QUESTAR CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 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
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(Exact name of registrant as specified in its charter)

State of Utah 87-0407509
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

180 East 100 South, P.O. Box 45433, Salt Lake City, Utah 84145-0433
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(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (801) 324-5000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, Without Par Value, with New York Stock Exchange
Common Stock Purchase Rights

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

The aggregate market value of the registrant's common stock, without par
value, held by nonaffiliates on March 1, 2002, was $1,826,924,606 (based on the
closing price of such stock).

On March 1, 2002, 81,620,810 shares of the registrant's common stock,
without par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE. Portions of the definitive Proxy Statement
for the 2002 Annual Meeting of Stockholders are incorporated by reference into
Part III. The sections of the Proxy Statement labelled "Committee Report on
Executive Compensation" and "Cumulative Total Shareholder Return" are expressly
not incorporated into this document.

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TABLE OF CONTENTS

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FORM 10-K

ANNUAL REPORT, 2001

PART I

ITEMS 1. AND 2. BUSINESS AND PROPERTIES.

GENERAL

Registrant Questar Corporation ("Questar" or "the Company") is a
diversified energy services holding company that is involved in the full
spectrum of natural gas activities through two divisions-Market Resources and
Regulated Services. Market Resources engages in energy development and
production; gas gathering and processing; and wholesale gas and hydrocarbon
liquids marketing, risk management, and storage. Regulated Services, through two
subsidiaries, conducts interstate gas transmission and storage activities and
retail gas distribution services. The Company is also involved in providing
integrated information and communication services.

Questar was organized in 1984 and became a publicly held entity when the
shareholders of Questar Gas Company ("Questar Gas," then known as Mountain Fuel
Supply Company) approved a corporate reorganization. Questar was created to
provide organizational and financial flexibility and to achieve a more clearly
defined separation of utility and nonutility activities. Questar is a "holding
company," as that term is defined in the Public Utility Holding Company Act of
1935, because Questar Gas is a natural gas utility. The Company, however,
qualifies for and claims an exemption from provisions of such act applicable to
registered holding companies.

As is noted in the following chart, Questar's Market Resources unit
includes a subholding company, Questar Market Resources, Inc. ("QMR"), which
owns Wexpro Company ("Wexpro"), Questar Exploration and Production Company
("Questar E&P") and its Canadian affiliate, Celsius Energy Resources Ltd.
("Celsius"), Shenandoah Energy Inc. ("SEI"), Questar Gas Management Company
("QGM"), and Questar Energy Trading Company ("QET"). Questar's Regulated
Services unit also includes a subholding entity--Questar Regulated Services
Company ("QRS")--in addition to Questar Gas, Questar Pipeline Company ("Questar
Pipeline") and Questar Energy Services, Inc. ("QES").

The Company's information and communication activities are conducted by
Questar InfoComm, Inc. ("Questar InfoComm") which, in turn, currently owns
approximately 89 percent of Consonus, Inc. ("Consonus").

QUESTAR
CORPORATION
|
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| | |
Questar Questar Questar
InfoComm, Inc. Market Regulated
(Information and Resources, Services
Communication Inc. Company
Services) (Subholding (Subholding
| Company) Company)
| | |
| | ----------------------|---------------------
| | | | |
Consonus, Inc. | Questar Gas Questar Questar
(Networking, | Company Pipeline Energy
Website and Data Se- | (Retail Company Services
curity Services) | Distribution) (Transportation Inc.
| | and Storage (Nonregulated
| | Products &
| | Services
|
----------------------------------------------------------------------------
| | | |
Wexpro Questar Exploration and Questar Energy Questar Gas
Company Production Company, Trading Com- Management
(Management and Shenandoah Energy any Company
Development, Inc., and Celsius Energy (Wholesale Mar- (Gathering and
Cost-of-Service Resources, Ltd. keting, Trading, Processing
Properties) (Exploration and Production) Risk Management,
Storage)

As a diversified provider of energy services, Questar believes that its
structure enhances its operating flexibility to take advantage of the earnings
growth potential of exploration and production operations, wholesale marketing,
gathering and processing even as it continues to take advantage of opportunities
to expand its regulated activities through customer additions, new pipeline
projects, and expanding hub services. Questar's management is convinced that
experience in the various activities along the natural gas value
chain--production, gathering, processing, transportation, storage,
distribution--enable the Company to develop and implement strategies for taking
advantage of opportunities associated with the expected demand for natural gas
and for services relating to the effective use of natural gas. Questar, however,
is also concerned about the increased risks associated with traditional utility
operations as regulators and politicians fail to understand the need for
competitive returns and to reward efficient operators.

Questar intends to continue emphasizing the ownership of assets--reserves,
pipelines, storage reservoirs, distribution systems--as it fulfills stated
objectives to enter new markets, provide new services, and take advantage of the
convergence of natural gas and electricity. The Company has important joint
venture arrangements and will continue to pursue new alliances to strengthen its
position and exploit its assets.

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Financial information concerning the Company's lines of business, including
information relating to the amount of total revenues contributed by any class of
similar products or services responsible for 10 percent or more of consolidated
revenues, is presented in Note 12 of the Notes to Consolidated Financial
Statements under Item 14.

The Company's activities are discussed below.

MARKET RESOURCES, GENERAL.

The Market Resources unit is the primary growth area within the Company.
Over the next five years, Questar expects to spend approximately 60-70 percent
of its total capital budget in Market Resources, primarily to expand oil and gas
reserves through drilling and acquisitions; enlarge an infrastructure of
gathering systems, processing plants, header facilities, and storage facilities;
and continue risk management and electric power generation activities. The
diversity of activities within the group enhances a basic strategy to pursue
complementary growth. As Questar E&P, SEI and Celsius (QMR's exploration and
production subsidiaries), for example, find and acquire new reserves, QGM will
have opportunities to expand gathering and processing activities, and QET will
have more physical production to support its marketing and storage programs.

MARKET RESOURCES, EXPLORATION AND PRODUCTION

The Company has been in the exploration and production ("E&P") business
since its organization in 1935. Through the ensuing years, the Company's E&P
activities have generated substantial economic benefits for the Company and its
shareholders and customers and have expanded in size and geographic location.
The year 2001 was the third consecutive banner year for the Company's E&P
operations as it expanded both reserves and production when it purchased SEI.

Effective July 31, 2001, QMR purchased SEI, a privately-held entity engaged
in production, gathering, processing and drilling activities, for $403 million
including cash and assumed debt. The acquisition involved 415 billion cubic feet
equivalent ("Bcfe") of proved reserves (72 percent natural gas and 28 percent
oil), 114,000 net acres of undeveloped leasehold acreage, 100 million cubic feet
("MMcf") per day of natural gas processing capacity, 90 miles of gathering
lines, and four drilling rigs. These assets constitute the largest acquisition
in Questar's history and are located in the Company's core operating area that
already includes extensive pipeline and gathering systems.

Questar's E&P group includes Questar E&P and Celsius in addition to SEI.
These entities form a unique E&P group that conducts a blended program of
low-cost development drilling and low-risk reserve acquisition. Questar's E&P
group has a large inventory of proved undeveloped properties that should be
converted into production over the next several years. It will also continue to
identify promising exploration prospects and farm them out to entities that are
willing to assume the initial drilling risks, while retaining some ownership
percentage.

The E&P group also maintains a geographical balance and diversity, while
focusing its activities in core areas where it has accumulated geological
knowledge and has significant expertise. Core areas of activity are the Rocky
Mountain region of Wyoming, including the Uinta Basin of eastern Utah and the
Pinedale Anticline area of western Wyoming; the Midcontinent region of

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Oklahoma, the Texas Panhandle, East Texas, and the Upper Gulf Coast; the
Southwest region of northwestern New Mexico and southwestern Colorado; and the
Western Canadian Sedimentary Basin located primarily in Alberta, Canada.

Natural gas remains the primary focus of the Company's E&P operations. As
of year-end 2001, the Company had proved reserves (excluding Questar Gas's
cost-of-service reserves) of 998.0 Bcf of gas and 31.1 million barrels
("MMBbls") of oil and natural gas liquids, compared to 639.9 Bcf of gas and 15.0
MMBbls of oil as of the same date in 2000. (Any references to oil in this report
include natural gas liquids.) On an energy-equivalent ratio of six thousand
cubic feet ("Mcf") of natural gas to one barrel ("Bbl") of crude oil, natural
gas comprised approximately 84.3 percent of proved reserves (excluding
cost-of-service reserves). Proved developed gas reserves constituted 58.9
percent of the total non-regulated proved gas reserves reported. Approximately
6.2 percent of the group's proved natural gas reserves and 10.7 percent of its
proved oil reserves are located in Canada. SEE "Oil and Gas Operations," a
separate section of this report, for additional information concerning the
Company's oil and gas activities on a consolidated basis.

The E&P group's drilling activities occurred in four core operating areas:
Midcontinent and Upper Gulf Coast; Rocky Mountains, including the Uinta Basin in
eastern Utah; Pinedale Anticline in western Wyoming (separated out from the
Rocky Mountain area given its key importance); and western Canada. During 2001,
the E&P companies and Wexpro, on a combined basis, participated in 337 gross
wells (130.3 net), compared to 316 gross wells (94 net) in 2000. The 337 wells
included 247 gas wells, 16 oil wells, 18 dry holes and 56 wells in progress
(waiting on completion or drilling) at year-end. The overall drilling success
(on a net well count basis) in 2001 was 95 percent, compared to 90 percent in
2000.

