PART I FINANCIAL INFORMATION

Item 1. Financial Statements

QUESTAR GAS COMPANY

STATEMENTS OF INCOME

(Unaudited)

3 Months Ended

6 Months Ended

12 Months Ended

June 30,

June 30,

June 30,

2003

2002

2003

2002

2003

2002

(In Thousands)

REVENUES

$   91,162

$   82,801

$   326,565

$  344,060

$   578,016

$  627,339

OPERATING EXPENSES

  Cost of natural gas sold

54,481

48,062

199,116

225,191

344,219

416,982

  Operating and maintenance

24,130

23,747

52,670

50,398

107,816

105,759

  Rate refund obligation

22,000

22,000

22,000

  Depreciation and amortization

9,801

9,937

20,404

19,660

40,515

37,539

  Other taxes

2,832

2,828

5,751

5,694

9,605

8,881

   TOTAL OPERATING EXPENSES

113,244

84,574

299,941

300,943

524,155

569,161

   OPERATING INCOME (LOSS)

(22,082)

(1,773)

26,624

43,117

53,861

58,178

INTEREST AND OTHER INCOME

634

904

1,123

1,370

2,082

4,089

DEBT EXPENSE

(5,245)

(5,593)

(11,160)

(11,322)

(22,333)

(23,261)

   INCOME (LOSS) BEFORE INCOME

    TAXES AND CUMULATIVE EFFECT

(26,693)

(6,462)

16,587

33,165

33,610

39,006

INCOME TAXES

(10,235)

(2,953)

7,041

12,508

12,322

13,668

   INCOME (LOSS) BEFORE

    CUMULATIVE EFFECT

(16,458)

(3,509)

9,546

20,657

21,288

25,338

Cumulative effect of accounting change

For asset retirement obligations, net of

Income taxes of $204

(334)

(334)

          NET INCOME (LOSS)

($  16,458)

($   3,509)

$   9,212

$  20,657

$  20,954

$   25,338

See notes to the financial statements

QUESTAR GAS COMPANY

CONDENSED BALANCE SHEETS

June 30,

December 31,

2003

2002

2002

(Unaudited)

(In Thousands)

ASSETS

Current assets

  Cash and cash equivalents

$      113

$     2,993

  Notes receivable from Questar Corp.

$    20,400

  Accounts receivable, net

41,259

42,215

90,738

  Inventories, at lower of average cost or market

    Gas stored underground

16,993

12,769

22,742

    Materials and supplies

5,134

3,203

4,073

  Prepaid expenses and other

998

605

1,474

  Deferred income taxes - current

222

6,683

5,047

    Total current assets

64,719

85,875

127,067

Property, plant and equipment

1,216,302

1,155,159

1,193,553

Less accumulated depreciation and amortization

529,485

497,164

513,485

    Net property, plant and equipment

686,817

657,995

680,068

Regulatory and other assets

27,136

19,678

19,004

Goodwill

5,652

5,879

5,652

$   784,324

$  769,427

$  831,791

LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities

  Checks outstanding in excess of cash balances

$    2,699

  Notes payable to Questar Corp.

$     4,000

$    36,400

  Accounts payable and accrued expenses

67,358

57,541

85,388

  Purchased-gas adjustments

584

17,588

13,282

    Total current liabilities

71,942

77,828

135,070

Long-term debt

290,000

285,000

285,000

Deferred income taxes and investment tax credits

101,202

86,815

94,720

Other long-term liabilities

10,640

5,448

3,173

Common shareholder's equity

  Common stock

22,974

22,974

22,974

  Additional paid-in capital

121,875

121,875

121,875

  Retained earnings

165,691

169,487

168,979

    Total common shareholder's equity

310,540

314,336

313,828

$  784,324

$  769,427

$  831,791

See notes to the financial statements

QUESTAR GAS COMPANY

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

6 Months Ended

June 30,

2003

2002

(In Thousands)

OPERATING ACTIVITIES

  Net income

 $     9,212

$      20,657

  Depreciation and amortization

21,928

21,195

  Deferred income taxes and investment tax credits

11,512

(7,298)

  Net (gain) loss from asset sales

169

(53)

  Cumulative effect of accounting change

334

43,155

34,501

  Change in operating assets and liabilities

22,635

81,949

       NET CASH PROVIDED FROM OPERATING ACTIVITIES

65,790

116,450

INVESTING ACTIVITIES

  Capital expenditures

(29,035)

(24,232)

  Proceeds from (cash used in) disposition of assets

265

(33)

       NET CASH USED IN INVESTING ACTIVITIES

(28,770)

(24,265)

FINANCING ACTIVITIES

  Checks outstanding in excess of cash balance

2,699

  Issuance of long-term debt

110,000

  Repayment of long-term debt

(105,000)

  Increase in notes receivable from Questar Corp.

