Revenues less cost of gas sold (margin)

Questar Gas reported an increase in its margin in the 2002 periods presented when compared with the same periods of the previous year primarily due to a 4% year-to-year increase in the number of customers, a change in the method of collecting bad debt costs that benefited the margin by $.4 million in the second quarter and $1.9 million in the first half of 2002, and a $.9 million increase in contributions of construction funds from new customers. These increases were partially offset by a decline in gas usage per customer that lowered the margin by $.8 million in the second quarter and $3.6 million in the first half of 2002 compared with the 2001 periods. The Company added 10,500 customers in July of 2001 in an acquisition and simultaneous merger of small distribution systems in eastern Utah and southwestern Wyoming. Excluding this one-time event, the number of customers grew by 2.5%.

Declining usage per general service customer has been a persistent trend experienced by Questar Gas and was a major cause of a general rate increase filed in Utah on May 3, 2002. Average usage per customer on a temperature-adjusted basis has declined by 3.7% in the first half of 2002 compared with the first half of 2001.

In an interim measure associated with a pass-through rate filing in late 2001, Questar Gas was allowed to include the gas-cost portion of bad debt expenses in Utah's semi-annual gas cost filings effective January 1, 2002. This change in procedure provides recovery of the growing bad debt charges experienced by the Company. A stipulation with the Division of Public Utilities and the Committee of Consumer Services agreeing to the change was submitted to the Public Service Commission of Utah (PSCU) on June 19, 2002. The PSCU had yet to take formal action approving the stipulation. The Public Service Commission of Wyoming (PSCW) has approved the change.

Temperatures were colder than normal during the first half of 2002 and resulted in a 13% increase in the general service gas volumes delivered amounting to 6,019,000 decatherms when compared with the first half of 2001. However, 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 26% lower in the first half of 2002 due to reduced deliveries for manufacturing and power generation. A major steel manufacturer suspended its gas deliveries when it filed for Chapter 11 bankruptcy and shut down its facilities. The Company received $812,000 in transportation revenues from this customer in 2001.

Expenses

Operating and maintenance expenses were higher in the 2002 periods when compared to the same periods in the previous year due primarily to higher labor-related costs and increased bad debt expenses. Labor-related costs, primarily for pension and medical benefits, increased $.8 million in the second quarter and $1.7 million in the first half of 2002. Pension expenses have increased because of reduced returns earned on assets held in pension trust funds. Bad debt expenses were $.6 million higher in the first half of 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 accounts.

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.

The effective income tax rate for the first half was 37.7% in 2002 and 37.5% in 2001. The Company realized $.8 million and $.9 million of non-conventional fuel tax credits in the first half of 2002 and 2001, respectively.

Interest and other income

The Company earns a return on the balances in the purchased-gas adjustment account if it is under-collected (recorded in current assets) and from its investment in gas stored underground. Interest and other income was lower in the second quarter and first half of 2002 due to a lower inventory balance, an over-collected purchase-gas adjustment account and smaller gains from selling assets.

Liquidity and Capital Resources

Operating Activities

Net cash provided from operating activities in the first half of 2002 was $113.5 million more than was generated during the first half of 2001. The increase in cash flow resulted primarily from changes in operating assets and liabilities. Accounts receivable were significantly lower in the 2002 periods. Lower gas prices caused the purchased-gas adjustment account to switch from an under-collected position in 2001 to an over-collected position in 2002. The cost of gas stored underground decreased between June 30, 2001 and June 30, 2002.

Investing Activities

Capital expenditures were $24.2 million for the first half of 2002 and are estimated to reach $59.6 million for calendar year 2002.

Financing Activities

Net cash provided from operating activities in the first half of 2002 allowed the Company to finance capital expenditures, pay dividends, eliminate short-term debt and loan cash to Questar Corp. Capital expenditures for the remainder of 2002 are expected to be financed from net cash flow provided from operating activities, the return of cash loaned to Questar Corp., and borrowings from Questar Corp. The Company loans cash to Questar Corp. or borrows from Questar Corp. for short-term needs. Such notes receivable and notes payable bear market interest rates. The Company issues long-term debt to third parties and sells equity to Questar Corp. to meet long-term capital requirements.

Moody's Reviews Possible Downgrade of Debt Ratings

Moody's review of Questar Gas and some of its affiliated companies is still pending. On May 2, 2002, Moody's Investors Service placed Questar Gas Company under review for a possible rating downgrade of the Company's A1 senior unsecured debt. Moody's also placed Questar Gas's parent company, Questar Corporation and affiliated companies, Questar Pipeline and Questar Market Resources under review. The review was prompted by Moody's concern over an increase in Questar's financial leverage following an acquisition in 2001, 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. Lower debt ratings would increase the Company's cost of debt. Unless ratings fall below investment grade, a downgrade is not expected to materially affect the Company's growth strategy.

On July 1, 2002, Questar Corporation filed a shelf registration statement with the Securities and Exchange Commission to issue common equity or mandatory convertible securities if necessary to achieve debt-reduction goals.

Regulatory Items

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 in Utah natural gas rates effective January 1, 2003, which amounts to $23 million of annualized revenues and includes a 12.6% return on equity. Questar Gas's return on equity for 2001 was 9.1%. The PSCU has currently authorized a return on equity of 11.0%. Questar Gas is also requesting that the PSCU approve the use of a forward-looking test period that ends January 1, 2003. Response from all intervening parties is due August 28. Hearings on the rate case are scheduled to begin October 17. Under Utah law, the general rate increase becomes effective 240 days after filing, if the PSCU does not render a decision by that date.

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 PSCW 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.

In May of 2002, the Company filed for gas-cost increases in both Utah and Wyoming. Because of subsequent changes in gas-price forecasts, the Company requested to suspend the increases.

On October 23, 2001, the Utah Supreme Court unanimously reversed and remanded a 1999 PSCU decision and agreed with Questar Gas's position that certain gas processing costs should have been considered for recovery in a 1999 pass through filing. A hearing was held June 17, 2002 on the question of the amount of gas processing costs that Questar Gas should be allowed to recover as a result of the remand. The Company is seeking $5.3 million plus interest. The Division of Public Utilities has suggested at least $2.3 million plus interest and the Committee of Consumer Services suggested that Questar Gas not be allowed to recover any processing costs. The Company is awaiting a decision from the PSCU.

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 var y 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;

       Changes in gas prices and supplies;

       The creditworthiness of our customers and their ability to pay for gas consumed;

       Competition from other sources of energy;

       Changes in rate and regulatory issues including receiving a reasonable rate of return and        acceptance of a future test period by state rate regulators;

       The effects of environmental regulations;

       Changes in suppliers' credit ratings including energy merchants;

       Changes in the rate of inflation, interest rates and regulation of income and other taxes;

       Changes in the rate of inflation, interest rates and regulation of income and other taxes;

       The effect of natural phenomena;

       The effect of any terrorist activities;

       The effect of accounting policies issued periodically by accounting standard-setting bodies,

       Adverse changes in the business or financial condition of the Company; and

       As Questar Corp. diversifies into more unregulated business activities, the Company's credit        ratings may be affected.