QMR's Pinedale activities in 2001 continue to merit special emphasis. As of
year-end 2001, Questar E&P and Wexpro reported 30 producing wells and five
awaiting completion or drilling. Drilling results and initial production tests
confirmed reserve expectations of 4.8 to 5.75 Bcfe per well, depending on
location. As of December 31, 2001, the gross daily production from the 30 QMR
wells in Pinedale was estimated at 63 MMcf, compared to 26 MMcf as of the period
a year earlier.

Questar E&P and Wexpro expect to continue drilling activities in Pinedale
when government restrictions permit. On a combined basis, they have an
approximate 60 percent average working interest in 14,800 acres in the Mesa Area
of the Pinedale Anticline. The original Pinedale drilling program projected 135
to 150 locations, based on 80-acre spacing. Questar E&P and Wexpro continue to
assess the feasibility of using 40-acre spacing, which would double the number
of wells.

QMR's activities in Pinedale illustrate its long-term approach. Wexpro held
the leasehold acreage by production as a result of three wells drilled in the
area during the mid-1970's. Pinedale gas reserves are contained in tight sands
with a low porosity. Consequently, Questar E&P and Wexpro did not drill
additional wells in the area until other companies developed new stimulation
techniques that fractured sandstone formations at multiple intervals and
successfully used such techniques to drill wells in neighboring fields. The
Pinedale wells are expensive to drill; future wells drilled to 13,000 feet
levels will cost between $2.6 and $3.6 million. This cost reflects the
completion depth of the wells, the need for special handling and multiple
stimulations, and

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governmental orders that impose surface-use limitations and preclude drilling
activities during specified periods.

QMR also plans to aggressively develop the SEI acreage in the Uinta Basin
of eastern Utah, particularly the large inventory of low-risk tight-sand
development locations in the Wasatch Formation. This formation lies beneath the
Green River Formation, which the E&P group believes may contain significant
volumes of unrecovered oil. Wasatch development drilling will allow QMR to
evaluate the remaining potential of the Green River.

The Questar E&P group's gas production increased from 69.0 Bcf in 2000 to
70.6 Bcf in 2001. The increase in production was attributable to reserve
acquisitions and expanded development activities, which more than offset the
natural decline in some producing areas and the sale of producing reserves. The
E&P companies received an average selling price of $3.21 per Mcf in 2001,
compared to $2.80 per Mcf in 2000. Gas production is produced from four separate
regions--the Midcontinent area, San Juan Basin area, Rocky Mountain area, which
includes both the Pinedale Anticline area and the Uinta Basin area, and western
Canada area. Production from each of these areas is generally priced below the
Henry Hub pricing center in Louisiana, reflecting demand and access to
transportation.

Natural gas prices continued to be volatile during 2001, with spot prices
for Rocky Mountain production ranging from a high in excess of $6.00 per Mcf in
the first quarter to a low of below $1.00 per Mcf in the third quarter of 2001.
The E&P group hedges as much as 50-75 percent of its natural gas production in
order to minimize the effect of price volatility on revenues and to lock in
prices that will enable it to meet strategic objectives. (SEE Item 7 and Notes 1
and 6 of the Notes to Consolidated Financial Statements in Item 14.) Hedging
activities are conducted by QET.

During 2001, the E&P companies produced 2.5 MMBbls of oil, compared to 2.2
MMBbls in 2000. The production was sold at an average price of $19.22 per barrel
in 2001, compared to $20.80 per barrel in 2000.

The E&P group continued to generate Section 29 tax credits during 2001.
These tax credits are available for production from wells that meet specified
criteria, including a requirement that drilling of the wells was commenced prior
to January 1, 1993. Properties are often referred to as "tight sands," "coal
seams," or low permeability formations from which it is generally more expensive
to produce gas. During 2001, Questar E&P recorded $5.0 million in Section 29
credits, compared to $4.7 million in 2000. Under current law, 2002 will be the
last year in which Section 29 tax credits are available.

The production of oil and gas is subject to regulation by appropriate
federal and state agencies in the United States and by federal and provincial
agencies in Canada. In general, these regulatory agencies are authorized to make
and enforce regulations to prevent waste of oil and gas, protect the correlative
rights and opportunities to produce oil and gas by owners of a common reservoir,
and protect the environment. Many leases held or operated by the E&P group are
federal or Crown (Canadian) leases subject to additional regulatory
requirements. As illustrated by the actions taken by the Bureau of Land
Management for Pinedale, agencies are generally imposing

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more restrictions on access to leasehold acreage, thereby increasing the
planning time to obtain drilling permits and limiting the E&P group's
flexibility to adapt quickly to new developments.

The Questar E&P group maintains regional offices in Denver, Colorado;
Tulsa, Oklahoma; and Oklahoma City, Oklahoma. Canadian operations are managed
through an office in Calgary, Alberta.

WEXPRO COMPANY. Wexpro was incorporated in 1976 as a subsidiary of Questar
Gas. Questar Gas's efforts to transfer producing properties and leasehold
acreage to Wexpro resulted in protracted regulatory proceedings and legal
adjudications that ended with a court-approved settlement agreement that was
effective August 1, 1981.

Wexpro, unlike the members of the E&P group, does not conduct exploratory
operations and does not acquire leasehold acreage for exploration activities. It
conducts oil and gas development and production activities on certain producing
properties located in the Rocky Mountain region under the terms of the
settlement agreement. (The terms of the settlement agreement are described in
Note 11 of the Notes to Consolidated Financial Statements under Item 14.) Wexpro
produces gas from specified properties for Questar Gas and is reimbursed for its
costs plus a return on its investment. In connection with its operations, Wexpro
charges Questar Gas for its costs plus a specified rate of return, which
averaged 19.7 percent on an after-tax basis in 2001 and is adjusted annually
based on a specified formula on its net investment in such properties adjusted
for working capital and deferred taxes. At year-end 2001, Wexpro's investment
(net of deferred income taxes) in cost-of-service operations was $161.3 million
compared to $124.8 million at year-end 2000. Under the terms of the settlement
agreement, Wexpro bears all dry hole costs. The settlement agreement is
monitored by the Utah Division of Public Utilities, the staff of the Public
Service Commission of Wyoming and experts retained by these agencies.

The gas volumes produced by Wexpro for Questar Gas are reflected in the
latter's rates at cost-of-service prices. Cost-of-service gas (defined to
include the gas attributable to royalty interest owners) produced by Wexpro
satisfied 44 percent of Questar Gas's system requirements during 2001. Questar
Gas relies upon Wexpro's drilling program to develop the properties from which
the cost-of-service gas is produced. During 2001, the average wellhead cost of
Questar Gas's cost-of-service gas was $2.55 per decatherm ("Dth"), which was
lower than Questar Gas's average price for field-purchased gas.

Wexpro participates in drilling activities in response to the demands of
other working interest owners, to protect its rights, and to meet the needs of
Questar Gas. Wexpro, in 2001, produced 41.0 Bcfe of natural gas and hydrocarbon
liquids from Questar Gas's cost-of-service properties and added reserves of 69.1
Bcfe through drilling activities and reserve estimate revisions. (These numbers
do not include the related royalty gas.)

Wexpro, under the terms of the Wexpro agreement, owns oil-producing
properties. The revenues from the sale of crude oil produced from such
properties are used to recover operating expenses and provide Wexpro with a
return on its investment. In addition, Wexpro receives 46 percent of any
residual income. (The remaining income is received by Questar Gas and is used to
reduce natural gas costs reflected in customer rates.)

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Wexpro has an ownership interest in the wells and facilities related to its
oil properties and in the wells and facilities that have been installed to
develop and produce gas properties described above since August 1, 1981 (a date
specified by the settlement agreement referred to above). Wexpro maintains an
office in Rock Springs, Wyoming, in addition to its principal office in Salt
Lake City, Utah.

MARKET RESOURCES, GATHERING, MARKETING AND TRADING

QGM conducts gathering and processing activities in the Rocky Mountain and
Midcontinent areas. Its activities are not subject to regulation by the Federal
Energy Regulatory Commission (the "FERC") because the Natural Gas Act of 1938
specifically provides that the FERC's jurisdiction does not extend to facilities
involved in the production or gathering of natural gas.

During 2001, QGM changed the scope of its operations when it and Western
Gas Resources ("Western Gas") formed a new joint venture--Rendezvous Gas
Services ("Rendezvous")--to develop and operate new gathering and compression
facilities in the Hoback Basin of southwestern Wyoming. The Hoback Basin
includes the Pinedale Anticline area in which Questar E&P and Wexpro have
developed reserves as well as producing areas south of Pinedale. Gas reserves
from more than 179,000 gross acres are dedicated to Rendezvous under existing
gathering contracts. Rendezvous plans to deliver gas volumes from this area for
processing and blending to the Blacks Fork plant in which QGM has a 50 percent
interest and to the Granger plant owned by an affiliate of Western Gas.

The year also witnessed a functional combination of QGM's gathering
facilities in eastern Utah with SEI's gathering assets. As previously mentioned,
SEI's eastern Utah assets include 90 miles of gas gathering lines and the Red
Wash processing plant that has a daily processing capacity of 100 MMcf.

