entered into a stipulation agreement with other parties in the case to settle all issues in the case. The stipulation agreement sets an allowed return on equity of 10.35%, increases customer rates by $5.0 million, establishes a mechanism to adjust rates for feeder-line replacement and continues the CET. The stipulation agreement was approved by the PSCU with the changes in rates effective August 1, 2010.

Expenses

Cost of natural gas sold was down 19% in the first quarter of 2010 compared to the first quarter of 2009 and down 23% in the 12 months ended March 31, 2010, compared to the 12 months ended March 31, 2009, due to lower gas purchase expenses per dth. Questar Gas accounts for purchased-gas costs in accordance with procedures authorized by the PSCU and the PSCW. Purchased-gas costs that are different from those provided for in present rates are accumulated and recovered or credited through future rate changes. As of March 31, 2010, Questar Gas had a $3.1 million under-collected balance in the purchased-gas adjustment account representing costs incurred in excess of costs recovered from customers.

Operating and maintenance expenses increased $8.0 million, or 26%, in the first quarter of 2010 compared to the first quarter of 2009 and increased $18.1 million, or 19%, in the 12 months ended March 31, 2010, compared to the 12 months ended March 31, 2009. The increases were due primarily to higher demand-side management costs of $11.5 million in the quarter and $26.1 million in the 12-month period. The demand-side management costs are for the company’s energy efficiency program and are recovered from customers through periodic rate changes. The increase in demand-side management costs were partially offset by a reduction in bad-debt costs of $1.9 million in the quarter and $6.9 million in the 12-month period. General and administrative expenses increased $1.5 million, or 15%, in the 2010 first quarter and $6.4 million, or 17% in the 12 month period ended March 31, 2010, due to higher overhead costs. Operating, maintenance, general and administrative expenses per customer were $56 in the first quarter of 2010 compared to $46 in the first quarter of 2009 as a result of higher demand-side management costs of $13 per customer.

Depreciation expense increased 3% in the first quarter of 2010 compared to the first quarter of 2009 and increased 5% in the 12 months ended March 31, 2010, compared to the 12 months ended March 31, 2009, primarily as a result of plant additions from customer growth and replacement of feeder lines.

Forward-Looking Statements

This quarterly report may contain or incorporate by reference information that includes or is based upon “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, exploration efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results.

Any or all forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining actual future results. These statements are based on current expectations and the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements. Among factors that could cause actual results to differ materially are:

the risk factors discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009;

general economic conditions, including the performance of financial markets and interest rates;

changes in industry trends;

changes in laws or regulations; and

other factors, most of which are beyond the Company’s control.

Questar Gas undertakes no obligation to publicly correct or update the forward-looking statements in this quarterly report, in other documents, or on the Web site to reflect future events or circumstances. All such statements are expressly qualified by this cautionary statement.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2010. Based on such evaluation, such officers have concluded that, as of March 31, 2010, the

Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company, required to be included in the Company’s reports filed or submitted under the Exchange Act. The Company’s Chief Executive Officer and Chief Financial Officer also concluded that the controls and procedures were effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management including its principal executive and financial officers or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls.

There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS.

The following exhibits are filed as part of this report:

Exhibit No.

Exhibits

31.1.

Certification signed by Ronald W. Jibson, Questar Gas Company’s President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2.

Certification signed by Richard J. Doleshek, Questar Gas Company’s Executive Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.

Certification signed by Ronald W. Jibson and Richard J. Doleshek, Questar Gas Company’s President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, respectively, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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 7, 2010

/s/Ronald W. Jibson

Ronald W. Jibson

President and Chief Executive Officer

May 7, 2010

/s/Richard J. Doleshek

Richard J. Doleshek,

Executive Vice President

and Chief Financial Officer