| QUESTAR CORP ITEM 1A RISK FACTORS Investors should read carefully the following factors as well as the cautionary statements referred to in “Forward-Looking Statements” herein |
| If any of the risks and uncertainties described below or elsewhere in this Annual Report actually occur, the Company’s business, financial condition or results of operations could be materially adversely affected |
| The future price of natural gas, oil and NGL is unpredictable |
| Historically the price of natural gas, oil and NGL has been volatile and is likely to continue to be volatile in the future |
| Any significant or extended decline in commodity prices would impact the Company’s future financial condition, revenues, results of operations, cash flows and rate of growth |
| Because approximately 90prca of Questar’s proved reserves at December 31, 2005, was natural gas, the Company is substantially more sensitive to changes in natural gas prices than to changes in oil prices |
| Questar cannot predict the future price of natural gas, oil and NGL because of factors beyond its control, including but not limited to: * changes in domestic and foreign supply of natural gas, oil and NGL; * changes in local, regional, national and global demand for natural gas, oil, and NGL; * regional price differences resulting from available pipeline transportation capacity or local demand; * the level of imports of, and the price of, foreign natural gas, oil and NGL; * domestic and global economic conditions; * domestic political developments; * weather conditions; * domestic and foreign government regulations and taxes; * political instability or armed conflict in oil and natural gas producing regions; * the price, availability and acceptance of alternative fuels; * US storage levels of natural gas, oil, and NGL Questar uses derivative instruments to manage exposure to uncertain prices |
| Questar uses financial contracts to hedge exposure to volatile natural gas, oil, and NGL prices and to protect cash flow, returns on capital, net income and credit ratings from downward commodity price movements |
| To the extent the Company hedges commodity price exposure, it forgoes the benefits otherwise experienced if commodity prices increase |
| Questar believes its regulated businesses – interstate natural gas transportation and retail gas distribution – and its Wexpro subsidiary generate revenues that are not significantly sensitive to short-term fluctuations in commodity prices |
| Questar enters into commodity price hedging arrangements with creditworthy counterparties (banks and industry participants) with a variety of credit requirements |
| The amount of credit available may vary depending on the credit rating assigned to the Company’s debt securities |
| A substantial increase in the price of natural gas, oil and/or NGL could result in the requirement to deposit large amounts of collateral with counterparties that could seriously impact the Company’s cash liquidity |
| Additionally a downgrade in the Company’s credit ratings to sub-investment grade could result in the acceleration of obligations to hedge counterparties |
| The Company may not be able to economically find and develop new reserves |
| The Company’s profitability depends not only on prevailing prices for natural gas, oil and NGL, but also its ability to find, develop and acquire gas and oil reserves that are economically recoverable |
| Substantial capital expenditures are required to find, develop and acquire gas and oil reserves to replace those depleted by production |
| Questar E&P’s proved natural gas and oil reserve estimates are prepared annually by independent reservoir-engineering consultants |
| Gas and oil reserve estimates are subject to numerous uncertainties inherent in estimating quantities of proved reserves, projecting future rates of production and timing of development expenditures |
| The accuracy of these estimates depends on the quality of available data and on engineering and geological interpretation and judgment |
| Reserve estimates are imprecise and will change as additional information becomes available |
| Estimates of economically recoverable reserves and future net cash flows prepared by different engineers, or by the same engineers at different times may vary significantly |
| In addition the estimation process also involves economic assumptions relating to commodity prices, production costs, severance and other taxes, capital expenditures and remedial costs |
| Actual results most likely will vary from the estimates |
| Any significant variance could reduce the estimated future net revenues from proved reserves and the present value of those reserves |
| Investors should not assume that the “standardized measure of discounted future net cash flows” from Questar E&P’s proved reserves referred to in this Annual Report is the current market value of the estimated natural gas and oil reserves |
| In accordance with SEC requirements, the estimated discounted future net cash flows from Questar E&P’s proved reserves is based on prices and costs in effect on the date of the estimate, holding the prices constant throughout the life of the properties |
| Actual future prices and costs may differ materially from those used in the current estimate, and future determinations of the standardized measure of discounted future net cash flows using then current prices and costs may be significantly less than the current estimate |
| Drilling is a high-risk activity |
| Operating risks include: fire, explosions and blow-outs; unexpected drilling conditions such as abnormally pressured formations; abandonment costs; pipe, cement or casing failures; environmental accidents such as oil spills, natural gas leaks, ruptures or discharges of toxic gases, brine or well fluids (including groundwater contamination) |
| The Company could incur substantial losses as a result of injury or loss of life; pollution or other environmental damage; damage to or destruction of property and equipment; regulatory investigation; fines or curtailment of operations; or attorney’s fees and other expenses incurred in the prosecution or defense of litigation |
| As is customary in the oil and gas industry, the Company maintains insurance against some, but not all, of these potential risks and losses |
| Questar can not assure that insurance will be adequate to cover these losses or liabilities |
| Losses and liabilities arising from uninsured or underinsured events could have an adverse effect on the Company’s financial condition and operations |
| Shortages of oilfield equipment, services and qualified personnel could impact results of operations |
| The demand for qualified and experienced field personnel to drill wells and conduct field operations, geologists, geophysicists, engineers and other professionals in the oil and gas industry can fluctuate significantly, often in correlation with oil and natural gas prices, causing periodic shortages |
| There have also been shortages of drilling rigs and other equipment, as demand for rigs and equipment has increased along with the number of wells being drilled |
| These factors also cause significant increases in costs for equipment, services and personnel |