QGM's gathering system was originally built as part of a regulated
enterprise. It consists of 1,385 miles of gathering lines, compressor stations,
field dehydration plants and measuring stations and was largely built to gather
production from Questar Gas's cost-of-service properties. Under a contract that
was assigned when the gathering assets were transferred from Questar Pipeline,
QGM is obligated to gather the cost-of-service production for the life of the
properties. During 2001, QGM gathered 37.2 million decatherms ("MMDth") of
natural gas for Questar Gas, compared to 36.8 MMDth in 2000.

QGM also gathers gas for affiliates within QMR and for nonaffiliated
customers. During 2001, QGM gathered 27.0 MMDth for QMR affiliates, compared to
25.0 MMDth in 2000, and gathered 91.7 MMDth for nonaffiliated customers,
compared to 93.0 MMDth in 2000.

QGM continues to own a 50 percent interest in the Blacks Fork processing
plant, which has a daily capacity of 84 MMcf and could be expanded to handle
additional volumes gathered by Rendezvous. A processing plant strips liquids
such as butane and ethane from natural gas volumes to enable the producers to
meet pipeline specifications for their gas volumes and to capitalize on
historical price advantages for natural gas liquids when compared to natural gas
volumes. QGM and Wexpro jointly own a processing facility located in the Canyon
Creek area of southwestern

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Wyoming that has an operating capacity of 43 MMcf per day. QGM also owns
interests in other processing plants in the Rocky Mountain and Midcontinent
areas.

QET conducts energy marketing activities. It combines gas volumes purchased
from third parties and equity production (production that is owned by
affiliates) to build a flexible and reliable portfolio. QET aggregates supplies
of natural gas for delivery to large customers, including industrial users,
municipalities, and other marketing entities. During 2001, QET marketed a total
of 91.8 equivalent MMDth ("EMMdth") of natural gas and earned a margin of $.149
per equivalent Dth. (The volumes and margins exclude affiliated production.)

QET uses derivatives as a risk management tool to provide price protection
for physical transactions involving equity production and marketing
transactions. It executed hedges for equity production on behalf of the Questar
E&P group with a variety of contracts for different periods of time. QET does
not engage in speculative hedging transactions. (SEE Notes 1 and 6 of the Notes
to Consolidated Financial Statements included in Item 14 of this report for
additional information relating to hedging activities.)

As a wholesale marketing entity, QET concentrates on markets in the Pacific
Northwest, Rocky Mountains, Midwest, and western Canada that are close to
reserves owned by affiliates or accessible by major pipelines. It has contracted
for firm-transportation capacity on pipelines and firm-storage capacity at Clay
Basin.

QET, through a limited liability company in which it has a 75 percent
interest, operates the Clear Creek storage facility located in southwestern
Wyoming. This facility has 8 Bcf of capacity and is connected with lines owned
by Questar Pipeline, The Williams Companies, and Overthrust Pipeline Company. A
pipeline connection with the Kern River line is planned for 2002.

QET is also responsible for reviewing possible electric power projects that
will allow the Company to add electric power generation to its natural gas value
chain. QET's strategy involves reviewing power generation opportunities in
western states that are complementary to the Company's pipeline, gas storage and
production assets. It will only invest in power projects that are supported by
long-term purchase agreements with counterparties that have good credit.
Finally, this entity is involved in the final stages of negotiating an alliance
with a major energy marketing company. The first phase of the project involves
QET's contracted capacity at Questar Pipeline's Clay Basin storage project.

MARKET RESOURCES, REGULATION

QMR's operations are subject to various levels of government controls and
regulation in the United States and Canada at the federal, state/provincial, and
local levels. Such regulation includes requiring permits for the drilling of
wells; maintaining bonding requirements in order to drill or operate wells;
submitting and implementing spill prevention plans; filing notices relating to
the presence, use and release of specified contaminants incidental to oil and
gas regulations; and regulating the location of wells, the method of drilling
and casing wells, surface usage and restoration of properties upon which wells
have been drilled, the plugging and abandoning of wells and the transportation
of production. QMR's operations are also subject to various conservation

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matters, including the regulation of the size of drilling and spacing units or
proration units, the number of wells that may be drilled in a unit, and the
unitization or polling of oil and gas properties. State conservation laws
establish the maximum rates of production from oil and gas wells, generally
prohibit the venting or flaring of gas and impose requirements for the ratable
purchase of production.

Some of QMR's leases, including many of its leases in the Rocky Mountain
area, are granted by the federal government and administered by federal
agencies. These leases require compliance with detailed regulations on such
things as drilling and operations on the leases and the calculation and payment
of royalties.

Various federal, state and local environmental laws and regulations affect
the Company's operations and costs. These laws and regulations concern the
generation, storage, transportation, disposal or discharge of contaminants into
the environment and the general protection of public health, natural resources,
wildlife, and the environment. They also impose substantial liabilities for any
failure on the part of the Company to comply with them.

Each province in Canada and the federal government of Canada also have laws
and regulations governing land tenure, royalties, production rates and taxes,
and environmental protection.

MARKET RESOURCES, COMPETITION AND CUSTOMERS

QMR faces competition in all aspects of its business including the
acquisition of reserves and leases; obtaining goods, services, and labor; and
marketing its production. Its competitors include multinational energy companies
and other independent producers, many of which have greater financial resources
than QMR.

QMR's business activities can be subject to seasonal variations.
Historically, the demand for natural gas decreases during the summer months and
increases during the winter months. The increasing demand for natural gas to
generate electricity may cause increased demand during the hottest months of the
summer. Weather (both in terms of temperatures and moisture) can have dramatic
impacts on natural gas prices and QMR's operations.

The Questar E&P group sells its natural gas production to a variety of
customers including pipelines, gas marketing firms, industrial users, and local
distribution companies. QMR's crude volumes are sold to refiners, remarketers
and other companies, some of which have pipeline facilities near the producing
properties. In the event pipeline facilities are not available, crude oil is
trucked to storage, refining, or pipeline facilities.

REGULATED SERVICES, INTRODUCTION

Questar's Regulated Services segment includes Questar Gas, a retail
distribution utility; Questar Pipeline, an interstate pipeline; QES, an entity
engaged in retail energy services, particularly appliance financing and energy
management services; and QRS, a subholding company that is the direct parent of
such entities and provides administrative services to them. All members of the
Regulated Services group have common officers and share service functions, e.g.,
marketing,

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planning, business development, engineering, legal, regulatory affairs,
accounting, and budgeting. All Regulated Services employees share base and
incentive compensation programs and are expected to work together to improve
customer service and operating efficiency. The integration of the entities has
resulted in lower operating and maintenance costs and better coordination of
activities and projects.

REGULATED SERVICES, RETAIL DISTRIBUTION

CUSTOMERS AND DELIVERIES. Questar Gas distributes natural gas as a public
utility in Utah and southwestern Wyoming. As of December 31, 2001, it was
serving 731,900 sales and transportation customers, a 3.9 percent increase from
the 704,629 customers as of year-end 2000. (Customers are defined in terms of
active meters.)

Over 96 percent of Questar Gas's customers live in Utah. Questar Gas
distributes gas to customers in the major populated areas of Utah, commonly
referred to as the Wasatch Front in which the Salt Lake metropolitan area,
Provo, Ogden, and Logan are located. It also serves customers in eastern,
central, and southwestern Utah with Price, Roosevelt, Fillmore, Richfield, Cedar
City, and St. George as the primary cities. Questar Gas supplies natural gas in
the southwestern Wyoming communities of Rock Springs, Green River, and Evanston,
and the southeastern Idaho community of Preston. With the mid-2001 acquisition
and merger of Utah Gas Service Company ("Utah Gas"), Questar Gas became the only
gas distribution public utility in Utah and added customers in the cities of
Vernal, Moab, and Monticello, which are all located in eastern Utah. The
concurrent acquisition and merger of Wyoming Industrial Gas Company ("Wyoming
Industrial") added the Wyoming communities of Kemmerer and Diamondville.

Questar Gas added 27,271 customers in 2001, compared to 18,312 new
customers added in 2000. These customer additions include 10,500 customers from
Utah Gas and Wyoming Industrial. Utah's population is still growing faster than
the national average, although the rate of increase is slowing down.

Questar Gas has the necessary regulatory approvals granted by the Public
Service Commission of Utah ("PSCU"), Public Service Commission of Wyoming
("PSCW"), and the Public Utilities Commission of Idaho ("PUCI") to serve these
areas. It also has long-term franchises granted by communities and counties
within its service area.

Questar Gas's sales to residential and commercial customers are seasonal,
with a substantial portion of such sales made during the heating season. The
typical residential customer in Utah (defined as a customer using 115 Dth per
year) consumes over 75 percent of his total gas requirements in the coldest six
months of the year. Questar Gas's revenue forecasts used to set rates are based
on normal temperatures. As measured in degree days, temperatures in Questar
Gas's service area were 2 percent warmer than normal in 2001, which was the
eighth consecutive year in which temperatures have been warmer than normal.

Questar Gas's sensitivity to weather and temperature conditions, however,
has been ameliorated by a weather normalization mechanism for its general
service customers in Utah and Wyoming. The mechanism, which has been in effect
since 1997, adjusts the non-gas portion of a

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customer's monthly bill as the actual degree days in the billing cycle are
warmer or colder than normal. This mechanism reduces the sometimes dramatic
fluctuations in any given customer's monthly bill from year to year.

