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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number 1-935

(801) 324-5555
(Registrant's telephone number, including area code)

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Questar Gas Company

Form 10-Q for the Quarterly Period Ended September 30, 2004

TABLE OF CONTENTS

PART I.

FINANCIAL INFORMATION

Page #

Item 1.

Financial Statements.

Statements of Income for the three-, nine- and twelve-months

ended September 30, 2004 and 2003.

Condensed Balance Sheets at September 30, 2004 and 2003

and December 31, 2003.

Condensed Statements of Cash Flows for the nine-months

ended September 30, 2004 and 2003.

Notes Accompanying 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 1.

Legal Proceedings.

Item 6.

Exhibits and Reports on Form 8-K.

Signatures

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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 t he negative thereof or variations thereon or similar terminology. Although these statements are made in good faith and are reasonable representations of Questar Gas Company’s (“Questar Gas” or the “Company”) expected performance at the time, actual results may vary from management’s stated expectations and projections due to a variety of factors.

Distribution operations are subject to regulation which can directly impact earnings primarily through a regulated return on rate base.  The Company monitors the allowed rate of return, its effectiveness in earning such a rate and initiates rate proceedings or operating changes as needed.  In addition in the normal course of the regulatory environment, assets may be placed in service and historical test periods may need to be established before rate cases can be filed.  Once rate cases are filed, regulatory bodies have the authority to suspend implementation of the new rates while studying the cases.  Because of this process, Questar may temporarily suffer the negative financial effects of having placed assets in service without the benefit of rate relief.

Increased regulatory requirements relating to the integrity of pipelines will require Questar Gas to spend additional money to comply with these requirements.  Questar Gas’s distribution systems are subject to extensive laws and regulations related to pipeline integrity.  For example recent federal legislation signed into law in December 2002 includes new guidelines for the U.S. Department of Transportation (“DOT”) and pipeline companies in the areas of testing, education, training and communication.  Compliance with existing and recently executed regulations requires significant expenditures. Additional laws and regulations that may be enacted in the future could significantly increase the amount of these expenditures.

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 and oil prices and changes in estimated quantities of gas and oil reserves; changes in rate-regulatory policies; regulation of the Wexpro Agreement; creditworthiness of counterparties; rate of inflation and interest rates; assumptions used in business combinations; weather and natural disasters; the effect of environmental and other regulation; effects of endangered or threatened species regulations; changes in customers' credit ratings; competition from other forms of energy, other pipelines and storage facilities; the effect of accounting policies issued periodically by accounting standard-setting bodies; terrorist attacks or acts of war; changes in the business or financial condition of the Company; and changes in credit ratings.

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PART I  FINANCIAL INFORMATION

Item 1.  Financial Statements.

QUESTAR GAS COMPANY

STATEMENTS OF INCOME

(Unaudited)

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QUESTAR GAS COMPANY

NOTES ACCOMPANYING FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

Note 1 – Basis of Presentation of Interim Financial Statements

The accompanying interim financial statements of Questar Gas with the exception of the condensed balance sheet at December 31, 2003, have not been audited by independent public accountants. The unaudited financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The interim financial statements reflect all normal, recurring adjustments and accruals that are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods presented. The preparation of financial statements and notes in conformity with GAAP requires that management make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets a nd liabilities. Certain reclassifications were made to the 2003 financial statements to conform with the 2004 presentation.

The results of operations for the three-, nine- and twelve-month periods ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004, due to the seasonal nature of the gas-distribution business and other risk factors listed in the Forward-Looking Statements section of this report.  Interim financial statements do not include all of the information and notes required by GAAP for audited annual financial statements. For further information please refer to the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Note 2 – Questar Gas Processing Dispute

On August 1, 2003, the Utah Supreme Court issued an order reversing an August 2000 decision made by the Public Service Commission of Utah (“PSCU”) concerning certain natural gas processing costs incurred by Questar Gas Company (“Questar Gas”).  The court ruled that the PSCU did not comply with its statutory responsibilities and regulatory procedures when approving a stipulation in Questar Gas’s 1999 general rate case. The stipulation permitted Questar Gas to collect $5.0 million per year through May 2004 to recover a portion of the processing costs.  The Committee of Consumer Services (“Committee”), a Utah state agency, appealed the PSCU’s decision because the PSCU did not explicitly address whether the costs were prudent.