(20,400)

  Decrease in notes payable to Questar Corp.

(32,400)

(66,600)

  Payment of dividends

(12,500)

(12,250)

        NET CASH USED IN FINANCING ACTIVITIES

(39,900)

(96,551)

  Change in cash and cash equivalents

(2,880)

(4,366)

  Beginning cash and cash equivalents

2,993

4,366

  Ending cash and cash equivalents

 $         113

 $             -

See notes to the financial statements

QUESTAR GAS COMPANY

NOTES TO FINANCIAL STATEMENTS

June 30, 2003

(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-, six- and twelve-month periods ended June 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The impact of abnormal weather on gas distribution earnings is partially reduced by the operations of a weather-normalization adjustment. For further information refer to the financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2002 filed by Questar Gas Company (Questar Gas or the Company).

Note 2 - Utah Supreme Court Order in Questar Gas Carbon Dioxide Case

The Utah Supreme Court issued an order reversing a decision made by the Public Service Commission of Utah (PSCU) in August of 2000 concerning certain processing costs incurred by Questar Gas. The court ruled that the PSCU did not comply with its responsibilities and regulatory procedures when approving a stipulation in Questar Gas's general rate case filed in December of 1999. The stipulation permitted Questar Gas to collect $5 million per year in rates to recover costs incurred to reduce the level of carbon dioxide in gas volumes delivered to customers. The Committee of Consumer Services, a Utah state agency, appealed the PSCU's decision because the PSCU did not address whether or not the costs were prudently incurred. The Supreme Court heard the appeal in June of 2003 and issued an order on August 1, 2003.

The Committee of Consumer Services had argued that the costs of carbon dioxide removal should have been borne by nearby gas producers, not Questar Gas customers. The Committee argued that Questar Pipeline Company (Questar Pipeline), a Questar Gas affiliate, should have sought Federal Energy Regulatory Commission (FERC) approval to modify its pipeline transportation tariff to force gas producers in central Utah to remove carbon dioxide from the gas before delivery for transport on Questar Pipeline.

As a result of the Supreme Court's order, Questar Gas recorded a $22 million liability for a potential refund to gas distribution customers. The liability reflects revenue received for processing costs from June of 1999 through June of 2003. This charge reduces Questar Gas's net income by $13.6 million. Going forward, for the safety of Questar Gas's customers, the Company intends to continue operating the plant to remove carbon dioxide from the gas stream. The cost for the second half of 2003 will be approximately $1.6 million after tax. Thereafter, annual costs will be approximately $3.2 million after tax. Recording the liability did not have a material impact on credit, cash or liquidity of Questar Gas.

The processing plant was constructed and is operated by Questar Transportation Services, a subsidiary of Questar Pipeline. Questar Gas determined that contracting with Questar Transportation Services was the lowest cost alternative.

Questar Gas believes that it acted prudently and in the best interests of its customers to incur the processing costs. It will pursue legal and regulatory avenues to recover processing costs incurred historically and to collect such costs in future rates.

Note 3 - New Accounting Standard

to a majority of the Company's long-lived distribution-system assets due to lack of a legal obligation to abandon the assets or to an indeterminable abandonment date. The new accounting rules allow deferral of an obligation until the abandonment date is known.

A regulatory asset amounting to $6.6 million, reflecting a retroactive charge, was recorded by Questar Gas for the abandonment costs associated with gas wells operated on its behalf by Wexpro. The regulatory asset will be reduced as gas wells are plugged and abandoned.

The asset retirement obligation (liability) is adjusted to its present value each period through an accretion process using a credit-adjusted risk-free interest rate. Both the accretion expense associated with the liability and the depreciation associated with the capitalized abandonment costs are non-cash expenses until the asset is retired.

Note 4 - Financing

On January 24, 2003, Questar Gas issued $40 million of medium-term notes with an effective interest rate of 5.02% and a ten-year life. The proceeds were used to redeem $41 million of debt with a coupon rate of 8.4%. Questar Gas paid a $1.7 million call premium. This issue completed a Form S-3 shelf registration for issuance of up to $100 million of medium-term notes filed by Questar Gas in the third quarter of 2001.