During 2001, Questar Gas sold 83.7 MMDth to residential and commercial
customers, compared to 83.4 MMDth in 2000. General service sales to residential
and commercial customers were responsible for 87.8 percent of Questar Gas's
total revenues in 2001. The increase in sales volumes reflects colder weather
and increased customers. Customers are continuing to decrease their usage on a
temperature-adjusted basis as they use more efficient gas-burning appliances and
respond to higher commodity prices with conservation measures.

Questar Gas has designed its distribution system and annual gas supply plan
to handle design-day demand requirements. It periodically updates its design-day
demand, which is the volume of gas that firm customers could use during
extremely cold weather. For the 2001-02 heating season, Questar Gas used a
design-day demand of 1.036 Bcf for firm sales customers. Questar Gas is also
obligated to have pipeline capacity, but not gas supply, for firm-transportation
customers. Questar Gas's management believes that the distribution system is
adequate to meet the demands of its firm customers.

Questar Gas has been providing transportation service since 1986. It has
worked diligently to retain its transportation customers with cost-based rates.
Transportation service is attractive to customers that can buy volumes of gas
directly from producers and have such volumes transported at aggregate prices
lower than Questar Gas's sales rates.

Questar Gas's largest transportation customers, as measured by revenue
contributions in 2001, are the Gadsby plant operated by Scottish Power
(electric utility) in Salt Lake City; the Kennecott copper processing
operations, located in Salt Lake County; and the mineral extraction
operations of Magnesium Corporation of America in Tooele County, west of Salt
Lake City. Questar Gas's total industrial deliveries, including both sales
and transportation, were basically flat for the two years (65.3 MMDth in 2001
compared to 65.3 MMDth in 2000).

GAS SUPPLY. Questar Gas's competitive position has been strengthened as a
result of owning natural gas producing properties. During 2001, it satisfied 44
percent of its system requirements with the cost-of-service gas produced from
such properties. These properties are operated by Wexpro, and the gas produced
from such properties is transported by Questar Pipeline. Questar Gas's
investment in these properties is included in its utility rate base.

Questar Gas had estimated reserves of 427.8 Bcfe as of year-end 2001,
compared to 399.7 Bcfe as of year-end 2000. (The reserve numbers do not include
volumes attributable to royalty interests, but they do include oil reserves.)
The average wellhead cost associated with Questar Gas's cost-of-service reserves
was below the cost of field-purchased gas. During 2001, Questar Gas recorded
$1.8 million in Section 29 tax credits associated with production from wells on
its cost-of-service properties that qualify for such credits. Questar Gas
believes that it is important to continue owning gas reserves, producing them in
a manner that will serve the best interests of its customers, and satisfying a
significant portion of its supply requirements with gas produced from such
properties.

-11-

Questar Gas uses storage capacity at Clay Basin (a base-load storage
facility owned and operated by Questar Pipeline) to provide flexibility for
handling gas volumes produced from cost-of-service properties. It stores gas at
Clay Basin during the summer and withdraws it during the heating season.

Questar Gas has a balanced and diversified portfolio of gas supply
contracts with suppliers located in the Rocky Mountain states of Wyoming,
Colorado, and Utah. During 2001, Questar Gas received regulatory recognition
that price stability, reliability, and cost are the three key factors to
consider when obtaining gas supplies and that costs associated with hedging
activities can be included in its balancing account for pass-through treatment.
When filing its most recent pass-through application with the PSCU, Questar Gas
reported using a blend of fixed-price contracts, price-indexed contracts, and
price-capped contracts as well as spot purchases to fulfill its purchased-gas
supply requirements. In this same application, Questar Gas estimated that its
average cost of purchased gas for 2002 would be $2.94 per Dth for gas delivered
to the upstream pipeline, compared to the $6.75 price it was quoting a year
earlier.

COMPETITION. Questar Gas has historically enjoyed a favorable price
comparison with all energy sources used by residential and commercial customers
except coal and occasionally fuel oil. This historic price advantage, together
with the convenience and handling advantages associated with natural gas, has
permitted Questar Gas to retain 90-95 percent of the residential space and water
heating markets in its service area and to distribute more energy, in terms of
Btu content, than any other energy supplier to residential and commercial
markets in Utah. Questar Gas has close to 100 percent of the space heating and
water heating offered in new homes within its service area that are connected to
its system.

Questar Gas is a public utility and currently has no direct competition
from other distributors of natural gas for residential and commercial customers.
(The PSCW approved a "supplier choice" program for Questar Gas's Wyoming
customers in 1998, but no supplier has yet offered to provide service under the
program.) Questar Gas does compete with other energy sources. It continues to
monitor its competitive position, in terms of commodity costs and efficiency of
usage, with other energy sources.

Questar Gas is also interested in Utah's economic development in order to
enhance market growth and is encouraging the use of natural gas in additional
appliances. Its market share for other gas appliances, e.g., ranges and dryers,
has historically been less than 30 percent, which is significantly lower than
its over 90 percent market share for furnaces and water heaters. Questar Gas
continues to focus marketing efforts to develop incremental load in existing
homes and new construction.

Questar Gas believes that it must maintain a competitive price advantage in
order to retain its residential and commercial customers and to build
incremental load by convincing current customers to convert additional
appliances to natural gas. Consequently, Questar Gas follows an annual gas
supply plan that provides for a judicious balance between cost-of-service gas
and purchased gas and that allows it to increase operating efficiency.

-12-

The Kern River pipeline, which was built to transport gas from southwestern
Wyoming to Kern County, California, runs through portions of Questar Gas's
service area and provides an alternative delivery source for transportation
customers. As of the date of this report, Questar Gas has lost no industrial
load as a result of the Kern River pipeline. The existence of this interstate
pipeline system has made it possible for Questar Gas to develop a second source
of supply for its central and its southern Utah system and to take delivery of
additional supplies to meet increasing demand.

Questar Gas and other local distribution companies are faced with the
challenges and opportunities posed by the unbundling and restructuring of
traditional utility services, which have been complicated by some adverse
experiences for customers and suppliers in deregulated states. At this point, it
is too soon to predict a timetable for Questar Gas's unbundling of services to
residential and commercial customers. Questar Gas will continue to examine its
costs, take advantage of technological developments, and improve its overall
efficiency in order to take advantage of opportunities in a deregulated
environment.

REGULATION. As a public utility, Questar Gas is subject to the jurisdiction
of the PSCU and PSCW. (Questar Gas's customers in Idaho are served under the
provisions of its Utah tariff. Pursuant to a special contract between the PUCI
and the PSCU, rates for Questar Gas's Idaho customers are regulated by the
PSCU.) Questar Gas's natural gas sales and transportation services are made
under rate schedules approved by the two regulatory commissions. It is
authorized to earn a return on equity of 11 percent in Utah and 11.83 percent in
Wyoming.

Regulatory treatment of processing costs has been an issue of contention
for the past 30 months. Questar Gas, in order to insure customer safety and give
its customers time to adjust the combustion settings in its service area to
handle lower Btu-gas, determined to enhance the Btu of gas volumes by
contracting to have carbon dioxide removed and agreeing to pay the costs
associated with this activity. The PSCU, however, refused to allow Questar Gas
to reflect such costs in its pass-through applications.

During 2001, Questar Gas achieved a victory in its efforts to obtain
recognition of carbon dioxide removal costs as proper costs for pass-through
treatment. The Utah Supreme Court, by an decision dated October 23, 2001,
determined that the PSCU was not precluded from considering Questar Gas's
application for pass-through treatment of such costs according to previously
approved balancing account procedures and remanded the case back to the PSCU for
a decision on the merits of the case. Questar Gas, in its most recent
pass-through application, requested regulatory permission to recover $5.8
million of such costs through its balancing account.

Questar Gas is still involved in another appeal concerning its processing
costs. After the PSCU granted permission for Questar Gas to recover a portion of
such costs on a prospective basis in its 2000 general rate case, a state agency
(the Committee of Consumer Services) filed an appeal from such order. This case
has not been briefed or argued.

Both the PSCU and the PSCW have authorized Questar Gas to use a balancing
account procedure for changes in the cost of natural gas, including supplier
non-gas costs, and to reflect changes on at least a semi-annual basis. During
2001, Questar Gas filed two pass-through

-13-

applications with both the Utah and Wyoming commissions to reflect decreased gas
costs in its rates. In the last pass-through applications that became effective
January 1, 2002, Questar Gas was allowed to reflect annualized gas costs of
$321,711,555 in its Utah rates and $13,159,844 in its Wyoming rates. The typical
residential customer in Utah will have an annual bill of $681.02, using rates in
effect as of January 1, 2002, compared to an annual bill of $905.02, using rates
in effect as of January 1, 2001. The PSCW and PSCU have allowed Questar Gas to
reflect the decreased gas costs in rates, subject to refund.

As previously reported, Questar Gas's pass-through application filed with
PSCU also included a request to recover carbon dioxide removal costs for prior
periods. (The PSCW had not contested Questar Gas's inclusion of such costs in
Wyoming filings.) Finally, Questar Gas requested the PSCU to allow it to
include, on a prospective basis, an allowance for the commodity and supplier
non-gas cost portions of its bad debts in its gas balancing account. The PSCU
has set a hearing date of April 4, 2002, to receive an update from Questar Gas
and other parties concerning the issues raised in the application.

Questar Gas is not earning its authorized return on equity and may file a
general rate case in Utah during 2002. Under Utah law, tariff sheets reflecting
a general rate case became effective 240 days after filing if the PSCU doesn't
render a decision concerning the case by such date.

