Questar Corporation History

Company Perspectives:

In today's rapidly evolving energy marketplace, Questar distinguishes itself with its focus on real, tangible energy ... from developing assets that can be measured and counted--gas-and-oil reserves and growing gas-transportation systems&mdashø pursuing ambitious growth strategies.

Company History:

Questar Corporation is an integrated natural gas company whose major subsidiaries search for, produce, and market oil and natural gas; conduct interstate gas transmission; and distribute gas to the retail market in Utah, southwestern Wyoming, and southeastern Idaho. Other affiliates provide data processing and telecommunications services. The subsidiaries Questar Pipeline Company and Questar Gas provided the bulk of Questar's revenues in the late 1990s, yet non-gas-related subsidiaries, such as Questar InfoComm, Inc., were receiving increasing attention from the company.

Company Origins

Questar Corporation was organized in Utah in April 1984. On October 2, 1984, it became the holding company for Mountain Fuel Supply Company, a public utility that is the backbone of Questar and other gas transmission and exploration and production subsidiaries. Mountain Fuel Supply had grown out of another company, one formed by the Ohio Oil Company in 1928.

In 1922, the Ohio Oil Company discovered natural gas reservoirs in the Baxter Basin area near Rock Springs, Wyoming. Because of these substantial reservoirs, Ohio Oil decided to develop its company in the West. They merged with two other companies to form the Western Public Service Corporation in October 1928. One of their primary subsidiaries was Mountain Fuel Supply, which handled gas production, owned and leased natural gas territory, and controlled gas purchase agreements in other territories. These territories, which included both proven and suspected natural gas reservoirs, covered 125,000 acres in Colorado, Utah, and Wyoming.

In December of that same year, Western Public Service acquired the Utah Gas and Coke Company, which owned and operated the manufactured gas distribution system in Salt Lake City. These acquisitions provided the company with established distribution systems that could be used for natural gas as well. Western Public Service acquired the distribution rights in Ogden, Utah, and several other towns in Utah and Wyoming. Extensive pipeline systems were needed to transport the gas 200 miles from the Baxter Basin reservoirs to Salt Lake City and Ogden. Some came from their subsidiary Wasatch Gas, and the rest were built by Western Public Service.

With natural gas reserves ready, pipelines and distribution networks in place, and growth in the West raising demand for energy, Western Public Service expected 1929 and the following years to be stellar ones. The stock market crash in October, however, dashed the company's hopes. Western Public's stock price fell from $46 a share in September 1929 to $3 a share in 1932. By 1932, the company's net income had only reached $313,000. Most of that income was generated by commercial customers; natural gas was too expensive for the average Depression-era family.

In 1935 Western Public Service merged with its subsidiaries Aspen Mountain Gas, Utah Gas and Coke Company, Wasatch Gas, Ogden Gas, Uinta Pipe Line, and Mountain Fuel Supply, ending the holding company structure. The new organization, incorporated under the name Mountain Fuel Supply Company, avoided many of the bureaucratic entanglements required by the federal Public Utility Holding Company Act. The consolidated company moved its general office from Pittsburgh to Salt Lake City.

World War II vastly increased the demand for natural gas, not only from residential customers who found the rising price of coal too expensive but also from the new munitions plants and defense installations. In 1941, Mountain Fuel refused new applications for heating services from industrial customers to conserve its resources for the war effort. The following year, the federal War Production Board indicated the company should refuse new residential heating customers also. Pent-up demand at the end of the war led to boom years at Mountain Fuel, although the continued scarcity of steel made it difficult for the company to extend its pipelines for several years.

As the company expanded its distribution service over the next several decades, it kept up with increasing demand with several substantial natural gas discoveries in Wyoming, Colorado, and Utah. The first, in the Clay Basin region northeast of Utah, was made in the mid-1930s. In 1946 the Church Buttes field was discovered in southwestern Wyoming. Another prolific source was discovered in the Brady field, about 30 miles southeast of Wyoming, in 1972.