On February 27, 2003, Questar Gas filed a shelf registration statement for the issuance of up to $70 million of medium-term notes. In March 2003, Questar Gas sold $70 million of 15-year notes with a coupon rate of 5.31%. On April 24, 2003, proceeds from the offering were used to redeem $64 million of higher-cost debt issued in 1992 and 1993 with a weighted-average interest rate of 8.11%. Questar Gas paid a call premium of $2.6 million.

Note 5 - Reclassifications

Certain reclassifications were made to the 2002 financial statements to conform with the 2003 presentation.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

QUESTAR GAS COMPANY

June 30, 2003

(Unaudited)

Operating Results

Following is a summary of financial and operating information for the Company:

3 Months Ended

6 Months Ended

12 Months Ended

June 30,

June 30,

June 30,

2003

2002

2003

2002

2003

2002

FINANCIAL RESULTS - (in thousands)

  Revenues

    From unaffiliated customers

$90,594

$82,004

$325,108

$342,962

$575,981

$625,314

    From affiliates

568

797

1,457

1,098

2,035

2,025

      Total revenues

91,162

82,801

326,565

344,060

578,016

627,339

  Cost of natural gas sold

54,481

48,062

199,116

225,191

344,219

416,982

         Margin

$36,681

$34,739

$127,449

$118,869

$233,797

$210,357

  Operating income (loss)

($22,082)

($1,773)

$ 26,624

$ 43,117

$ 53,861

$ 58,178

  Income (loss) before cumulative effect

($16,458)

($3,509)

$  9,546

$ 20,657

$ 21,288

$ 25,338

  Cumulative effect of accounting change

(334)

(334)

  Net income (loss)

($16,458)

($ 3,509)

$  9,212

$ 20,657

$ 20,954

$ 25,338

OPERATING STATISTICS

  Natural gas volumes (in MDth)

    Residential and commercial sales

12,999

10,784

48,467

54,145

85,118

89,669

    Industrial sales

2,201

2,356

5,428

5,796

10,361

10,694

    Transportation for industrial customers

9,421

9,831

18,973

21,691

43,741

47,030

      Total industrial

11,622

12,187

24,401

27,487

54,102

57,724

      Total deliveries

24,621

22,971

72,868

81,632

139,220

147,393

  Natural gas revenue (per Decatherm)

    Residential and commercial

$   5.82

$   6.01

$   6.01

$   5.61

$5.99

$   6.12

    Industrial sales

4.23

4.33

4.27

4.64

3.94

4.86

    Transportation for industrial customers

0.19

0.17

0.19

0.16

0.17

0.14

  Heating degree days colder (warmer)

      than normal

1%

(19%)

(9%)

12%

(5%)

7%

  Average temperature adjusted usage

    per customer (Dth)

17.2

16.3

69.3

67.2

118.3

118.4

  Number of customers at June 30,

    Residential and commercial

748,512

728,881

    Industrial

1,282

1,299

      Total

749,794

730,180

Revenues less cost of natural gas sold (margin)

Questar Gas's margin was higher in the 2003 periods presented compared with the 2002 periods due to a general rate increase, customer additions and higher usage per customer. Effective December 30, 2002, the Public Service Commission of Utah (PSCU) issued an order approving an $11.2 million general rate increase for Questar Gas using an 11.2% return on equity. The rate increase also reflects year-end 2002 usage per customer and costs. The number of customers increased 19,614 or 2.7% in the year over year comparison. Temperature adjusted usage per customer grew by 6% in the second quarter and 3% in the first half of 2003 compared with the same periods in 2002. This positive change in usage per customer is not expected to continue. Questar Gas received PSCU approval to pass-through a 25% increase in natural gas costs in rates beginning July 1, 2003.

The margin for the 12-months ended June 30, 2003 was higher when compared with the corresponding period of 2002 due to several factors in addition to those discussed above. The 2003 period benefited from an August 2002 one-time recovery of $3.8 million of gas costs previously denied. The PSCU order allowing the recovery was later reversed by a Utah Supreme Court ruling dated August 1, 2003. In addition, the PSCU authorized Questar Gas to recover the gas cost portion of bad debt expense in its pass through gas costs. Starting in 2003, the Utah general rate case required recording contributions in aid of construction as a reduction of rate base rather than in revenues.