MISCELLANEOUS. Questar Gas owns and operates distribution systems
throughout its Utah, Wyoming and Idaho service areas and has a total of 22,805
miles of street mains, service lines, and interconnecting pipelines. Questar Gas
has consolidated many of its activities in its operations center located in Salt
Lake City, Utah. It also owns operations centers, field offices, and service
center facilities throughout other parts of its service area. The mains and
service lines are constructed pursuant to franchise agreements or rights-of-way.
Questar Gas has fee title to the properties on which its operation and service
centers are constructed.

REGULATED SERVICES, TRANSMISSION AND STORAGE

Questar Pipeline is an interstate pipeline company that transports natural
gas in the Rocky Mountain states of Utah, Wyoming and Colorado and stores gas
volumes in Utah and Wyoming. As a "natural gas company" under the Natural Gas
Act of 1938, Questar Pipeline is subject to regulation by the FERC as to rates
and charges for storage and transportation of gas in interstate commerce,
construction of new facilities, extensions or abandonments of service and
facilities, accounts and records, and depreciation and amortization policies.
Questar Pipeline holds certificates of public convenience and necessity granted
by the FERC for the transportation and underground storage of natural gas in
interstate commerce and for the facilities required to perform such operations.

TRANSMISSION SYSTEM. Questar Pipeline, as an open-access pipeline,
transports gas for affiliated and unaffiliated customers. It also owns and
operates the Clay Basin storage facility, which is a large underground storage
project in northeastern Utah, and other underground storage operations in Utah
and Wyoming. Questar Pipeline has a 90 percent ownership interest in Overthrust
Pipeline Company ("Overthrust") (recently increased from 72 percent) and,
through a subsidiary, a 50 percent ownership interest in TransColorado Gas
Transmission Company ("TransColorado").

-14-

Questar Pipeline's transmission system is strategically located in the
Rocky Mountain area near large reserves of natural gas. It is referred to as a
"hub and spoke" system, rather than a "long-line" pipeline, because of its
physical configuration, multiple connections to other major pipeline systems and
access to major producing areas. Questar Pipeline's transmission system connects
with the transmission systems of Colorado Interstate Gas Company ("CIG"), the
middle segment (commonly referred to as the "WIC segment") of the Trailblazer
pipeline system, The Williams Companies, Inc. ("Williams") including Kern River,
and TransColorado. These connections provide access to markets outside Questar
Gas's service area and allow Questar Pipeline to transport gas for nonaffiliated
customers.

Questar Pipeline's transmission system includes 1,840 miles of transmission
lines that interconnect with other pipelines and link producers of natural gas
with Questar Gas's distribution operations in Utah and Wyoming. (The
transmission mileage figure includes lines at storage fields and tap lines used
to serve Questar Gas, but does not include the 700-mile Southern Trails line.)
This system includes two major segments, often referred to as the northern and
southern systems; the northern system segment extends from northwestern Colorado
through southwestern Wyoming into northern Utah, and the southern system segment
extends from western Colorado to Payson in central Utah. The two portions are
linked together and have significant connections with other pipeline systems,
making it a fully integrated system.

Questar Pipeline's largest single transportation customer is Questar Gas.
During 2001, Questar Pipeline transported 110.3 MMDth for Questar Gas, compared
to 108.2 MMDth in 2000. These transportation volumes include cost-of-service gas
produced by Wexpro on properties owned by Questar Gas as well as some volumes
purchased by Questar Gas directly from field producers.

Questar Gas has reserved firm transportation capacity of about 849,000 Dth
per day on an ongoing basis, or about 60 percent of Questar Pipeline's reserved
capacity. (Questar Gas also contracts for additional capacity during the heating
season.) Questar Pipeline's primary transportation agreement with Questar Gas
was recently extended and expires on June 30, 2017. Questar Gas paid reservation
charges of $52.1 million to Questar Pipeline in 2001; these charges include
reservation charges attributable to firm and "no-notice" transportation. Questar
Gas only needs its total reserved capacity during peak-demand situations. When
it is not fully utilizing such capacity, Questar Gas releases it to others,
primarily industrial transportation customers and marketing entities.

Questar Pipeline recovers approximately 95 percent of its transmission cost
of service through demand charges from firm transportation customers. In other
words, these customers pay primarily for access to transportation capacity.
Consequently, Questar Pipeline's throughput volumes do not have a significant
effect on its short-term operating results. Questar Pipeline's transportation
revenues are not significantly impacted by fluctuating demand based on the
vagaries of weather or natural gas prices. Its revenues would vary with
throughput if the FERC changes its basic regulatory scheme of "straight
fixed-variable" rates.

Questar Pipeline's total system throughput increased from 275.2 MMDth in
2000 to 312.8 MMDth in 2001. Questar Pipeline increased the volumes it
transports for nonaffiliated customers from 158.6 MMDth in 2000 to 195.6 MMDth
in 2001.

-15-

Questar Pipeline owns and operates a major compressor complex near Rock
Springs, Wyoming, that compresses volumes of gas from the transmission system
for delivery to the WIC segment of the Trailblazer system and to CIG. The
complex has become a major delivery point on Questar Pipeline's system, with
five of its major natural gas lines connected to the system at the complex. In
addition, both of CIG's Wyoming pipelines and the WIC segment are connected to
the complex.

In addition to the transmission system described above, Questar Pipeline
has a 90 percent interest in and is the operating partner of Overthrust, a
general partnership that owns and operates the Overthrust segment of
Trailblazer. Trailblazer, in turn, is a major 800-mile line that transports gas
from producing areas in the Rocky Mountains to the Midwest. The 88-mile
Overthrust segment is the western-most of Trailblazer's three segments.

The Kern River pipeline, which Williams recently agreed to sell, was built
to transport gas from Wyoming to the enhanced oil recovery projects in Kern
County, California. It runs through Utah's Wasatch Front, making it possible for
some large industrial customers to bypass both Questar Gas and Questar Pipeline
by buying transportation service on Kern River. The new connection between Main
Line 104 (SEE "New Projects") and Kern River permits additional opportunities
for producers and marketers to move gas to Kern River. The Kern River line has
diverted some transportation volumes from both Questar Pipeline and Overthrust.
The Kern River line, on the other hand, has also provided Questar Pipeline with
opportunities to make additional connections with outside markets.

Questar Pipeline's 50 percent ownership interest in the TransColorado
pipeline project is subject to a complex lawsuit that is described under "Legal
Proceedings" later in this report. Until this lawsuit is resolved, Questar
Pipeline is effectively precluded from realizing any value by its contractual
claim to sell its interest in TransColorado to its partner, a subsidiary of
Kinder Morgan Inc. (formerly KN Energy), as early as March 31, 2001.

The TransColorado pipeline project, which commenced operations on March 31,
1999, was built to transport natural gas from the Rocky Mountain area that was
traditionally priced lower than other gas supplies, e.g., San Juan Basin, to
California and Midwestern markets through interconnections with major pipeline
systems. The pipeline originates at a point on Questar Pipeline's system 25
miles east of Rangely in northwestern Colorado and extends 292 miles to the
Blanco hub in northwestern New Mexico.

In its three years of operation, TransColorado has incurred significant
losses because gas prices did not reflect basis differentials that encouraged
producers and market aggregators to transport volumes on the line. Questar
Pipeline wrote down its investment in TransColorado at year-end 1999 and has
been recording operating losses in TransColorado since April 1, 2001, pending
the outcome of the litigation and its ability to sell its interest to its
partner.

NEW PROJECTS. In November of 2001, Questar Pipeline completed its Main Line
104 pipeline, which is 77 miles in length and 24 inches in diameter. The line
extends from Price, Utah, near the Ferron area of coalbed methane gas, to
Questar Gas's system at Payson, Utah, and the Kern River

-16-

line near Elberta, Utah. Questar Gas has contracted for approximately 22 percent
of the 272,000 Dth of the firm transportation capacity on the new line.

Questar Pipeline, through a subsidiary, has begun converting the 490-mile
eastern segment of the Southern Trails line that runs from the Blanco hub area
in the San Juan Basin to multiple delivery points near the California state
line. The conversion process includes adding four new compressor stations,
installing additional receipt and delivery connections, and building a line to
the TransColorado pipeline. The segment's daily capacity of 80,000 Dth is fully
subscribed under long-term transportation contracts. The line is expected to be
in service by mid-2002.

Regulatory and marketing constraints have prevented Questar Pipeline from
developing the western segment of Southern Trails that runs from the California
border to Long Beach. While continuing to aggressively pursue natural gas
markets on the California portion of Southern Trails, Questar Pipeline is
exploring other options, including sale or alternative uses, for the western
segment.

Questar Pipeline intends to offer specified hub services such as "parking"
and "loaning" effective May 1, 2002. It will install an additional compressor at
Clay Basin to facilitate such services and has to filed the necessary tariff
revisions with the FERC. Questar Pipeline has introduced the concept of hub
services to customers and believes that its central location, connections to
multiple lines, and the accessibility of storage capacity will enable it to
increase the load factor of its lines and increase its revenues by offering such
services.