As a result of the court’s order, Questar Gas recorded a liability for a potential refund to gas-distribution customers. The current liability of $29.0 million, including $4.1 million recorded in the first nine months of 2004, reflects revenue received for processing costs and interest from September 1999 through September 2004.

On August 30, 2004, after hearings held in May 2004, the PSCU ruled that Questar Gas failed to prove prudence in contracting for gas processing in response to the changes in the heat content of its gas supply.  The PSCU reversed the stipulation, denied the request for rate recovery and ordered the refund of costs previously collected in rates.  Since Questar Gas had accrued a liability for the potential refund, the order did not have a material impact on earnings for the third quarter of 2004.  In addition, the order did not have a material impact on the creditworthiness, cash flow or liquidity of Questar Gas.  Questar Gas reduced its rates on September 1, 2004, to eliminate the collection of gas-processing costs and on October 1 began refunding previously collected costs, plus interest over a 12 month period as ordered by the PSCU.

On September 30, 2004, Questar Gas filed a petition with the PSCU for reconsideration or clarification of the August 30, 2004 order.  On October 20, the PSCU declined to reconsider its order, but clarified that its order did not preclude recovery of ongoing and certain past processing costs. Ongoing processing costs are approximately $7 million per year.

Questar Gas has requested ongoing rate coverage for gas processing costs in its pass through filings, but are not currently collecting these costs in rates.  The PSCU has scheduled several technical conferences to determine how to resolve issues of managing heat content of gas supply.

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

September 30, 2004

(Unaudited)

Results of Operations

Questar Gas is a wholly-owned subsidiary of Questar Corporation (“Questar”).  Questar Gas distributes natural gas in Utah, southwestern Wyoming and southeastern Idaho. Following is a summary of financial results and operating information.

Questar Gas lost $9.8 million in the third quarter of 2004 and reported income of $12.5 million in the first nine months of 2004 compared with a loss of $8.3 million in the third quarter of 2003 and income of $1.0 million in the first nine months of 2003.  The 2003 second quarter results included an expense of $22.0 million ($13.6 million after-tax) for a potential refund to customers for gas-processing costs.  Of this amount, $11.9 million related to periods prior to 2003.  

Questar Gas’s margin was flat in the third quarter of 2004, increased 1% in the first nine months of 2004 and was unchanged in the 12 months ended September 30, 2004, compared with the 2003 periods. Following is a summary of major changes in Questar Gas’s margin for the third quarter of 2004, first nine months of 2004 and twelve months ended September 30, 2004.

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Effective December 30, 2002, the PSCU approved an $11.2 million general-rate increase and an 11.2% allowed return on equity. The PSCU based the increase on November 2002 rate base, operating costs and usage per customer.

At September 30, 2004, Questar Gas was serving 778,992 customers. Customer growth remained above national averages at 3.1% over the prior year. Housing construction in Utah remained strong, driven by low mortgage-interest rates. Usage per customer, adjusted for normal temperatures, was up 4% in the third quarter of 2004, declined 3% in the first nine months and 2% in the 12 months of 2004 compared with the 2003 periods.  Usage per customer has been decreasing due to more efficient appliances and homes and customer response to higher prices.

Weather, as measured in degree days, was 26% colder than normal in the third quarter of 2004 and 7% colder than normal in the first nine months of 2004 compared with 9% warmer than normal in the third quarter and first nine months of 2003. A weather-normalization adjustment on customer bills generally offsets financial impacts of moderate temperature variations.

Questar Gas’s results for the 12 months ended September 30, 2003, included $3.8 million of recovery of previously denied 1999 gas-processing costs. The PSCU’s 2002 order allowing the recovery of gas-processing costs is part of a continuing dispute, as discussed below.