The weather-normalization adjustment (WNA) mitigates the financial effect of temperatures that are either colder or warmer than normal. Generally, under the WNA customers pay for non-gas costs based on normal temperatures.

Gas volumes delivered to industrial customers were lower in the 2003 periods presented due to decreased gas usage for generation of electricity and in manufacturing processes.

Expenses

Operating and maintenance expenses were higher in the 2003 periods presented when compared to the same periods in 2002 due primarily to higher labor-related costs. Labor-related expenses have increased primarily because of higher costs of pension and benefit programs and less capitalization of labor costs. Higher depreciation expense in the first half of 2003 reflects increased investment in computer equipment and software, which are depreciated over a shorter life than assets placed in the ground.

The Utah Supreme Court issued an order reversing decisions made by the PSCU in August of 2000 and August of 2002. The PSCU originally permitted Questar Gas to collect $5 million per year to recover costs incurred to process certain gas volumes delivered to customers. In August 2002, the PSCU allowed an additional $3.8 million of recovery from a previous period. As a result of the order, Questar Gas recorded a $22 million liability reflecting a potential refund of processing costs collected in rates from June of 1999 through June of 2003.

Debt expense was lower in the 2003 periods presented when compared with the 2002 periods as a result of refinancing long-term debt and a lower purchased-gas account. Questar Gas incurs a carrying charge on the purchased-gas account obligation.

The effective income tax rate for the first half was 42.6% in 2003 and 37.7% in 2002. An income tax credit for non-conventional fuel credits expired for gas produced after December 31, 2002. However, the expired tax credit was considered in setting rates in Questar Gas's general rate increase effective December 30, 2002. The Company realized $.8 million of non-conventional fuel tax credits in the first half of 2002.

Cumulative effect of change in accounting method

On January 1, 2003, the Company adopted a new accounting rule, SFAS 143, "Accounting for Asset Retirement Obligations" and recorded a cumulative effect that reduced net income by $334,000. Another $6.6 million, before income taxes, was recorded as a regulatory asset representing the accumulated SFAS 143 costs incurred by Wexpro for gas wells operated on behalf of Questar Gas. This asset will be amortized as the wells are plugged and abandoned. The ongoing accretion and depreciation expenses associated with SFAS 143 that will directly affect income are insignificant.

Liquidity and Capital Resources

Operating Activities

Net cash provided from operating activities in the first half of 2003 was $50.7 million less than was provided during the first half of 2002, primarily due to changes in operating assets and liabilities. The change in the over-collected purchased-gas adjustment account was $38.6 million less in the first half of 2003. In addition, a warmer winter and higher gas prices in 2003 resulted in more gas volumes in storage at a higher average cost.

Investing Activities

Capital expenditures were $29.0 million for the first half of 2003 and are estimated to reach $81.3 million for calendar year 2003. Questar Gas's forecasted capital investment in 2003 includes approximately $17.4 million to replace an aging customer information system. Questar Gas intends to include these costs in a future general rate case.

Financing Activities

Net cash provided from operating activities in the first half allowed the Company to finance capital expenditures, pay dividends and reduce short-term debt. Capital expenditures for the remainder of 2003 are expected to be financed from net cash flow provided from operating activities.

Questar Gas issued $110 million of medium-term notes in the first half of 2003 and used the proceeds to replace $105 million of existing medium-term notes that had higher coupon rates.

OTHER INFORMATION

Purchased-Gas Cost Filings

Effective July 1, 2003, the PSCU approved a $146.4 million pass-on increase in annual gas costs for Utah customers. The Public Service Commission of Wyoming granted Questar Gas permission to pass on a $6.8 million increase in gas costs to Wyoming customers also effective July 1, 2003. The increased gas costs were attributed to a forecast of higher gas prices in the Rockies. Pass-on rate increases or decreases result in dollar for dollar adjustments of revenues and gas costs without affecting the earnings of Questar Gas.

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 prices and supplies;

       Changes in rate-regulatory policies;

       Regulation of the Wexpro agreement;

       Rate of inflation and interest rates;

       Weather and other natural phenomena;

       The effect of environmental regulation;

       Changes in customers' credit ratings and their ability to pay for gas consumed;

       Competition from other forms of energy;

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

       Adverse repercussion from terrorist attacks or acts of war;

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

       Lower credit ratings.

Item 4. Controls and Procedures

     a. 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-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company, including its consolidated subsidiaries, required to be included in the Company's reports filed or submitted under the Exchange Act.