STORAGE AND PROCESSING. Questar Pipeline's Clay Basin storage facility in
northeastern Utah is the largest underground storage reservoir in the Rocky
Mountains. The facility has a capacity of 117.5 Bcf. Clay Basin has been
operational since 1977 and has been successfully expanded several times. Storage
service is important to parties that need to balance purchases with fluctuating
customer demand, improve service reliability, and avoid imbalance penalties. The
storage capacity at Clay Basin is fully subscribed by customers under long-term
agreements. Questar Gas currently has 13.4 MMDth of working gas capacity at Clay
Basin. Other large customers, in addition to Questar Gas, include Williams;
Puget Sound Energy Company, a utility in the state of Washington; and Duke
Energy Trading and Marketing L.L.C. Questar Pipeline also offers interruptible
storage service at Clay Basin and allows firm storage service customers the
right to transfer their injection and withdrawal rights to other parties.

Questar Pipeline has proposed using a salt formation located near Evanston,
Wyoming, for the first salt-cavern storage project located in the Rocky Mountain
region. Current plans envision four potential caverns, which are formed through
water leeching techniques, that would each contain 2.5 Bcf of working gas and
that could be cycled 10-12 times per year. Questar Pipeline is finishing a well
that will provide additional engineering data and is soliciting customer
support.

Through a subsidiary, Questar Pipeline also owns gathering lines and
processing plant near Price, Utah, that removes carbon dioxide from coalbed
methane gas in order to raise the Btu content of the gas to be safely and
efficiently used for appliances in Questar Gas's service area. This plant began
operations in June of 1999.

-17-

REGULATION. Questar Pipeline does not currently plan to file a general rate
case in 2002. It, however, will continue to review its revenues and costs as it
adds new facilities that are not included in its rate base and makes
expenditures to comply with regulatory mandates.

Questar Pipeline and its affiliates in the Regulated Services group have
actively opposed the FERC's efforts to broaden the scope of its regulations that
are currently limited to "marketing affiliates." The FERC issued a Notice of
Proposed Rulemaking ("NOPR") in September of 2001, in which it proposed rules
that would require pipelines to comply with certain "nondiscriminatory"
standards when dealing with energy company affiliates, including local
distribution companies. At the current time, local distribution companies such
as Questar Gas that do not engage in unregulated gas sales are exempt from the
FERC's marketing affiliate regulations. Questar Pipeline believes that the
current exemption should be continued. If adopted, the FERC's proposed rules
would diminish Questar Pipeline's operational efficiencies and increase its
costs because QRS provides administrative, engineering, gas control, technical,
accounting, legal, and regulatory services to both Questar Pipeline and Questar
Gas.

Questar Pipeline is also required to comply with the FERC's Order No. 637
that requires it, among other things, to offer capacity segmentation to its
transportation customers. Given its configuration as a hub and spoke pipeline,
rather than as a long line, Questar Pipeline argued that traditional
segmentation would reduce shippers' flexibility to use their capacity on its
system and would negatively affect its own throughput capacity. The FERC denied
Questar Pipeline's request of a waiver, but acknowledged that segmentation
should be implemented in a fashion that does not negatively impact firm-capacity
customers. Questar Pipeline has until May 15, 2002 to file tariff provisions
that comply with the segmentation portion of Order No. 637 and has filed a
request for rehearing of the FERC's decision denying its petition for a waiver.

MISCELLANEOUS. Questar Pipeline extended its footprint to other parts of
the western United States by participating in the TransColorado pipeline project
and purchasing the Southern Trails line. There are market risks associated with
these projects, as evidenced by Questar Pipeline's decision to writedown its
investment in TransColorado. Questar Pipeline's efforts to complete the Southern
Trails conversion are affected by its ability to obtain market support and by
the local regulatory and political climate in California.
Competition for Questar Pipeline's transportation and storage services has
intensified in recent years. Regulatory changes have significantly increased
customer flexibility and increased the risks associated with new projects.
Questar Pipeline has two key assets that contribute to its continued success. It
has a strategically located and integrated transmission system with
interconnections to major pipeline systems and with access to major producing
areas and markets and it has significant storage capacity with Clay Basin.
Questar Pipeline's announced projects to build a salt cavern storage project and
to obtain regulatory approval to offer hub services capitalize on these assets.

REGULATED SERVICES, OTHER SERVICES

QES was organized in 1996 to pursue opportunities created by the
deregulation of energy markets and was transferred from QMR to QRS effective
January 1, 1999. QES offers a variety of

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non-regulated products and services that include gas measurement, automation and
laboratory services, utility installation and infrastructure services, temporary
natural gas-heating equipment sales and rentals, and appliance financing. It
also develops and manages nonregulated energy and utility projects for
commercial, industrial, and municipal customers. During 2001, QES launched a new
business to provide fueling infrastructure for vehicles and stationary equipment
using natural gas and other alternative fuels.

OTHER OPERATIONS

In addition to the two primary segments of Market Resources and Regulated
Services, Questar has "other operations." This group includes Questar InfoComm,
which is a full-service provider of integrated information and communication
services to affiliates and external businesses; Consonus and limited real estate
operations. Equity securities owned by the Company or Questar InfoComm are also
included in this category.

Questar InfoComm provides information and communication services. It
operates a regional microwave system that covers much of Utah and southwestern
Wyoming. This digital system was originally built to satisfy the needs of
Questar's operations, but also carries data for alternative telephone providers
and other external customers. Questar InfoComm installs and maintains
telephone-switching equipment and voice-mail systems. It built and leases a
fiber optic telephone network in parts of Salt Lake City for an alternative
telephone provider. Questar InfoComm has developed and sold proprietary software
to handle electric grid customers in the United Kingdom and Europe.

In 1999, Questar InfoComm launched Consonus (formerly known as Questar
MetroNet Services), which offers managed hosting and operations services and
critical data center support. Consonus owns three ultra-secure Internet data
centers in the Salt Lake metropolitan area and will consider constructing
additional data centers in other metropolitan areas. These centers are designed
to protect critical systems and data from natural or man-made disasters.
Consonus' operations and expansion opportunities have been negatively affected
by the economic recession in the high tech industry.

As of year-end 2001, Questar retained 788,962 shares of its original 7.8
million shares issued by Nextel, an international wireless communication
company. The Company acquired this stock in 1994 when it sold Questar Telecom, a
specialized mobile radio subsidiary, to Nextel.

Questar no longer owns the office building in downtown Salt Lake City that
serves as its headquarters facility. It does have a long-term lease for the
building and has approximately 750 employees in it. Questar, through a
subsidiary, continues to own property close to the building that is currently
used for parking and will continue to review proposals to develop it.

Through an affiliate, Questar also owns 14.5 acres of commercial real
estate in Salt Lake County that was the site of the Wasatch Chemical clean-up
activities and was being utilized by the organizing committee for the Salt Lake
2002 Olympics. SEE Legal Proceedings. Although the Company intends to continue
owning the property to minimize any future problems associated with
environmental compliance, it believes that the property can earn attractive
returns when leased.

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EMPLOYEES

As of December 31, 2001, Questar and its affiliates had 2,221 employees
compared to 2,022 employees at year-end 2000. Of this total, 1,321 worked for
the Regulated Services segment, 581 worked for Market Resources entities, and
319 worked for corporate, Questar InfoComm and Consonus. None of these employees
is represented under collective bargaining agreements. Questar has comprehensive
benefit plans for its employees, but some benefit plans vary by business unit.
Employee relations are generally deemed to be satisfactory.

ENVIRONMENTAL MATTERS

Questar and its affiliates are subject to the National Environmental Policy
Act and other federal and state legislation regulating the environmental aspects
of their businesses. During 2001, Questar continued to be involved in actions
involving local and federal environmental enforcement agencies and allegations
of "hazardous waste" problems. SEE Legal Proceedings for a discussion of
penalties assessed by the Wyoming Department of Environmental Quality against
QMR. The Company does not believe that environmental protection provisions will
have any significant effect on its competitive position; it does believe,
however, that such provisions have added and will continue to add to capital
expenditures and operating costs.

Questar is actively promoting the environmental advantages of natural gas
in comparison to other fuels. It has actively participated in various clean air
committees and has promoted the use of natural gas in automobiles. Questar's
management believes that increasing concerns about environmental pollution will
result in an increased demand for natural gas.

RESEARCH AND DEVELOPMENT

Questar Gas has the primary responsibility for the Company's research and
development activities. It has evaluated gas conversion equipment, gas piping,
and engines using natural gas and also evaluated technological developments with
electrical appliances. The total amount spent by Questar on research and
development activities either directly or through contributions is not
significant.

OIL AND GAS OPERATIONS

Oil and gas operations are significant to the business functions and
financial condition of Questar. (All information set forth below relates to the
Company on a consolidated basis.) Certain information concerning the Company's
oil and gas operations is presented in Note 14 of the Notes to Consolidated
Financial Statements included in Item 14 of this report. The Company does not
have any long_term supply contracts with foreign governments or reserves of
equity investees.

RESERVE REPORTS. The following is a reconciliation of reserve quantities
reported in Note 14 of the Notes to Consolidated Financial Statements and
reserve quantities reported to other regulatory agencies:

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During 2001, the Company filed estimated reserves as of year-end 2000 on
Form EIA-23 with the Energy Information Administration in the Department of
Energy and will submit a comparable report for 2001. Although Questar used the
same technical and economic assumptions when it filed this report, it was
obligated to report reserves on wells it operates, not on all wells in which it
has an interest, and to include the reserves attributable to other owners in
such wells.

Questar Gas files information using a FERC Form 2 format with the PSCU and
PSCW and lists gas reserves of 451.4 Bcf (working interest) at December 31,
2001, which include reserves attributable to royalty interests. The 405.7 Bcf
(net revenue interest) reported as cost-of-service gas reserves in Note 12
exclude reserves attributable to royalty interests.