| Higher oil and natural gas prices generally stimulate increased demand and result in increased costs for drilling rigs, crews and associated supplies, equipment and services |
| These shortages or cost increases could impact profit margin, cash flow and operating results or restrict the ability to drill wells and conduct operations |
| A significant portion of Market Resources production, revenue and cash flow are derived from assets that are concentrated in a geographical area |
| While geographic concentration of assets provides scope and scale that can reduce operating costs and provide other operating synergies, asset concentration does increase exposure to certain risks |
| Market Resources has extensive operations on the Pinedale Anticline and in the Greater Green River Basin of southwestern Wyoming |
| Any circumstance or event that negatively impacts the operations of Questar E&P, Wexpro or Gas Management in that area could materially reduce earnings and cash flow |
| Questar is subject to complex regulations on many levels |
| The Company is subject to federal, state and local environmental, health and safety laws and regulations |
| Environmental laws and regulations are complex, change frequently and tend to become more onerous over time |
| In addition to the costs of compliance, substantial costs may be incurred to take corrective actions at both owned and previously owned facilities |
| Accidental spills and leaks requiring cleanup may occur in the ordinary course of business |
| As standards change, the Company may incur significant costs in cases where past operations followed practices that were considered acceptable at the time but that now require remedial work to meet current standards |
| Failure to comply with these laws and regulations may result in fines, significant costs for remedial activities, or injunctions |
| Questar must comply with numerous and complex regulations governing activities on federal and state lands in the Rocky Mountain region, notably the National Environmental Policy Act, the Endangered Species Act, and the National Historic Preservation Act |
| Federal and state agencies frequently impose conditions on the Company’s activities |
| These restrictions tend to become more stringent over time and can limit or prevent exploring for, finding and producing natural gas and oil on the Company’s Rockies leasehold |
| Certain environmental groups oppose drilling on some of Market Resources’ federal and state leases |
| Various federal agencies within the US Department of the Interior, particularly the Minerals Management Service and the Bureau of Indian Affairs, along with each Native American tribe, promulgate and enforce regulations pertaining to gas and oil operations on Native American tribal lands |
| These regulations include such matters as lease provisions, drilling and production requirements, environmental standards and royalty considerations |
| In addition each Native American tribe is a sovereign nation having the right to enforce laws and regulations independent from federal, state and local statutes and regulations |
| These tribal laws and regulations include various taxes, fees, requirements to employ Native American tribal members and other conditions that apply to lessees, operators and contractors conducting operations on Native American tribal lands |
| Finally, lessees and operators con ducting operations on tribal lands are generally subject to the Native American tribal court system |
| One or more of these factors may increase the Company’s costs of doing business on Native American tribal lands and have an impact on the viability of its gas, oil and transportation operations on such lands |
| Both Questar Pipeline and Questar Gas incur significant costs to comply with federal pipeline-safety regulations |
| Questar may also be affected by possible future regulations requiring the tracking, reporting and reduction of greenhouse-gas emissions |
| FERC regulates interstate transportation of natural gas |
| Questar Pipeline’s natural gas transportation and storage operations are regulated by the FERC under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978 |
| The FERC has authority to: set rates for natural gas transportation, storage and related services; set rules governing business relationships between the pipeline subsidiary and its affiliates; approve new pipeline and storage-facility construction; and establish policies and procedures for accounting, purchase, sale, abandonment and other activities |
| FERC policies may adversely affect Questar Pipeline profitability |
| The FERC also has various affiliate rules that may cause the Company to incur additional costs of compliance |
| State agencies regulate the distribution of natural gas |
| Questar Gas natural gas-distribution business is regulated by the PSCU and the PSCW These commissions set rates for distribution services and establish policies and procedures for services, accounting, purchase, sale and other activities |
| PSCU and PSCW policies may adversely affect Questar Gas profitability |
| Questar is dependent on bank credit facilities and continued access to capital markets to successfully execute its operating strategies |
| The Company relies on bank borrowing and access to public capital markets to finance a material portion of its operating strategies |
| Also, Questar relies on access to short-term commercial paper markets |
| The Company is dependent on these capital sources to provide capital to acquire and develop properties |
| The availability and cost of these credit sources is cyclical, and these capital sources may not remain available or the Company may not be able to obtain money at a reasonable cost in the future |
| All Questar’s bank loans are floating-rate debt |
| From time to time the Company may use interest rate derivatives to fix the rate on a portion of its variable rate debt |
| The interest rates on bank loans are tied to debt credit rat ings of Questar and its subsidiaries published by Standard & Poorapstas and Moodyapstas |
| A downgrade of credit ratings could increase the interest cost of debt and decrease future availability of money from banks and other sources |
| Management believes it is important to maintain investment grade credit ratings to conduct the Company’s businesses, but may not be able to keep investment grade ratings |
| General economic and other conditions impact Questar’s results |
| Questar’s results may also be negatively affected by: changes in general economic conditions; changes in regulation; availability and economic viability of gas and oil properties for sale or exploration; creditworthiness of counterparties; rate of inflation and interest rates; assumptions used in business combinations; weather and natural disasters; changes in customers &apos credit ratings; competition from other forms of energy, other pipelines and storage facilities; effects of accounting policies issued periodically by accounting standard-setting bodies; terrorist attacks or acts of war; changes in business or financial condition; changes in credit ratings; and availability of financing for Questar |