Expansion in the 1970s

Throughout the 1970s, Mountain Fuel Supply altered the organization of its subsidiaries to create distinct profit centers. According to the Questar 1991 Fact Book, this reorganization was done to "provide greater financial and operating flexibility." To begin, in 1971, Mountain Fuel Supply created Entrada Industries, Inc., to operate the corporation's nonutility endeavors. Within months, Entrada acquired Interstate Brick Company, which manufactured and marketed brick and tile products.

In 1975 Mountain Fuel Resources, later renamed Questar Pipeline Company, was organized and incorporated as a wholly owned subsidiary of Entrada Industries. With Federal Power Commission approval, this new company acquired a gas transmission system in Colorado and Utah from Cascade Natural Gas Corp. The $8.5 million investment gave Mountain Fuel Resources over 200 miles of transmission, gathering, and underground storage lines and enabled them to connect gas fields in western Colorado with their existing transmission system in eastern Utah. From 1976 to 1978, Mountain Fuel Resources invested $33 million in the construction of a new underground storage reservoir. The reservoir, located in the Clay Basin gas field of northeastern Utah, was approved by the FPC and served an interstate market.

In addition to these projects, Mountain Fuel Resources joined with six other companies to create the Trailblazer pipeline system, a 793-mile, 36-inch diameter pipeline that runs from Beatrice, Nebraska, to western Wyoming. Mountain Fuel Resources designed, constructed, and operated the 88-mile Overthrust Segment, which extended from Whitney Canyon, north of Evanston, Wyoming, to Rock Springs, Wyoming.

Mountain Fuel Supply continued its restructuring in 1976 with the organization of Wexpro Company, a subsidiary held by Entrada Industries. Having designed the subsidiary to conduct development drilling and production operations, Mountain Fuel Supply transferred to Wexpro all of its nonutility oil-producing properties in January 1977. Wexpro worked under a joint operating agreement with Mountain Fuel. In 1983 a settlement agreement with the states of Utah and Wyoming stipulated that Wexpro was authorized to engage in development drilling on oil and gas properties that were productive as of August 1, 1981.

Reorganization in the 1980s

Celsius Energy Company, another Entrada Industries subsidiary, was organized in 1982 to conduct oil and gas exploration and production operations in the Rocky Mountain region. By 1984 Celsius owned oil and gas leases or rights on over two million acres of potential oil and gas lands. Together with Wexpro and their parent company, Mountain Fuel Supply, Celsius had full or partial working interests in 340,000 acres of producing fields by 1984. These fields, located in New Mexico, Nevada, Wyoming, Montana, North Dakota, and Nebraska, contained about 150 oil wells and 425 gas wells held by the company in full or jointly with others.

Mountain Fuel Supply's transmission system had grown by 1984 to include almost 1,500 miles of gas transmission pipeline, and its distribution system to over 12,000 miles of street mains and service and connecting pipelines. Its maximum delivery capacity had reached over 900 million cubic feet per day.

In 1984 the company transferred from Mountain Fuel Supply to Mountain Fuel Resources various interstate transmission operations and assets. Approved by the Federal Energy Regulatory Commission (FERC), this transfer was designed to reduce regulatory duplication and improve operating efficiency.

The company's corporate structure continued to evolve when the shareholders of Mountain Fuel Supply accepted an agreement of reorganization and plan of merger in 1984, which created a new holding company, Questar Corporation. Mountain Fuel Supply became one of the corporation's subsidiaries and began to concentrate solely on natural gas distribution. In 1985 the corporation's data processing and communication needs were taken over by a new subsidiary, Questar Service Corporation.

In the 1980s the gas industry changed significantly as a result of deregulation. Once the controls on gas prices were loosened, exploration for gas dramatically increased, resulting in the abundant gas supply of the late 1980s and early 1990s. This abundant supply lowered prices and changed gas companies' marketing strategies. Many began purchasing gas at low wellhead prices and storing it in anticipation of seasonal price fluctuations. Questar Pipeline took advantage of this development by creating new storage service at its depleted Clay Basin gas field. The FERC accepted an open-access blanket certificate, and by 1992 customers had subscribed to 90 percent of the available firm storage. Further deregulation ordered by the FERC in 1992 allowed companies to buy gas directly from producers and transport and store the gas with someone else. These changes gave an additional boost to the Clay Basin storage field.