Questar Pipeline files a Form 2 (Annual Report) with the FERC. The Form 2
discloses Questar Pipeline's cushion gas of 70.4 Bcf at December 31, 2001. This
gas is not included in the total reserve number.

OIL AND GAS PRODUCTION.(1)

(1) Production quantities from all properties, including cost-of-service
properties.

AVERAGE SALES PRICE.(2)

(2) Average sales price is calculated on production excluding
cost-of-service volumes.

AVERAGE PRODUCTION (LIFTING) COST. The average production cost Mcfe
excludes costs and volumes associated with production of cost-of-service
reserves. One barrel of oil equals the energy content of 6 Mcf of gas.

PRODUCING WELLS AT DECEMBER 31, 2001.

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The numbers for gross wells include 98 wells with multiple completions.

LEASEHOLD ACREAGE AT DECEMBER 31, 2001. Questar can retain its interest in
undeveloped acreage by either drilling activity that establishes commercial
production or by the payment of delay rentals. A portion of the unproved acreage
may be allowed to lapse prior to the primary terms of the lease. Leasehold
acreage is located in the United States and Canada. Approximately 80 percent of
the domestic unproved acreage consists of federal and state leases that
generally have ten-year terms. The remaining 20 percent is attributable to fee
leases that generally have three- to five-year terms. About 41 percent of the
unproved acreage is scheduled to expire within the next five years if no
drilling or development activity is undertaken. Substantially all the Canadian
unproved acreage is related to Crown or government leases, which provide for
five-year terms.

The following chart lists the Company's consolidated productive and
unproved acreage:

NET PRODUCTIVE AND DRY WELLS DRILLED.

PRESENT ACTIVITIES. At year-end 2001, Questar affiliates had a working
interest in 46 gross wells waiting on completion and 10 gross wells being
drilled.

DELIVERY COMMITMENTS. Questar Gas is obligated to deliver natural gas to
approximately 732,000 customers in Utah, Wyoming and Idaho, but future
quantities associated with such service are neither fixed nor determinable.

The E&P group sells a majority of its oil and gas production on the
spot-market or under short-term contracts that provide for price readjustments.

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ITEM 3. LEGAL PROCEEDINGS.

There are various legal proceedings pending against 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.
Significant cases are discussed below.

TRANSCOLORADO. Questar TransColorado, Inc. ("QTC"), a subsidiary of Questar
Pipeline, owns a 50 percent interest in TransColorado, which is the partnership
that built and operates the TransColorado pipeline project. QTC and its partner,
KN TransColorado, Inc. ("KNTC") are involved in a complex lawsuit that is
pending in a state district court in Colorado. At center stage in the lawsuit is
the validity of a contractual right claimed by QTC to put its 50 percent
interest in TransColorado to KNTC during the 12-month period beginning March 31,
2001.

KNTC originally filed the lawsuit in June of 2000 alleging that Questar
Pipeline and its affiliates breached their fiduciary duties to TransColorado and
KNTC by developing a plan to construct and operate a new pipeline (this
project--Mainline 104--is described under the section "Regulated Services,
Transportation and Storage") that would compete with TransColorado, rendering it
economically unviable. KNTC is seeking at least $150 million 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
its named affiliates, including Kinder Morgan, Inc., seeking a declaratory
judgment that its contractual right to exercise the put is binding and
enforceable and damages of at least $185 million.

The parties have entered into a stipulation and standstill agreement that
preserves the claims made by the parties pending the resolution of the
litigation. On December 31, 2000, QTC gave notice of its election to exercise
its contractual right to sell its 50 percent interest in TransColorado to KNTC,
subject to the standstill agreement. A trial before the judge is scheduled to
begin April 1, 2002.

GRYNBERG. Questar defendants are involved in three separate lawsuits filed
by Mr. Grynberg, an independent producer. The first case involves claims filed
by Grynberg under the Federal False Claims Act and is substantially similar to
other cases filed against pipelines and their affiliates that have all been
consolidated for discovery and pre-trial motions in Wyoming's federal district
court. The cases involve allegations of industry-wide mismeasurement and
undervaluation of gas volumes on which royalty payments are due the federal
government. The complaint seeks treble damages and imposition of civil
penalties. The federal district judge denied the motions filed by the defendants
to dismiss the lawsuits and has not set a date for a scheduling conference.

The second case is a lawsuit that is currently on appeal before the Utah
Supreme Court. The case was dismissed by a Utah state court judge after he
granted the motion for summary judgment filed by the Questar parties. Grynberg
claims that Questar Pipeline, QGM and QET mismeasured gas volumes attributable
to his working interest in specified wells located in southwestern Wyoming. He
cites mismeasurement to support claims for breach of contract, negligent
misrepresentation, fraud, breach of fiduciary responsibilities and related
causes.

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The third case is pending in a Wyoming federal district court against
Questar Gas (as the successor to the named Questar Pipeline). The judge, in June
of 2001, entered an order granting the motion for partial summary judgment filed
by the Questar defendants that dismissed the antitrust claims from the case, but
has not ruled on other motions for summary judgment dealing with "ratable take"
and fraud.

GAS PIPELINES. Questar E&P, QGM, Wexpro, Questar Gas, and Questar Pipeline
are among the numerous defendants in this case, which is currently styled as
WILL PRICE V. GAS PIPELINES, that has been filed against the pipeline industry.
Pending in a Kansas state district court, this case is similar to the cases
filed by Grynberg, but the allegations of a conspiracy by the pipeline industry
to set standards that result in the systematic mismeasurement of natural gas
volumes and resulting underpayment of royalties are made on behalf of private
and state lessors, rather than on behalf of the federal government. The
defendants, including the Questar defendants, have filed motions to dismiss for
lack of personal jurisdiction.

DEQ PENALTIES. QMR subsidiaries have received notices of violation from the
Wyoming Department of Environmental Quality ("DEQ") in conjunction with DEQ's
program to require that all existing air-emission facilities be registered and
permitted. QMR has raised an issue concerning DEQ's failure to provide proper
notice of the new requirements and contends that existing equipment should be
"grandfathered" under DEQ's regulatory program in place at time of installation.
QMR expects that any penalties assessed its subsidiaries will not exceed
$300,000 on an aggregate basis. The penalties are assessed on a per-well or
per-facility basis and differ based on the eligibility of the facility for a
waiver or the need for appropriate action to minimize emissions. In response to
the action taken by the DEQ, QMR has made an extensive review of wells and other
facilities in Wyoming to ascertain that the necessary filings have been made and
has established procedures to make such filings on an ongoing basis.

QMR CLASS ACTION CASES. Royalty class actions are being asserted by
landowners against entities involved in the oil and gas production and marketing
businesses. The QMR group of companies has been involved in one major class
action (the Bridenstine case in Oklahoma) that was settled near the end of 2000,
reached an agreement to settle another Oklahoma case that was recently filed,
and has been named in class actions in Wyoming that have not yet been certified.
These companies believe that they will continue to be subject to other royalty
class actions.

WASATCH CHEMICAL. The Company continues to monitor the Wasatch Chemical
property in Salt Lake City, which is still included on the national priorities
list, commonly known as the "Superfund" list. The Wasatch Chemical property was
the location of chemical mixing operations and is the subject of a 1992 consent
order. Questar conducted the necessary soil remediation and groundwater
remediation activities and expects that the site will be eventually removed from
the Superfund list.

SEE "Regulated Services, Retail Distribution, Regulation" for a review of
significant regulatory proceedings and appeals from decisions in such
proceedings.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Company did not submit any matters to a vote of stockholders during the
last quarter of 2001.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Information concerning the market for the common equity of the Company and
the dividends paid on such stock is located in Note 11 of the Notes to
Consolidated Financial Statements under Item 14. As of March 19, 2002, Questar
had 11,299 shareholders of record and estimates that it had an additional
30,000-35,000 beneficial holders.

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

SUMMARY

Questar Corporation reported earnings of $158.2 million for 2001, up 6% compared
with earnings for 2000. Following is a year-to-year comparison of net income by
line of business.

Questar Market Resources' net income rose 30% in 2001 compared with 2000 driven
by a 53% increase in earnings from exploration and production operations and a
16% increase in Wexpro's earnings from gas-development operations. In 2001, gas
and oil reserves grew 62% after production to nearly 1.2 trillion cubic feet
equivalent.

Questar Regulated Services reported an 8% increase in earnings for 2001 compared
with the prior year. The number of distribution customers grew by 3.9% partially
offset by lower gas usage per customer and higher bad debt expense. An increase
in transportation capacity demand was offset by ongoing legal costs and
operating losses from the TransColorado partnership.

Corporate and Other Operations, dominated by information-technology and
web-hosting activities, reported a net loss in 2001, which corresponded with the
steep decline in business activity in the electronic-business and internet
sectors. In addition, weak market values in the internet sector caused a net
loss from securities transactions in 2001.

On July 1, 2001, Questar elected to change its accounting method for gas and oil
properties from the full cost method to the successful efforts method. Prior
years financial statements have been restated in an amended Form 10-K filed for
the year ended December 31, 2000. Previously reported earnings decreased $7.2
million ($.09 per share) and $2.0 million ($.03 per share) for the years ended
December 31, 2000 and 1999, respectively.

-27-

RESULTS OF OPERATIONS

QUESTAR MARKET RESOURCES (Market Resources or QMR) conducts Questar's
exploration and production, gas development, gathering, processing and marketing
activities. Following is a summary of financial results and operating
information.