In addition, regulations changed not only for gas prices but also for the industry's business practices. In 1985 the FERC issued the first of a series of orders devised to encourage competition in the pipeline industry and increase the scope of their business. In effect, pipeline companies had to alter their operations from buying and reselling gas to transporting gas for third parties. Questar was challenged to make drastic changes in internal structure to accommodate the new orders. As of 1991 the FERC was refining the new shape of the industry, primarily through regulations concerning "comparability of service" rulemaking. According to Questar's 1991 annual report, the company had "been able to minimize ... negative side effects" of these new rulings. The company also felt that "pipelines will be able to manage and perhaps prosper in the new industry environment."

The low gas prices of the mid-1980s combined with a slow economy in Utah to create some difficult challenges for Questar. Not only did the company have to contend with lowered demand and lower prices, various incidents, including labor disputes and flooding of the Great Salt Lake, led to the company losing some of its largest customers.

The company's stability going into this tumultuous period, however, helped it survive the problems and even take advantage of certain opportunities. The lowered gas prices had led to lower assessed values on oil- and gas-producing company assets. Questar found it had the resources to buy companies it could not have afforded before. In 1987 Questar acquired 53 percent of Universal Resources Corp. for $16.24 million. Soon thereafter, Questar bought the company's remaining shares for $14.19 million, although by assuming Universal Resources' debt, the total value of the acquisition was about $100 million. The purchase of the exploration and production company brought with it holdings primarily in Oklahoma, Kansas, and Texas, but also smaller properties in few Midwestern and Rocky Mountain states. With producing fields in the midcontinental United States and established natural gas marketing in the West, Universal Resources seemed a natural addition to Questar.

Questar managed to find another advantage in Utah's depressed economy in the 1980s. With lower construction costs, Mountain Fuel was able to build new transmission lines. Between 1986 and 1988, Mountain Fuel extended service to southern Utah with a 209-mile pipeline, making natural gas available for the first time to over 20,000 customers in the area. An extension to the line in 1988 brought the distribution system 74 miles further southwest.

Diversification in the Late 1980s and Early 1990s

The gas industry, which relies heavily on the demand for heating, varies with cyclical weather patterns, as do its revenues. To stabilize its revenues, Questar diversified in the late 1980s into non-gas-related businesses. Taking advantage of the expertise gained with radio communications while operating its interstate gas transmission, the corporation established a new subsidiary, Questar Telecom Inc., in 1989. This company provided customers a combination of two-way radio and mobile telephone service called specialized mobile radio, or SMR. Following a strategy of buying smaller SMR providers and combining them to improve customer service and achieve economies of scale, Questar Telecom had already become one of the largest providers of SMR in the western United States by 1992. Although the enterprise was not yet working at a profit, Questar planned to double its investment in the operation in the next few years, counting on increased efficiency and the steadily growing demand for personal communications to make the operation into a consistent revenue source.

Questar supported the development of another new technology, natural gas vehicles (NGV). Vehicles powered by natural gas generate far fewer emissions that contribute to urban air pollution than petroleum-powered vehicles, making them appealing to environmentalists. Mountain Fuel Supply sponsored tests at the National Center for Vehicle Emissions Control in Ft. Collins, Colorado, that showed when vehicles burned natural gas instead of petroleum, carbon monoxide emissions were reduced by 94 percent, oxides of nitrogen by 16 percent, carbon dioxide by 22 percent, and reactive hydrocarbons by 67 percent.

Mountain Fuel Supply planned in 1991 to allocate approximately $4 million to further development of NGV-related facilities. Mountain Fuel began by initiating marketing efforts on fleet vehicles because the cost of converting a vehicle to natural gas was more economical for vehicles with high annual mileages. According to Questar's 1991 annual report, Mountain Fuel representatives discussed NGV conversions with operators of more than 40 fleets consisting of nearly 6,000 vehicles. Mountain Fuel also converted 500 of its own fleet to natural gas.

As of 1991, Questar owned one-third of a related venture, FuelMaker Corporation, a company that marketed a refueling device for NGVs. The device connected directly to the user's gas supply at home or business and automatically refueled the vehicle in about five hours. Utilities and other businesses bought the original 2,000 units, and FuelMaker began expanding production capabilities to 6,000 units per year.