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REVENUES
Revenues were 1% higher in 2001 when compared with 2000 as a result of increased
production, higher gas prices and increased investment in gas-development
activities. Market Resources produced 85.6 billion cubic feet equivalent (Bcfe)
in 2001 compared with 82.3 Bcfe in 2000 due to the acquisition of Shenandoah
Energy Inc. (SEI) on July 31, 2001. Gas production increased 2% over year
earlier levels while average realized selling prices rose 15%. Production of oil
and natural gas liquids (NGL) rose 12%, excluding Wexpro. Energy-marketing
volumes dropped 13% in 2001 compared with 2000. In 2001, declining prices for
plant products and higher gas prices were responsible for reduced revenues and
lower margins from processing plants.

Market Resources enters hedging transactions to support earnings targets and to
protect earnings from downward moves in commodity prices. In 2001, approximately
59% of equity gas production and 58% of oil production, excluding Wexpro, was
hedged. This compares with 2000 when approximately 53% of gas production and 73%
of oil production was priced under hedging contracts. In 2001, the average price
received from hedging transactions was $2.99 per Mcf of gas, net to the well,
and $18.28 per barrel of oil, net to the well. Hedging activities reduced 2001
revenues from gas sales by $44.7 million and oil sales by $9.8 million.

Revenues from cost-of-service operations were 21% higher in both 2001 and 2000
when compared with prior years. Wexpro operates and develops oil and natural gas
properties on behalf of Questar Gas and receives a return on its investment in
successful wells in addition to being reimbursed for operating expenses. The
natural gas produced from these properties is delivered to Questar Gas at
Wexpro's cost of service. Oil is sold at market prices. Any net income from oil
sales remaining after recovery of expenses and Wexpro's return on investment is
shared between Wexpro and Questar Gas. Questar Gas' portion is reported as
oil-income sharing on the income statement. Wexpro's investment base, net of
deferred income taxes, grew 29% and 15% in 2001 and 2000, respectively. The
return on average investment base was 19.7% in 2001 and 19.5% in 2000.

Revenues increased 49% in 2000 when compared with 1999 due primarily to higher
energy prices and increased gas production. Natural gas prices began rising in
the second half of 2000 and spiked in the first quarter of 2001 due to an energy
shortage in the western United States. Natural gas production rose 10% as a
result of acquiring Canadian producing properties in January 2000.

OPERATING EXPENSES
Operating and maintenance (O&M) expenses were 5% higher in 2001 when compared
with 2000 due primarily to an increase of the number of gas and oil properties
operated following the acquisition of SEI. O&M expenses increased 34% in 2000
compared with 1999 due primarily to an increase in the number of gas and oil
properties and to the costs of litigating and settling a major lawsuit.
Exploration expense, largely a function of drilling dry exploratory wells,
decreased 12% in 2001 after increasing 49% in 2000. Depreciation, depletion and
amortization expense (DD&A) increased 9% in 2001 due to a 4% increase in gas and
oil production and a higher average rate. The average DD&A rate for oil and gas
properties was $.83 per thousand cubic feet equivalent (Mcfe) for 2001, up from
$.78 per Mcfe in 2000 and $.71 per Mcfe in 1999. Production and other taxes rose
19% in 2001 and 69% in 2000 driven by higher revenues and prices.

ENRON EXPOSURE
A QMR energy-marketing affiliate has bought and sold natural gas and engaged in
energy trading activities with affiliates of Enron. At the time of Enron's
announced plan and filing to seek protection under bankruptcy laws, Enron owed
QMR $3.0 million for gas purchased from QMR and QMR owed Enron $.8 million for
gas purchased from Enron. In addition, QMR owed $.8 million to Enron in a
terminated swap contract. It is the opinion of QMR's counsel that these
transactions may be netted. QMR has reserved the net amount of these balances or
$1.4 million.

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NONREGULATED GAS AND OIL RESERVES
In 2001, gas and oil reserves grew 62% after production to nearly 1.2 trillion
cubic feet through a combined strategy of acquiring reserves and a successful
drilling program. Market Resources achieved a 631% reserve replacement ratio in
2001 compared with 261% in 2000. QMR acquired 415 Bcfe of proved gas and oil
reserves in the SEI acquisition. Reserve additions, revisions and purchases, and
sales in place, amounted to 540 Bcfe in 2001. In January 2001, Market Resources
completed the sale of 290 producing properties and a gas gathering system in the
Midcontinent. Daily production volumes approximated 4.3 MMcf of gas and 180
barrels of oil.

The five-year average finding cost was $.85 per Mcfe in 2001 compared with $.86
in 2000 and $.90 in 1999, excluding Wexpro.

QUESTAR REGULATED SERVICES (Regulated Services) conducts Questar's natural
gas-distribution, transmission, storage, processing and nonregulated energy
services.

Natural Gas Distribution - Questar Gas conducts natural gas distribution
operations. Following is a summary of financial results and operating
information:

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MARGIN (REVENUES LESS NATURAL GAS PURCHASES)
Questar Gas' margin was 1% higher in 2001 when compared with 2000 and 5% higher
in 2000 when compared with 1999. The higher margins were primarily the result of
a $13.5 million annualized general rate increase in Utah, effective August 11,
2000, and a 3.9% larger customer base. An acquisition of two small distribution
systems accounted for 10,500 of the 27,271 increase in customers.

Usage per residential customer has been steadily declining for the past several
years in large part as a result of higher energy prices and more
energy-efficient appliances and home construction. Usage, calculated on a
temperature adjusted basis, has decreased by 4%, 2% and 1% in 2001, 2000 and
1999, respectively. Temperatures in 2001 were near normal; however, temperatures
have been warmer than normal for nine of the last ten years. The financial
impact of actual weather variations from normal are minimized by a
weather-normalization adjustment in rates.

Industrial deliveries were flat in 2001 and 6% higher in 2000. An increase in
natural gas volumes used to generate electricity offset lower deliveries to a
steel producer. In 2002, the steel producer announced plans to reorganize under
protection of bankruptcy laws. Margins from gas delivered to industrial
customers are substantially lower than margins from gas delivered to residential
and commercial customers.

A significant increase in purchased-gas costs in the second half of 2000 and the
first quarter of 2001 resulted in higher charges to customers but did not
directly affect the margin. The recovery of gas costs is authorized through rate
regulation in Utah and Wyoming. Gas costs in Utah rates, which peaked at $4.67
per dth in a January 1, 2001 filing, have subsided to $2.68 per dth in a January
1, 2002 gas-cost filing. In 2001, 44% of Questar Gas' supplies came from
company-owned reserves, which cost less than gas purchased from third-party
suppliers.

OPERATING EXPENSES
Operating and maintenance expenses were 2% higher in 2001 due largely to a $3.7
million increase in bad debt expenses that more than offset labor savings from a
fourth-quarter 2000 early-retirement program. An economic recession, increased
number of bankruptcies and higher energy costs resulted in more frequent
collection problems. O & M expenses were 2% lower in 2000 when compared with
1999 due to lower legal costs and reduced information-technology expenses.
Depreciation expense increased 2% in 2001 due to capital spending. Depreciation
expense was $2.8 million lower in 2000 due to investments in several information
systems being fully depreciated. In 2000, other taxes increased when compared
with 1999 because of a $1.4 million adjustment of prior-year taxes.

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Natural Gas Transmission - Questar Pipeline conducts natural gas-transmission,
storage and processing operations. Following is a summary of financial results
and operating information:

REVENUES
Transportation volumes rose 14% in 2001 to reach 313 million dth after posting a
9% increase to 275 million dth in 2000. Not only are the volumes of gas
transportation increasing, but the proportion of firm volumes to interruptible
volumes is increasing. Firm transportation volumes, whose customers pay a fixed
rate to reserve a portion of pipeline capacity, increased to 94% of the total in
2001 compared with 92% the previous year. The increase in firm transportation
reflects a growing demand for gas for power generation and growing pipeline
capacity. 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.

As of December 31, 2001, approximately 77% of Questar Pipeline's transportation
system was reserved by firm-transportation customers under contracts with
varying terms and lengths. Questar Gas continues to be Questar Pipeline's single
largest transportation customer accounting for 70% of the demand charges
collected. Questar Gas has reserved transportation capacity of 899,000 dth per
day, representing 61% of the total reserved daily-transportation capacity as of
December 31, 2001. Questar Gas' transportation contracts have been extended with
initial terms ending in 2006 to 2017.

Revenues from storage operations remained unchanged in the three-years ending
December 31, 2001. Questar Pipeline's primary storage facility at Clay Basin has
been 100% subscribed under long-term contracts for several years. A majority of
the storage contracts have terms in excess of eight years. The Clay Basin
storage facility in eastern Utah was last expanded by 5 Bcf in May of 1998.
Questar Gas has contracted for 26% of firm-storage capacity for terms extending
from 2008 to 2019.

A processing plant owned by Questar Transportation Services, which removes
carbon dioxide from a portion

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of the gas stream, completed its second year of operation in 2001.

OPERATING EXPENSES
Operating and maintenance expenses increased 8% in 2001 compared with 2000 due
primarily to rising legal costs and information system maintenance. These
increases more than offset labor savings from an early retirement program
offered in the fourth quarter of 2000. Higher legal costs and a full year of
expenses associated with a gas-processing plant were responsible for the 14%
increase in O&M expense