To improve returns, Questar sold Interstate Brick Company in 1990 for approximately book value. The company had not been consistently running at a profit for the previous few years.

In 1991 Mountain Fuel Supply connected service to its 500,000th customer, having doubled its customer base since 1970. It also continued to expand its service area, receiving franchises to 18 communities in western Utah. The services tapped into the Kern River Pipeline and were expected to begin providing gas by the winter of 1992-93.

Renewed Growth in the 1990s

In the early 1990s demand for natural gas was growing because of its cleanliness and domestic availability. Nationwide gas usage grew every year from 1986 to 1991 despite an economic recession and a series of warm winters. In addition, Utah's economy improved in the 1990s, and Questar enjoyed a dramatic increase in retail business. Between 1990 and 1997, Questar's customer base rose by 150,000, reaching 642,000 customers in 1997. This rate of growth doubled the industry average.

Exploration and production also improved in the 1990s. Although the lowered gas prices had hurt Questar's exploration and production companies in the 1980s, cost-cutting and employee incentives combined with rising gas prices in the 1990s to raise the E&P companies' income. Net income for Questar's E&P companies rose from approximately $11 million in 1989 to $41 million in 1997. The renewed prosperity allowed Questar to acquire several new holdings, expanding its reserves in the Rocky Mountains and the Midwestern United States and moving for the first time into Canada, namely Alberta and British Columbia. The company saw the early 1990s as a window of opportunity for exploration, in part because wells drilled prior to 1993 qualified for federal tax credits. Using funds from internal sources and short-term loans, the company increased exploration and production. Exploratory and development drilling received approximately $65 million in 1992, spent primarily on drilling in tight sands gas areas.

In 1994 Nextel Communications Inc. bought Questar Telecom for 3.8 million shares of Nextel stock. Using the price of Nextel stock at the time, Questar received approximately $100 million for the subsidiary. The sale, however, did not represent Questar's intention to abandon its diversification into the information technology and communications field. Questar Service expanded its operations in the mid-1990s and changed its name to Questar InfoComm in 1995. In addition to providing information and communications services to internal and external clients, Questar InfoComm moved into the local telecommunications market in 1996. Questar InfoComm initiated a joint venture with NEXTLINK, an operator of local telephone and data networks, to provide local telecommunications services to businesses in Utah.

Questar's expansion continued into the late 1990s. The company initiated a five-year spending program amounting to $2 billion, focusing on pipeline construction and reserve acquisition. Approximately $260 million was devoted to the TransColorado Pipeline, which neared completion in 1998. Questar Pipeline bought a 700-mile oil pipeline between New Mexico and California in 1998, renaming it the Questar Southern Trails Pipeline and beginning its conversion to gas transmission. The same year, Questar acquired HSRTW, Inc., an oil- and gas-exploration and production company with 150 billion cubic feet of proven natural gas reserves.

Because of the continued deregulation of the energy market, Questar wished to create a single brand image that customers would identify with its varied products and services. To that end, Mountain Fuel changed its name in 1998 to Questar Gas. The company also planned to combine Celsius Energy and Universal Resources under the name Questar Exploration and Production in 1999.

Principal Subsidiaries: Questar Regulated Services Company (holding company for Mountain Fuel Supply Company and Questar Pipeline Company); Entrada Industries Incorporated (holding company for Wexpro Company; Universal Resources Corporation; Questar Gas Management Company; Questar Energy Services, Inc.; Questar Energy Trading Company; and Celsius Energy Company); Questar InfoComm, Inc.

Principal Divisions: Regulated Services; Market Resources.

Further Reading:

• Baum, David, "Questar Corp: Rapid Development Fuels New Business," InfoWorld, September 18, 1995, p. 76.
• Edgerton, Jerry, "Build Your Wealth Drip by Drip," Money, August 1997, pp. 88-97.
  Questar 1991 Fact Book, Salt Lake City: Questar Corporation, 1992.
• "Questar to Pay $157.5 for Its Rival's Business," New York Times, July 29, 1998, p. C4.

Source: International Directory of Company Histories, Vol. 26. St. James Press, 1999.

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